Fintech seems to be having a moment. The term encompasses
businesses that improve (usually by automating) financial services via
technology, and its associated industry was the leading sector for venture
investment in 2021, according to Crunchbase News, marking $134 billion in
investment and 177% year-over-year growth.
With that much money pouring in, should you hop on the
bandwagon, or is it all one giant crash waiting to happen? A closer look at the
situation suggests fintech isn’t a bubble, but rather a balloon, one that could
stay aloft for a long time yet.
Getting into the sky
By definition, a bubble happens when the price of something
escalates quickly because of exuberant market behavior rather than warranted
features or fundamentals. Put another way, value climbs because people become
unjustifiably excited, not based on what the asset actually is or offers. Once
that enthusiasm cools, people sell off and the bubble pops.
But fintech isn’t really meeting this definition. Yes, it is
seeing a rapid increase in investment, with the first half of 2021 ($98
billion) outpacing all of 2020 ($121.5 billion), according to KPMG. But
investors decide whether to throw money at companies based on how big those
companies are likely to get, rather than their pre-IPO valuations. In that
sense, there isn’t anything to sell off, because so few fintechs have gone to
IPO. Longer-term data from Statista also shows that, although investors
scrambled into the industry in the previous decade, the amount of money they’re
funneling in has actually dropped off.
With these facts and figures in mind, companies across
sectors are embracing digital like never before, and the pandemic has only
accelerated the adoption of new technologies, including contactless payment and
other services. It’s relatively safe to regard this shift as permanent because
of the general state of the economy, along with competitiveness, growth
opportunities and the convenience it offers.
Although banks and other financial institutions have been
slower to move into digital than other sectors, they are gradually transforming
operations and offerings to reflect this new tech reality. As this happens,
investors who have been able to accumulate funds are hunting for alternative places
to put their money. Fintechs are taking full advantage of this — are grabbing a
steady stream of financial war chests, and this keeps their industry afloat.
Differentiation and consolidation both work
With lots of money available, there are plenty of
opportunities for new fintech organizations to get into the game. But the ease
of entry that technology offers creates a bit of a paradox: As more fintechs
crowd the space, it becomes increasingly difficult to find points of
differentiation.
This isn’t all that different from what’s already happening
in, say, ride sharing and food delivery. So many restaurants and grocery stores
now offer this service that it’s becoming the default, and so people choose
which provider to go to based mainly on access (e.g., “Do they have my favorite
pad thai?”) rather anything especially innovative. In the same way, many people
patronize whatever vehicle service has a driver available in a specific
location. Fintech companies have to acknowledge that the innovation line is
thin and be realistic about options they have for development.
But differentiation is possible. Uber, for instance, is
known for transportation, but quickly pivoted to allow its drivers to deliver
food, too. Uber Eats is now competing healthily with the likes of Grubhub and
DoorDash, bringing in billions of dollars per year. Lyft now allows drivers to
deliver food, too, but is intentionally choosing to continue specializing in
rides.
Although fintech companies can use their war chests to
pursue disruptions, investor money also can go toward acquisition when
companies have similar goals. This means that great ideas are not the only
factors determining success — another is whether companies can see ways to
consolidate that give them enough weight to stay relevant.
In the coming months and years, you’ll likely see a decent
amount of acquisition in this sector, the most recent being Square’s planned
acquisition of BNPL platform AfterPay for $29 billion. That said, constant
reinvention will become more and more necessary, and establishing new
distinguishing features should keep the market moving and prevent the balloon
from dropping. This continuous development will become the norm, but we are
likely to see the emergence of a group of leaders that are especially good at
it.
Creative fintechs will lead, so develop your ability to
innovate now
Fintech is elevated right now, but it’s a balloon, not a
bubble. You shouldn’t be overly worried about the industry sinking, because its
organizations can both consolidate and innovate to grow. Innovation is going to
become more commonplace, however, and the companies that get good at creativity
will likely end up leading the space and enjoying greater stability. To secure
your position for the future, build your ability to do new things now.
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