The fintech mirage is losing its shine

The fintech mirage is losing its shine

Have investors in fintech startup companies been drinking way too much Kool-Aid? Mark, Tluszcz, CEO of Mangrove Capital Partners, detects a sour after-taste.

For those that attended Innovate Finance last month, there would have been little doubt that fintech is attracting big money. Indeed according to, 95 financial technology companies in Europe and Israel raised capital in the first quarter of 2016, three times as many as in the same quarter a year ago, and almost double the amount from Q4 2015. That's one fintech company getting backed for every day of the first quarter and with a combined €500 million in funding its the hottest vertical in the region.

There's no doubt that the financial services sector is a massive industry with inefficiencies and opportunity for greater customer intimacy. However it’s clear to me that the level of hype around the current crop of fintech companies is unjustified and recent events suggest investors should exercise caution.

Part of the issue is that investors have been funding peripheral businesses - delivering services such as money transfers, factoring or pay day loans. These are great niche businesses but they're not transformational. There will doubtless be many great companies that come out of unbundling the various financial services typically delivered by a bank, but they're not going to become the billion dollar companies that we desperately want Europe to produce.

Only by going after the core and redefining how the industry operates can fintech entrepreneurs create massively valuable businesses. But the incumbents are protected by considerable regulation, have vast resources and will not fall over easily. While they undoubtedly have inefficiencies, they are also very well rehearsed in what they do.

It is of course encouraging to see a new generation of mobile first 'challenger banks' emerge however they do face another major hurdle - trust. As much as we love to hate banks and as much as the financial crisis demonstrated it is time for change, we ultimately want somewhere safe to store our hard earned money.

Even LendingClub, one of the very few fintech companies that has exited, is doing only hundreds of millions of dollars in revenue - no wonder the performance of its stock price since IPO has been so abysmal. The recent resignation of its CEO and discovery of weaknesses in its internal controls throw up further red flags, elucidating the myriad of complexities that new entrants must overcome in order to build a scalable business.

Fintech companies have underestimated this problem and it’s going to make it extremely difficult to build mainstream customer bases. Allegations that crowdfunding platforms have been encouraging companies to drip-feed money from other sources into their campaigns — to create the impression of investor demand — won't help their cause. Nor will stories of crowdfunded companies calling in administrators shortly after presenting a full bill of financial health. It's clear greater regulation is required.

The other problem is that fintech 'innovators' are competing on price. While some have improved the user experience, this won't allow them to move fast enough and anything other than free is simply indefensible. Let's not forget that payments has been a recurring theme for a long time and is drawing the interest of tech titans such as Apple and Facebook. The blockchain of course holds promise here and real-world applications for this paradigm-shifting technology are getting closer to fruition.

While fintech companies have done a remarkable job so far at creating an illusion, the cracks are now emerging. In recent days, TransferWise has been caught out for misleading customers about how cheap it is compared to banks while LendingClub sent shockwaves through the fintech sector when it revealed on its earnings call that the CEO had been removed for unethical behaviour. Furthermore, Prosper has had to lay off a third of its staff, Nutmeg has replaced its CEO and Wonga reported seeing losses double in 2015. This sad but predictable turn of events serves as a reminder that when any sector is flooded with money, it is typically a good time to take a step back and reassess.

From where I've been standing it looks like people have been drinking way too much Kool-Aid. Venture capital investors have been falling over themselves to give fintech companies money and losing sight of the realities of what it takes to succeed in this sector. Many will now begin to question the business models and we’ll likely see many casualties, just as we do in any any other area of technology. Yet I still believe that innovation will come and remain hopeful that the next generation of fintech companies will deliver. Let’s not lose sight of the prize because when we do see a truly transformational business emerge, we’ll know it was well worth the wait.

Comments: (6)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 13 May, 2016, 20:19Be the first to give this comment the thumbs up 0 likes

Can't agree more. For all the billions poured into fintech, I'm not seeing any concrete products. To take a personal example, my bank promised an add-on credit card over a month ago. Several reminders later, I still haven't got it. I'm sick and tired of waiting and have decided to shop around. But, lo and behold, I can't find a single fintech that does credit cards.

A Finextra member
A Finextra member 13 May, 2016, 21:35Be the first to give this comment the thumbs up 0 likes

How refreshing to read this.  Day after day we are deluged with announcements about the next fintech funding.  So many of the fintechs are focusing on the Millenials, yet that target market seeks to spend little or nothing for services.  It's hard to have a successful venture when the customers don't spend money.  Thanks for injecting some reality!

Roy Froud
Roy Froud - Fintech & AI - Uk 16 May, 2016, 07:07Be the first to give this comment the thumbs up 0 likes

Good article. I would also add that many fintech startups are trying to solve problems that are, at best, minor inconveniencies that customers are not going to spend lots of money to solve. 

A Finextra member
A Finextra member 16 May, 2016, 09:13Be the first to give this comment the thumbs up 0 likes True that the market seems overhyped with sky high valuations before the companies have even earnt a penny. However I don't think that we are seeing a revival of the dotcom days. The financial services are set for the biggest disruption of any verticals. Innovation to stay ahead is necessary, yet most Banks are tangled into Cost cutting, Reg compliance and the necessity to do something about their legacy IT. So Fintechs play a good challenger role today, very few will IPO, many will end up as Solutions or Utilities for Banks. I also believe that Fintechs are an even stronger challenger to the professional services industry. They will still have a role to play long after the hype will flatten.
Jayakumar Venkataraman
Jayakumar Venkataraman - Infosys Ltd - London 17 May, 2016, 14:59Be the first to give this comment the thumbs up 0 likes

While not dismissing the role of the FinTech firms and the opportunity available to upset the established banks, it must be worth assessing if such a threat can be really possible?

When the FinTechs do become big enough to matter, they will attract the regulatory attention and that will weigh / slow them down much as it does the players in the Financial services industry.

In order to be truly pathbreaking the FinTechs must play in the not very attractive world of the infrastructure and create truly alternative infrastructure. Riding on the current infrastructure can be limiting in terms of the variety of use cases or in terms of tru and sustainable differentiation that can be offered by the Fintechs.



A Finextra member
A Finextra member 17 May, 2016, 15:59Be the first to give this comment the thumbs up 0 likes

Too right Jayakumar - yet another mPOS/payment method that layers on top of VISA/MasterCard is hardly innovative in my book, even if it has a slick interface.  Got to be in those "unnattractive" markets...