Is there a fintech bubble?

by Matthew Reynolds

The last few years have been filled with talk of unicorns, bubbles, and disruptive technologies. But some markets haven’t shown any dramatic transformational change, specifically in the case of fintech companies – technology producers specifically designed to benefit the financial sector. The scary part? Investments have risen to grotesque levels, causing valuations to soar up to about “50% higher than everything else,” according to the FT. Just last year alone, the total global investment in the fintech industry was almost $13 billion. But with numbers that are that inflated and exorbitant, one has to step back and ask why.

Speed and efficiency are two obvious answers, but that doesn’t necessarily warrant a $13 billion investment. Yes, fintech increases the amount of money saved and earned due to upgraded processes. But when stacked up against Amazon, Airbnb, and Uber as model unicorns, – which is the level of success investors want to see - one important trait is missing: fintech companies haven’t produced anything transformational. Of course speed and volume are important factors in turning a profit, and it’s no great mystery that those slim advantages add up. But the New York Times said it best: “you have to be really big to worry about making money off things that are really tiny.”

Big companies can afford to push a fat stack of chips in on these incremental fintech advancements. But even if a company is big enough to make a killing off of the time saved on speed or efficiency, there will always be a new company that emerges and figures out how to do it faster. Existing fintech companies just aren’t transformative enough to warrant their valuations - and the market is beginning to reflect that. In the online lending industry, for example, companies are scaling down dramatically to combat the steady decline in borrowers - which is, in turn, is reducing the number of investors, says the Wall Street Journal. The online lending bubble is ominously close to popping, and it’s not unwise to think other fintech sectors are close behind.

The reality is that many of today’s fintech companies won’t revolutionize the financial industry with their current business models, but will make small, incremental changes instead. With that in mind, investing in fintech is an important strategic move. But the extent to which companies are doing so today is preposterous. 50% higher than everything else? Come on. This is the textbook definition of an industry bubble: the results don’t justify the level of investment, and the returns will eventually show that. Why? Because a $13 billion investment demands more than just “incremental” changes. And if $13 billion isn’t enough to transform horses into unicorns, transformational change probably isn’t happening any time soon.

Matthew Reynolds is an Editorial Assistant at Oxford Economics, where he aids research programs in a variety of industries.