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Could Fintech Be in a Bubble?

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By Amy Bell For Investopedia

While skeptics claim the fintech bubble will soon burst, many experts believe this innovative sector will keep on booming. Fintech, short for financial technology, became a major buzzword in 2015. That’s when a herd of fintech startups emerged and pronounced they would disrupt the financial industry – from established banks to payment firms. In 2015 financing for fintech startups surpassed $20 billion, a 66% increase over 2014.

Proponents say fintech will eventually affect the way every consumer spends, saves and invests his or her money. On the flip side, fintech doubters claim these digital platforms do not have the scale and competitive edge they need to compete with major banks and financial institutions.

Fintech Bubble – or Boom?

While cynics say fintech isn’t built to last, many big-name bankers would strongly disagree. In fact, quite a few former top-tier banking executives have found their way to fintech startups.

Take Anshu Jain, for example. After stepping down from his position as co-head of Deutsche Bank in 2015, Jain became an adviser to SoFi, one of the largest online lenders in the U.S. (see SoFi: What You Should Know About This Alternative Lender). Many others have followed suit, including Antony Jenkins, former CEO of Barclays. In June, Jenkins registered a new fintech business called 10X Future Technologies after declaring the banking industry is facing an “Uber moment.” Additionally, Vikram Pandit, former chief executive of Citigroup, recently invested in a series of lending websites that match investors and borrowers online. The list goes on.

In the meantime, fintech startups continue to attract billions of dollars in venture capital (VC) funding. Globally, VC-backed fintech companies raised $14.4 billion of financing last year and another $4.9 billion just in the first quarter of 2016. (For more on this, watch Who Are Venture Capitalists?) The majority of these fintech funding deals took place in North America with 128 transactions. However, Asian fintech companies saw the highest value, raising an unprecedented $2.6 billion.

Yet, thanks in large part to controversy at LendingClub, the biggest online lender in the U.S., some skeptics are questioning the staying power of fintech firms. LendingClub shares plummeted by more than 25% when the company’s CEO was force to resign amid a scandal (for more, see Banks Suspend LendingClub Purchases). The peer-to-peer lending (P2P) arena remains under intense scrutiny, and stocks for some P2P lenders are trading at all-time lows.

This may explain why VC-funding for fintech took a tumble in the third quarter of 2016. According to a report from KPMG International and CB Insights, third quarter funding fell by 17% from $2.9 billion. North America saw the largest drop, with a funding decrease of 68% as compared to the same quarter last year. Some blame the decline on investor uncertainty related to the presidential election, while others say the bubble is bursting.

“While we continue to see significant investment into fintech companies globally, the euphoria for mega-deals that we saw into the latter half of 2015 has waned,” wrote Anand Sanwal, CB Insights chief executive, in the report. “Total investments to key areas like marketplace lending and blockchain technology have both seen declines heading into the tail-end of 2016.”

The KPMG International and CB Insights report also touched on investor impatience for some fintech technologies to prove their worth. Namely, blockchain technology is currently under the fintech microscope. The brainchild of startup Ripple Labs Inc., blockchain is a distributive ledger technology that received the largest funding round in North America this year. (See also: Top 3 Books to Learn About Blockchain.)

“The ability to move blockchain from proof-of-concept to adoption and production has been minimal,” reads the report. “While the market is still giving blockchain companies plenty of room to prove themselves, investors are also becoming more concerned about results.”

The Bottom Line

While fintech has become one of the hottest financial buzzwords, some cynics believe the sector may not be worth all the hype. On the other hand, fintech has managed to raise billions of venture capital dollars – not to mention the attention of big-time banking executives. But will the fintech bubble burst? Only time will tell. (You may also want to read What Does Trump Mean for the Fintech Market?)

First appeared at Investopedia

 

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