Alarmists are busy drawing parallels to fintech and the dot-com bust of 2000. But here’s why fintech has immeasurably more sticking power than the investment craze over Internet-based companies.
Quick to talk. Slow to act. It’s a symptom of most innovations that come to the financial services industry, and there’s good reason for that. Financial services, a sector that’s ripe for change, has long favored tradition. Banks have gone unchallenged for over a century in the marketplace.
But with the generational shift from Gen X to nearly 85 million Millennials, a new digital imperative is emerging. The widespread use of mobile has all but erased the need to visit a physical bank branch. The cost of computing has decreased drastically, representative in that two iPhone 6s contain more memory than the International Space Station. And sentiments toward centralized power in banking is met with distrust at a higher degree than ever before. Fintechs are edging in on low-margin business product offerings like payments with faster solutions and an eye toward the future user.
Fintech’s spotlight moment
It goes without saying that fintech is having its moment. Research firm The McKinsey Global Institute has tracked upwards of 2,000 fintech startups in this space, and estimates as many as 12,000 exist. The 2018 World Economic Forum at Davos discussed fintech at length in a panel of experts titled: “The Future of Fintech.”
There is no shadow of doubt among innovators that the change fintech provides is enduring. But with nervous investors watching Bitcoin’s volatility, it’s important to make the distinction of what makes fintech different from the dot-com boom.
Dot-com businesses operated in the market like a sugar high. Basic cash flow principles flew out the window as many companies skimped on proving their ideas actually had market potential. Speculative valuations led many investors to follow the buzz instead of looking at a balance sheet or profitability. And while it is true that the internet has immense power to displace brick-and-mortar businesses, the momentum was shortsighted. This caused a good number of dot-com businesses to run out of cash shy of the goal, rightfully spooking investors.
Fintech moves into “adulthood”
The difference in the fintech movement is two fold:
- A growing distrust of traditional financial establishments, thanks to the housing market crisis of 2008;
- Fintech’s unique symbiotic relationship with incumbent banks.
While the dot-com wave was tech’s early failure, fintech’s approach is more timely and measured. The market sector has matured with fintech services that deliver better technology and services to the customer alongside banks as a trusted repository of funds.
Building customer loyalty
Fintech’s current challenge is to draw customers. Banks have always focused on the customer relationship and have enjoyed an assumed level of trust that has gone unchecked for centuries.
But with the turnover from Generation X to Millennials, many of the younger generation are less likely to go with a traditional bank than before. A growing mistrust of centralized banks is one driver that’s widening the scope of traditional financial service providers. Wells Fargo’s recent payout in the amount of $185 million for opening fake accounts under customer names is just one example. According to a 2016 Gallup poll, America’s confidence in banks hasn’t shown signs of improvement since the 2007 recession, lingering around 30 percent.
Unlike traditional banks, fintechs have an approach that creates sticking power through lean operational principles. While banks have clunky legacy technology to deal with, fintechs can afford to serve customers at a lower cost due to better technology. Fintech’s focus on niche market segments means there are huge opportunities to outfit far-flung populations with digital solutions as is the case with the underbanked.
Clearing the regulatory bar
Playing nice with regulators will put fintechs into a winning stride. This is again where the dot-com bust missed the mark.
Forging ahead into the future without a game plan instead of forecasting the requirements for legitimate businesses has its price. Fintech outfits in the U.S. are expectant that the Office of the Comptroller of the Currency will pass down a special charter that will allow them to do business under slightly different terms as banks, but with a measure of prudent oversight. Things like compliance, security of customer data, and anti-money laundering efforts will boost companies on the fringe of the disruption onto center stage. As with most things, and especially fintech, there are no shortcuts.
Disrupting the banking industry is no small feat, but for those who make it out the other side, there are big rewards. The untapped opportunity made possible through technology is vast, but entrants strategic in their approach and operational standards will outlast the others. As with most disruptions, fintech is expected to persist, despite naysayers, although it may not transfuse the market with change as rapidly as some expect. There’s a reason they call it the “slow march” toward progress, but it doesn’t negate the fact that change is coming.
Written by Lauren Ruef, a research analyst at Nvoicepay.