The head of innovation at Wells Fargo, Steve Ellis, is sort-of quoted here as saying “fintech sector could see a dot-com-style shakeout similar to what occurred in 2000”. Telegraph Hill has a lot of experience within Fintech, here is my take:
Hype vs Real Finance
There’s a lot of confusion about Fintech business models driven by the need for eyeball attracting headlines by both startups and their media enablers.
Headlines often confuse the kind of money raised. Lenders who hold loans on their balance sheet raise a different kind of money than that raised by marketplace lenders. The former is capital to be loaned out, the latter could be VC investments, or a bit of both.
Risks are different too: Balance sheet loan firms risk their loan portfolios going bad a la 2008. Marketplace lenders risk not getting enough investors interested in the rate of return their borrowers can earn them. “Auto loan standards deteriorating” means different things to each when they report earnings.
Another example: Headlines trumpeting new super-secret underwriting algorithms. Of course, they cannot be validated, but they certainly sound transformative in a press release about disrupting insurance or lending.
There’s the very popular Bitcoin price bubble headlines, and predictions of a bust. While Bitcoin has found its place as the currency of choice for drug dealers, cyber criminals and child slavers worldwide, it’s meaningless for the real economy unless accommodations with governments evolve.
Then there’s that spawn of Bitcoin — Blockchain. As a consultant, I love the possibilities for blowing smoke. But realizing business value will take many years while counterparties unwind centuries of common law relationships.
Finally, payments: Remember when paper checks were going to be gone by the year 2000? Volume is still growing, folks. And how many people really use their cell phones to buy retail?
Above all, Not Too Much Zeal
Being the sober engineering sort, I wouldn’t say Fintech is exploding, but it’s certainly not imploding either. As the head of Wells’s innovation notes, a lot of Fintech startups are now exploring partnerships, seeking buyers, evolving models, etc.
That’s normal, and prudent, and not a sign of a bust — except perhaps with Bitcoin, because it’s more like a stock price bubble.
Fintech models take a long time to prove themselves. Economic behaviors are driven by habit, laws and regulations which create trust. Habitual behaviors take a long time to change, and trust a long time to build when it comes to money.
In our age of one-click gratification, it may take too much patience to wait for a complete business cycle before judging a Fintech model, but that’s usually the case. And working within a Wells incubator may be a good strategy for mitigating those risks.
Fact is, writing code is simpler and much faster than proving a Fintech business model.
“Surtout, pas trop de zele” — Tallyrand