Chasing A Bubble, Or An Opportunity
Beyond all the hype, fintech offers a golden opportunity for financial institutions to create new real value
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Investment in fintech was $19 billion in 2015, up from $12 billion in 2014, having steadily risen from just $1 billion in 2010. That’s an astonishing number of dollars and clearly big capital is chasing fintech today. In a free market, conceptually speaking, if capital is chasing something so vigorously, it only means either a bubble is building up, or there is an unbelievable opportunity. It is difficult to ignore small talk here — skeptics call fintechs the new “unicorpse”, not unicorns. Believers call it the new frontier. How could we know? After all, every bubble feels real when you get into it.
To add, valuations of some fintech companies like Lendingclub, originally the vanguard of this emerging industry valued at $8 billion at IPO, crashed to $1.8 billion recently. On-deck is down 82 per cent below its IPO price, and down 38 per cent in the last three months. Big Carrot and Quackle closed down because of high default rates.
Let us first examine where the investment dollars are going. Citi research says that 73 per cent of the dollars are going to the Personal & SME segment, 10 per cent to asset management, 10 per cent to insurance, 3 per cent to large corporates. Split by business, 46 per cent ($10 billion) fintech investments are to lending, 23 per cent to payments, 10 per cent to savings and wealth, 10 per cent to insurance and 3 per cent to digital currency. Basically, a large part of fintech investments are into lending technologies, including the new family of lenders, who lend on the basis of demographics, social scores, mobile behaviour and the like.
When compared to the painful dotcom boom and bust of early 2000s, the question is whether “This time it’s different.” These are usually dangerous four words, as future bubbles come back to haunt your statement. But I am inclined to believe so because of one significant factor — a big change in consumer behaviour in terms of mobile usage.
During a recent McKinsey conference, a researcher mentioned that on an average, people check their smartphone 81 times a day! I sometime observe that when kids wake up, the first thing they do even before brushing their teeth is to rush to their phones to check if their groups’ have posted anything, while they were asleep. You may not like it, but the new generation simply resides within the phone, not just surfing, communicating or catching Pokemons. If that is so, habits are permanently changing. If as a habit we don’t go to the branch, if as a habit we are residing into our mobile phones, then fintech is probably the right place for investments to crowd up than to set up branches.
There are issues too, though. Fintechs may sound cool, interesting and exciting, but often they represent a simplistic picture of algorithms — these may neither be statistically valid yet, nor adequately back-tested. Back-testing involves seasoning, correlating rejects through subsequent behaviour off books if they managed to secure a loan elsewhere, physical visits to customer premises after a fintech-based loan, sample-end use monitoring and drawing correlations between declared end-use to actual end-use and their impact on customer performance and hundreds of such checks.
Just like the word dotcom was used to drive up valuations in 2000, fintech is often used as a tag to sound incredibly new and valuable. That would be a wrong approach — and the investor or the backing institution might as well call out that the emperor is wearing no clothes. But for existing financial institutions, which understand that fintech is not just about mish-mashing some impressive sounding terms, and instead focus on creating real value by opening newer markets or by serving existing markets more efficiently, there is a golden opportunity.
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