Fintech and the Fear of Froth

Deconstructing the recent financial technology boom raises intriguing questions about the sustainability of the innovation cycle.


For more than half a decade, a seemingly irresistible momentum has been building around the idea that finance and technology are converging at a historical inflection point, a combination of business transformation and competitive disruption that has come to be labeled fintech. With annual investments in product development and entrepreneurial ventures now well into double-digit billions of dollars — and climbing — a 2000-style crash apparently isn’t in the offing.

However, if fintech is booming, then it is not immune to cyclical decline. Any investment, whether in a strategic initiative or a start-up, carries risk. But might there be more secular, or macro, forces that could wreak havoc on fintech as a whole? Or, to spin it more positively, what will it take to ensure this emerging sector’s longer-term sustainability?

There may be no better barometer of the fintech climate than what the money people are saying. The venture capitalists, investment bankers and others spotlighted last November in Institutional Investor’s inaugural Fintech Finance 35 ranking were unanimously enthusiastic and optimistic — but with murmurs of concern about too much froth.

Alan Freudenstein, co-head of the Credit Suisse NEXT Fund, observed that some deals were “pushing prices to ridiculous levels.” Hans Morris, managing partner of Nyca Partners, cited overvaluations as a reason to be cautious about the blockchain boomlet.

Reacting to the mid-November announcement that Japanese e-commerce giant Rakuten had become the umpteenth corporation to launch a fintech investment strategy, Michael Maxworthy, a partner at M&A boutique Marlin & Associates, mused, “When will the madness end?”

In another everybody’s-doing-it example, Chicago is the latest major city to aspire to be a “fintech hub,” one of the local business community’s ChicagoNext initiatives.


Everyone wants a piece of fintech, but what exactly is it? The challenges and risks may lie in the fact that the concept is vague and undifferentiated. Some observers are taking a step back to define — or redefine — fintech. It is not one thing.

The basic premise is dialectic — a collision of old and new, incumbents and upstarts, legacy and disruption — along with a growing consensus that the opposites can profitably coexist.

Banks and other diversified financial institutions still have advantages in terms of customer databases and operational scale, but their lack of “fintech DNA” and “gaps in execution” leave them vulnerable to newer, agile, less regulated companies that are “digital first and can do one thing, but smarter,” says Senthil Kumar, vice president of marketing at Oracle Financial Services.

That essentially describes how one of the early fintech disruptions, peer-to-peer and online lending, has played out over eight to ten years. Now Lending Club and OnDeck Capital, among other maturing newcomers, are forming partnerships with the likes of Citi and JPMorgan Chase & Co.

“The greatest opportunity lies at the meeting point of large financial institutions and young, ambitious start-ups,” Andrew Veitch, director of Anthemis Group, said last June upon the release of a “Fintech 2.0” paper that the London-based investment firm co-authored with Oliver Wyman Group and Banco Santander’s Santander InnoVentures.

Alexei Miller, a managing partner at technology development and consulting firm DataArt, deconstructs fintech three ways: general advancements like high-performance computing and mobility that make an impact on finance; entrepreneurs in Silicon Valley and elsewhere who set out to disrupt specific aspects of the business; and innovation led by established players. He says the last category is often overlooked but is yielding benefits increasingly through collaboration, as in Depository Trust & Clearing Corp.’s customer-data-aggregation affiliate, Clarient, and Goldman Sachs Group’s trading technology spin-off, REDI Holdings.

John Dwyer, senior analyst at Oliver Wyman-affiliated research firm Celent, says attitudes toward “generic fintech” have been shaped by high-profile successes in online lending and electronic payments. He is considering a more detailed taxonomy of subsectors, including technology of regulation and compliance, which he dubs regtech; crypto tech, encompassing alternative currencies and blockchain; cybersecurity; insurance tech; and capital markets.

Seen in this light, fintech has legs, each of its facets evolving at a different pace. The capital markets category includes “the biggest [markets] on the planet,” Dwyer says: “As a fintech market, it is still in need of much greater definition.”

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