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05 September 2019

City A.M.: Fintech is all the rage, but is the bubble about to burst?

A new challenger bank or money app is making headlines about how it seeks to disrupt traditional banking and solve personal finance problems. The cavalier attitude to the importance of profitability has been viewed as a red flag, and some are now warning that an economic bubble has formed in the fintech space.

Rich Wagner – the chief executive of Cashplus, a digital challenger bank established in 2005 – tells City A.M. that we are “past due” on this bubble bursting.

“This bubble is probably taking longer to burst simply because of the amount of capital sitting on the sidelines, waiting to be invested in companies that in the past would not have been investable,” he says. “It is certainly something to keep a watchful eye on.”

Wagner argues that this bubble has formed because central banks have slashed interest rates to record lows since the financial crisis. 

“The risk appetite of the general population has changed because of the low returns offered by regular savings accounts, which has resulted in a number of private equity firms having substantially more money to deploy to increase the returns of what used to be normal savers.”

Many fintechs are now reliant on regular cash injections from these firms in order to survive. But if a recession hits and this money dries up, what will happen?

“The result will be that you’ll see either a consolidation in the market – as smaller fintechs get acquired by someone – or certainly an exit by some of the many players that we currently have in the fintech space,” he predicts.

If fintechs don’t see these risks, it may be because many of them are just a few years old and are only used to trading in a time of economic growth. This naivety from businesses that have never experienced a recession or downturn is now leading to more scrutiny by investors and commentators, argues John Mould, chief executive of ThinCats.

Part of the problem is that fintechs are trying to make revenue in unusual, innovative ways – like through leveraging data – rather than pursuing ordinary banking income such as from overdraft fees and credit facilities. This is harder to measure, and may have stoked fears of a bubble. 

But even if the data model works out in the long term, if fintechs want to succeed in the near future, they will have to adopt more traditional models of profitability. Fergus Hay, chief executive of Leagas Delaney, points out that some firms are doing this already. But this approach also has its downsides.

Full article on City A.M.

© City A.M.

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