Is fintech really headed for a downturn?


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Is fintech really headed for a downturn?
Is financial technology really deserving of the excitement surrounding it? The easy answer is a clear “yes.” In terms of venture investment, the sector has exploded over the past four years, growing from $3 billion in 2012 to more than $19 billion in 2015 and $5.3 billion during Q1 2016 alone, a 67 percent increase over the same period last year. As a result, the fintech world appears to be on a singular trajectory: ascendant. Roboadvisors are now estimated to manage about $19 billion in the United States alone. Marketplace lending is expected to reach $122 billion in originations by the year 2020, with some analysts predicting the sector could his $1 trillion by 2025. For at least the past 18 months, the news media has been flooded with stories and analysis about fintech startups “transforming” the finance industry.

Wall Street is paying attention

Even more significantly, finance industry incumbents like JP Morgan, Citi and Goldman Sachs have clearly taken notice, and have set technology on their radars: In March, JP Morgan Chase & Co. announced the establishment of an enormous, 125,000 square foot fintech hub on Manhattan’s West Side, and is expected to spend $3 billion on technology investments this year. Every major bank is working hard to study the use of blockchain technology. Goldman Sachs says it employs more engineers than Facebook. And the list goes on. In short, there is plenty of reason to be optimistic for fintech professionals to feel confident about 2016 and the future.

Apple leads tech down

And yet, there are indications that the coming period could herald sobering times for the new darling of the technology world. Apple’s poor Q1, which marked the end of the company’s 13-year run of quarterly revenue growth, was not directly related to the finance world. But the company’s mobile payments platform Apple Pay has yet to offer meaningful revenue, and neither Apple Pay nor its android cousin, Samsung Pay, have had any real impact on the spending economy. Furthrmore, the first quarter of the year saw a sharp drop in mergers and acquisitions over Q4 2015. And Tradestreaming has reported several times in recent weeks about a slowdown for marketplace lenders. In addition, anecdotal evidence suggests that many working professionals have yet to connect to the world of technological finance. Asked whether new retirement savings tools meant anything to them, one Seattle, Washington couple told me they are not familiar with any online financial services and felt no need to move in that direction. “It doesn’t really mean much to me," said 44-year-old Becky Blixt. "My partner and I both have 401k plans with no fees.  I’m not familiar with web services like NerdWallet but we don’t need to use an app like that because we have most of our investments with Fidelity. Because we have over a certain amount, we have free financial advising services with them. We meet with a guy twice a year and talk retirement and investments. So the online stuff isn’t really relevant for us.”

Wall Street not fully listening

And then there is the reaction from finance sector incuments. One individual active on Wall Street said that for whatever lip service JP Morgan, Goldman Sachs and others may pay to fintech upstarts, in reality those reactions are little more than media statements intended for public consumption, but with little intent of altering their core businesses. Even worse, some analysts say Wall Street is openly disparaging of the startup industry. “Innovation in US fintech is not rewarded. It is considered suspect,” writes John Biggs, the East Coast Editor of TechCrunch and former editor of Gizmodo in Why US fintech is a joke. “Sure, there are folks out there trying mightily to change the way things work, but they are not being rewarded. Sit down and talk with some old-guard financial types and you will see that improvements to their creaking ships are unwanted and seen as too difficult or frightening to implement. “Amazing ideas – ideas that will pull the banking industry out of the coming doldrums – are suspect,” Biggs concludes. The numbers indicate they are correct: For example, take just one area, roboadvisory. The $19 billion in roboadvisor AUM is a tiny fraction of the $1.7 trillion currently under management by JP Morgan alone. Even if the industry fulfills expectations to expand to $1 trillion in the next decade, it will remain a poor cousin in comparison to the Wall Street. From that perspective, one could argue that there is little reason for JP Morgan or Goldman Sachs management to lose sleep over the challenges presented by Betterment or Wealthfront.

Quickly growing up

None of which indicates, of course, the the fintech sector is in trouble. Rather, the current trends in the industry are more likely explained by the ancient proverb “all beginnings are hard”. Yes, the fintech industry has experienced expansive growth in recent years, but at the end of the day, the sector is still in its infancy, or at least in early childhood. PayPal, one of the earliest successful fintechs, was founded in 1998, less than 20 years ago. In contrast, the genesis of the London Stock Exchange dates back more than 300 years to 1698, when John Castaing first issued a detailed list of market prices called "The Course of The Exchange and Other Things". The coming period, then, will likely be a time of growth and maturity for the fintech industry. It remains to be seen how banks, asset management firms, credit card companies and other finance professions will respond to the challenges presented by fintech startups. But it is clear that they will respond in some fashion, either by outsourcing services to technology companies, purchasing or licensing new technologies and services, or developing in-house solutions to serve customers and maximize profits. That process could mean a short term search for the right path forward, but in the long-term, it should lead to a more mature industry with the ability to maximize profits as well as to serve an ever-broadening clientele. Photo credit: CJS*64 "Man with a camera" via VisualHunt / CC BY-ND

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