If you’re looking for an up-and-coming market to invest in, you’ve probably heard the term fintech. It’s a fast-growing area that has attracted plenty of media attention, but what exactly is it? And is it a good idea to invest in fintech or any other fringe markets that seem to be destined to be the next best thing at the top offshore betting sites?
It’s a question that carries extra weight considering what happened to the last best thing—cryptocurrency. Is fintech headed for the same fate as crypto or is the only similarity between the two the fact that everyone else seems to know what they are?
What is Fintech?
Fintech is short for financial technology. Basically, it’s any type of technology that can be used as an alternative to traditional financial transaction methods. So cryptocurrency? Would be considered fintech. So would Venmo or any of the other payment platforms used for online transactions. In fact, any type of app used for banking would be considered fintech. So would any of the emerging technologies that are being used by banks and other financial companies —both established firms and start-ups. The list includes AI, the cloud, advanced data metrics, and more.
When fintech first emerged, it focused on technology used by banks and other financial firms to help them do work on the backend, and their impact was largely invisible to their customers and the rest of the world. As time has gone by, the focus has moved to products and technologies aimed at consumers, who, in larger and larger numbers, wanted to be able to use their smartphones to do their banking, buy and sell stocks, and make other investments.
It’s obviously a very big club, and all the members of it are not created equally. Some technologies are far riskier than others. Some will have a much bigger impact on how we move and manage money than others. So it’s not a question of whether or not to invest in fintech, as much as a question of which areas of fintech to focus on.
The ABC and D
The ABCD of fintech refers to the four key areas that make up the bulk of the industry: Artificial intelligence, Blockchain, Cloud computing, and big Data.
All four areas are among the fastest growing areas of the tech sector, and that’s helped spur an area of explosive growth in fintech. As of summer 2023, publicly traded fintech companies had a combined market capitalization of more than $550 billion, which was twice as much as in 2019.
There are also seven times as many fintech “unicorn” companies worth at least a billion dollars as pre-pandemic. And that’s after the very public collapse of crypto over the last year.
One analysis found that neobanking’s revenues have increased sixfold over the last four years, while digital payments have doubled.
A recent analysis by McKinsey found that the market has entered the value creation phase, which means companies are taking fewer risks after working through their experimentation with different ideas. That means a slower but steadier growth period, in general. The consulting firm’s analysis said to expect fintech to continue to grow at a rate three times faster than traditional financial companies over the next five years.
Red Flags
Of course, crypto had a similarly rosy forecast not too long ago. How can we be sure that the rest of the fintech arms aren’t headed for a similar severe correction?
While there is no evidence of fraud or mismanagement, as we saw with some of the high-profile crypto failures, there are some reasons to be concerned about the sector.
Like many startups, fintech firms leaned heavily on their venture capital in the early going. But that source of funding appears to be drying up, as financial technology becomes more engrained in the way money is moved today. In 2022, funding levels of fintech declined by 46%, to its lowest level in five years.
It appears that the prevailing view among the ones controlling the purse strings is that the technology is here to stay, and now we need to see which companies that provide it have the staying power. That means there may be a shakeout as the less stable companies fall victim to market oversaturation.
Overall Outlook
Like taxi drivers, travel agents and brick-and-mortar stores, technology is making extensive changes to the financial industry that are not going to be temporary. Nearly three-quarters of all interactions between customers and banks, worldwide, are now done digitally. From that standpoint, fintech is an area where you’ll want to invest. However, the risk associated with the sector is high as we may be facing a shakeout of companies.
You’ll want to pay close attention to a company’s cash flow, since a new lifeline from the venture capitalist may not be coming anytime soon. Companies that are customer-centered —since individual convenience is often what drives the adoption of new tech— but are able to be easily integrated into existing businesses also seem to be the best bets to make it through.
