Fintech is reaching fever pitch. Over the past two years, the sector has evolved from an outlet for frustrated investment bankers and traders to embark on something entrepreneurial, to a multi-billion dollar industry with hubs in countries across Europe, North America and Asia. Is it reaching bubble stage?
“The term fintech covers a lot of ground, but some areas are hyper-saturated and there will be some epic fails over the next two to four years,” says Adam Honore, founder and CEO of financial technology consulting firm Markets Tech. “Peer-to-peer lending is the obvious one, and anything related to retail banking or robo-advisory. There are a lot of players here.”
On the one hand the argument is that the banking sector is ripe for disruption from small players providing alternatives to mainstream lenders. Then there’s also the opportunity to provide off-the-shelf solutions to tech headaches for investment banks and fund managers like, say, compliance software. However, getting these products over the line requires both investment and time.
In his now famous speech about Goldman Sachs being a technology company, Lloyd Blankfein pointed to the fact that regulation around financial services, while burdensome, “acts as a moat” around its business to new players. That applies to both large tech companies like Google trying to enter the financial sector, and small start-ups trying to get new products off the ground.
Nikolay Storonsky, founder of ‘money cloud’ fintech start-up Revolut, told us that regulation was the biggest headache.
“One of the biggest challenges we faced getting the product off the ground was all the regulatory box-ticking. You deal with people in other parts of the financial sector who are less motivated to work and are much slower moving. We hit a lot of walls with these types of people,” he says.
“A lot of firms will simply not have the patience or the funding to keep going for the time it takes to compete with the larger players,” says Honore.
Large financial institutions are, of course, those providing funding for a lot of the more innovative fintech start-ups anyway. Barclays, UBS, Credit Suisse, Santander and HSBC all either provide incubation funds or direct investment to fintech start-ups and there’s no shortage of mentoring schemes or ‘innovation labs’ to give new firms a help in hand.
Investment in fintech start-ups went from $3bn in 2013 to $12bn in 2014, and the range of investment vehicles is expanding – from venture capital, to crowdfunding and incubation funds – and this figure is expected to double in 2015.
However, success stories of firms securing millions in seed investment belie the fact that for most starting their own firms, it’s a hard slog.
“I’m working 500 times harder than I ever did in investment banking,” says Rajeev Gupta, a former Goldman Sachs banker who now runs social media site GeckoLife. “I do hiring and firing, product management and client management and am constantly seeking funding. I even bought the coffee machine. I am sleeping four hours per day. I am constantly abuzz. I am always thinking, writing or talking.”
“The idea was to take a pay cut and sacrifice money for a better work-life balance. That hasn’t really worked out – I’m working even harder now,” adds Stu Taylor, CEO of fintech firm Algomi.
Funding is a big concern. If you don’t have a stable client base, even if a VC firm decides to take a stake in your company the chances are that they’ll expect a bigger slice. For the first six months, Taylor self-funded Algomi so they could develop the product, secure some clients and get a better deal with VC investors. Storonsky also used his own money to get Revolut off the ground.
“The lack of regular income has been brutal,” says Gupta. “I have four kids and a wife. No income for the last two years was something I under-estimated. I thought the business would fly within a month and I would be drawing a Goldman partner-like salary. I now take buses, low-cost flights, and use airbnb or stay with friends and family. When you have zero coming in, your need to attempt to keep it as close to zero going out.”
There are also tentative signs that former bankers who have embraced the fintech boom are heading back into finance roles. Josh Schubkegal, the former head of equities technology at UBS who left to join fintech start-up REDI Technologies, has now joined KCG Holdings in a technology role, for example.
“There’s only room for a few winners within each niche of fintech and I think we’re likely to see a number of entrepreneurs return to a more stable finance career in the near future,” says Honore.
Fintech is becoming more mature. Companies built on a concept and the vision and drive of their founders now need to demonstrate results. Paul Reynolds, CEO of Bondcube – the ‘eBay’ for bond markets which filed for liquidation in July – says that the cost of regulation in finance is “not commensurate with a start-up”.
“I would structure a model that did not require regulation. I would target a handful of clients and obtain revenue at the outset, not at the end,” he said. Reynolds has since launched a new firm Bondchain, which reduces the regulatory burden and removes the ‘pricing issue’ that so many clients found difficult.
“The key to success in fintech is providing solutions to big problems in the financial sector,” says Honore. “Compliance is a good example, risk analytics and there are a lot of opportunities in institutional capital markets. Firms need to address a pain point affecting a lot of financial institutions and do so in an innovative way. Following the herd will not work.”