Fintech in 2022 and Beyond: 'Balloon' or 'Bubble'? This restlessly vigorous sector's growth shows few signs of slowing, but should investors be worried?
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Fintech seems to be having a moment. The term encompasses businesses that improve (usually by automating) financial services via technology, and its associated industry was the leading sector for venture investment in 2021, according to Crunchbase News, marking $134 billion in investment and 177% year-over-year growth.
With that much money pouring in, should you hop on the bandwagon, or is it all one giant crash waiting to happen? A closer look at the situation suggests fintech isn't a bubble, but rather a balloon, one that could stay aloft for a long time yet.
Getting into the sky
By definition, a bubble happens when the price of something escalates quickly because of exuberant market behavior rather than warranted features or fundamentals. Put another way, value climbs because people become unjustifiably excited, not based on what the asset actually is or offers. Once that enthusiasm cools, people sell off and the bubble pops.
But fintech isn't really meeting this definition. Yes, it is seeing a rapid increase in investment, with the first half of 2021 ($98 billion) outpacing all of 2020 ($121.5 billion), according to KPMG. But investors decide whether to throw money at companies based on how big those companies are likely to get, rather than their pre-IPO valuations. In that sense, there isn't anything to sell off, because so few fintechs have gone to IPO. Longer-term data from Statista also shows that, although investors scrambled into the industry in the previous decade, the amount of money they're funneling in has actually dropped off.
With these facts and figures in mind, companies across sectors are embracing digital like never before, and the pandemic has only accelerated the adoption of new technologies, including contactless payment and other services. It's relatively safe to regard this shift as permanent because of the general state of the economy, along with competitiveness, growth opportunities and the convenience it offers.
Although banks and other financial institutions have been slower to move into digital than other sectors, they are gradually transforming operations and offerings to reflect this new tech reality. As this happens, investors who have been able to accumulate funds are hunting for alternative places to put their money. Fintechs are taking full advantage of this — are grabbing a steady stream of financial war chests, and this keeps their industry afloat.
Differentiation and consolidation both work
With lots of money available, there are plenty of opportunities for new fintech organizations to get into the game. But the ease of entry that technology offers creates a bit of a paradox: As more fintechs crowd the space, it becomes increasingly difficult to find points of differentiation.
This isn't all that different from what's already happening in, say, ride sharing and food delivery. So many restaurants and grocery stores now offer this service that it's becoming the default, and so people choose which provider to go to based mainly on access (e.g., "Do they have my favorite pad thai?") rather anything especially innovative. In the same way, many people patronize whatever vehicle service has a driver available in a specific location. Fintech companies have to acknowledge that the innovation line is thin and be realistic about options they have for development.
But differentiation is possible. Uber, for instance, is known for transportation, but quickly pivoted to allow its drivers to deliver food, too. Uber Eats is now competing healthily with the likes of Grubhub and DoorDash, bringing in billions of dollars per year. Lyft now allows drivers to deliver food, too, but is intentionally choosing to continue specializing in rides.
Although fintech companies can use their war chests to pursue disruptions, investor money also can go toward acquisition when companies have similar goals. This means that great ideas are not the only factors determining success — another is whether companies can see ways to consolidate that give them enough weight to stay relevant.
In the coming months and years, you'll likely see a decent amount of acquisition in this sector, the most recent being Square's planned acquisition of BNPL platform AfterPay for $29 billion. That said, constant reinvention will become more and more necessary, and establishing new distinguishing features should keep the market moving and prevent the balloon from dropping. This continuous development will become the norm, but we are likely to see the emergence of a group of leaders that are especially good at it.
Creative fintechs will lead, so develop your ability to innovate now
Fintech is elevated right now, but it's a balloon, not a bubble. You shouldn't be overly worried about the industry sinking, because its organizations can both consolidate and innovate to grow. Innovation is going to become more commonplace, however, and the companies that get good at creativity will likely end up leading the space and enjoying greater stability. To secure your position for the future, build your ability to do new things now.