The Fintech Landscape
2015 was an astounding year for fintech startups. In global financial centers around the world, entrepreneurs were busy launching new companies and raising capital. From London to New York and across China, Hong Kong and Singapore, several hundreds of new companies joined a growing number of fintech startups.
Estimated counts from different regional and global lists puts the existing number of fintech startups at anywhere between 5,000 to 6,000 companies, all vying for market share in different sub sectors, ranging from mobile payments, data analytics and virtual banking to online lending, bitcoin applications and crowd funding. In the last five years, investors have poured billions into startups and are now looking for returns.
Mixed Performance
In fintech, the consumer side of the market is especially active. Retail customers are especially enjoying lower fees and lower interest rates by using mobile wallets, mobile payment apps and online lending platforms. The fintech startups providing these services have seen a rising adoption curve, especially among millennials. But for founders and investors, even in the sizzling fintech scene, success is not guaranteed
According to a Morgan Stanley whitepaper published last May, globally, marketplace lending platforms, which include players such as OnDeck and Lending Club, are forecasted to see loan issuance grow at a 51% CAGR between 2015 and 2020. Both Lending Club and OnDeck were first movers in the marketplace lending space and have become recognized brands in fintech. The companies were touted as unicorns for their high valuation. Both also went public almost a year ago, and as of December 31, 2015 both have seen their share prices drop more than 50% compared to their IPO open price. Despite the growth in marketplace lending, the public markets see risk in the underlying loans.
Venmo, the mobile payment app startup, was acquired by Braintree in 2012. In 2013 PayPal acquired Braintree and with it, Venmo. Inside PayPal’s vast empire, Venmo’s total payment volume increased to $2.1 billion in Q3 2015, a 201% jump compared to the prior year. The once small startup is now part of corporate giant with access to a global ecosystem of merchants and customers.
Most recently, payment processing company Square, a fintech unicorn, went public in November of last year, at a price which wiped away more than 30% of the company’s valuation compared to its last private funding round. While its revenues have been climbing, the company is not profitable and continues to compete in an overcrowded payment processing market.
With so many players and mixed results, should new, aspiring fintech entrepreneurs even bother entering the game? And how can existing fintech startups sharpen their strategy and make smarter moves?
Strategic Questions and Options
In a crowded playing field with thousands of companies, founders who have yet to enter the game should ask themselves three questions. First, is their product or service better than the ones that already exist? With more than 5,000 players already in the market, differentiation is all the more difficult. Outside of certain under banked markets in Asia or Africa, creating a very basic product, will result in a “me-too” situation with limited upside. Second, can their team raise enough funding to pay for the development and marketing of their product? Again, given the competitive playing field, newer companies will have to work harder to educate customers and provide compelling reasons and incentives to move to a new app or platform. Lastly, when will their company achieve profitability or breakeven? In an environment where investors are beginning to devalue unicorns and look for returns, a long breakeven timeline should be a warning sign. These questions are some of the same ones that large companies ask themselves when deciding whether to build or buy their way into a market. Entrepreneurs can use these same guideposts to decide whether their venture is likely to be financially viable and attractive.
For those players that have already entered the fintech arena, the situation is different. They most likely have venture capital backing and in some cases might have even received investments from large corporate venture arms. Founders and management teams will need to prove their worth on fundamental business metrics. From an investor’s perspective are using the same ratios they apply to banks and financial institutions in the traditional market. Startups need to prove that the “tech” in fintech is creating value for shareholders.
The reality is, investment booms don’t last forever. In the late 1990s, several hundreds of Internet and e-commerce startups emerged and only a dozen or so gained enough scale and traction to make it as standalone giants. Others saw their success in the form of an acquisition by a larger company. But the vast majority are now extinct. Fintech startups will face that same Darwinian future in the coming years.
