A View From the Fintech Snark Tank: If Fintech Was Failing, THESE Would Be the Reasons Why

A recent Forbes article titled 3 Reasons Fintech Is Failing (written by the founder of a fintech startup) lists the following reasons why fintech is supposedly failing:

1. There is a fundamental strategic contradiction between tech and finance. The "contradiction" is supposedly that "the tech idea that you must get big fast and dominate a sector is at odds with the slow-moving nature of finance, and lending in particular."
2. Market realities encourage short-term thinking. According to the author, "the realities of the market and the demands of investors force organizations (like Lending Club and OnDeck) to abandon data and technology in favor of traditional sales techniques. This growth-at-all-costs mentality is incredibly damaging for the industry."
3. Incumbents in the market are powerful and resistant to change. To quote the author: "Incumbents in the finance sector are incredibly powerful and complacent. Most don’t fear fintech companies looking to take their business because, frankly, not a single one poses a real threat at this time."

Debunking The 3 Reasons

These aren't the reasons fintech is failing (and in fact, the article doesn't even prove that fintech is failing). Here are my counter-arguments:

1) There is no contradiction between tech and finance. First off, while banks may be slow in digitizing some customer-facing processes and interactions, the deployment of ATMs, online banking, online bill pay, eBills, mobile banking, remote deposit capture, online account opening, etc. all prove that tech and finance are very well aligned, and I've only listed retail banking-related tech developments. I assume the author of the Forbes article has heard of online trading, eSurance, telematics, etc.

The point about "dominating a sector" is further nonsense. Not every fintech startup goes into the market expecting or hoping to be an Amazon or Google. Many seek to fill unmet needs in various (and not necessarily large) niches of the market. The reasons these niche opportunities exist is because technology enables a firm to profitably fill the need a non-technologically-driven approach could not.

2) The venture capital business actually encourages and enables long-term thinking. No doubt about it, if you're a public company listed on the New York Stock Exchange, you're pressured into short-term thinking. But private, venture-backed companies are generally free from that pressure (not to say that they don't face other pressures). But the short-term pressures on startups is not a "growth-at-all-cost" mentality. If anything, there's not enough of a (customer) growth mentality, as too many focus on tech development vs. tech deployment.

3) Incumbents in the market are powerful and resistant to change. DUH. This isn't just true in financial services, it's true for every industry on the planet. It's not the reason why fintech is supposedly failing -- it's the reason why fintech startups have an opportunity to succeed. Dear Mr. Fintech Entrepreneur: If powerful, large banks weren't resistant to change, they would have already developed whatever it is you're working on, and would have deployed it 2 years ago.

Regardless of what the author of the Forbes article -- or any other pundit -- says, incumbent banks are plenty damn worried and concerned about the threat of fintech startups, as well as existing tech players like Amazon, Facebook, and Google.

p.s. Incumbent banks aren't complacent. The definition of complacent is: "Showing smug or uncritical satisfaction with oneself or one's achievements." That doesn't describe today's banks. They're simply unable to react fast to changing technologies and market needs. Don't confuse that with complacency.

Wait a Second, Fintech Isn't Even Failing

If it wasn't bad enough that the three reasons why fintech is supposedly failing are nonsense, the author of the article makes no case to show that fintech is failing. Maybe his firm is failing, but fintech (as either a set of startups or as a class of technology) is anything but failing.

What is happening is that fintech isn't living up to hype.

What's happening to fintech is that the storm is abating. Early fintech startups benefited from a "perfect storm" -- an unprecedented convergence of four forces:

1. Economic conditions. The downturn in the economy -- mislabeled the "Great Recession" (wrongly labeled because the recession of the Carter era in the late 70s was far worse than what we experienced in the mid-00s) -- helped create negative sentiment towards banks, opening the door to new participants.
2. Demographic change. The change in consumer sentiment, in and of itself, would not have been sufficient for fintech success. Consumers with 20+ years of experience in a market are generally adverse to trying new providers. But younger consumers, with no prior history of working with established providers, are more open to new providers. And the tsunami of Millennials coming into adulthood (at least chronologically, if not behaviorally) between 2008 and 2016 helped to fuel fintech startup growth.
3. Technological change. On the heels of the Not-So-Great Recession and Millennial Mania came the development of online and mobile technology maturity. Without this maturation, fintech startups would have been hard (or harder) pressed to reach and serve a critical mass of consumers.
4. Regulatory environment. The regulatory changes that have taken place over the past ~8 years have shut the spigot on lending to all but the most credit-worthy consumers and businesses. Further opening the door to fintech startups, who have been willing to lend, and -- more importantly -- finding lenders (uh, investors) willing to lend to borrowers unable to get funds from banks.

The Real Reasons Fintech Might Fail

Fast forward to 2017, and here's what fintech startups are facing:

• An improving economy. A stronger economy should raise the credit-worthiness of both consumers and businesses, making them more attractive to the incumbent banks.
• Further demographic change. The oldest Millennials are already in their mid- to late-30s. Historically, consumers in this age range have better credit scores than consumers in their early 20s. More business for the incumbents.
• Regulatory easing. This hasn't happened yet, but if and when it does, it should further open the lending spigot from banks.
• Funding challenges. Getting funds to lend will increasingly be a challenge for startups (and incumbents). Hence, acquisitions like SoFi's purchase of Zenbanx. Will it be enough?
• Scaling challenges. As incumbents catch up with fintech development, and as they enjoy the luxury of sitting back and waiting to see what changes will be real and which won't, they'll have their pick of fintech startups to partner with to help those startups scale. Other fintech startsups will face stiff challenges in terms of marketing and business development funds and skills to grow their businesses.

Bottom line: Fintech -- as a set of startups or a class of technology -- is hardly failing. There are challenges that face individual startups, for sure. The founders and managers of those firms would be wise to ignore the Forbes article, however.