Watching the air come out of the FinTech bubble.

fintech bubble

I get a lot of questions about FinTech. With global investments into FinTech exceeding US$19 billion in 2015 (and nearly $14 billion of that went into VC-backed companies) it is obviously a hot space…but where are we in the hype curve? Could we be in a FinTech bubble?

On Thursday May 5, Canadian law firm BLG hosted a FinTech morning session in Toronto, with about 100 attendees, two panels, and an opening speaker (that would be me – photo below.)


It was a good discussion on FinTech (defined as “companies that use technology to make financial services more efficient. Financial technology companies are generally startups founded with the purpose of disrupting incumbent financial systems and corporations that rely less on software”) but I have a few thoughts I wanted to share.

Can we turn the hype meter DOWN to 11, please?spinaltap-11

The movie Spinal Tap made the joke about turning the amplifiers up to 11, but the conversation on FinTech is way past that number: the billions of dollars of investments get mentioned every third sentence, and speakers from Toronto-based accelerators/clusters like MaRS and OneEleven are wonderfully optimistic about the space, talking about the hundreds of FinTech startups in Canada, and how Toronto will become a global FinTech hub to rival London or New York.

It isn’t only about the future though, or even the “it worked for Uber, and the same thing will work for finance” kind of argument. The single biggest financial technology success story in FinTech so far is alternative lending. This includes peer-to-peer (P2P) lending, aka crowd lending, but also has players who raise their capital from large institutions. Loans are being given to consumers, small businesses, for student loans, or credit card debt. The alternative lending business is a genuine monster in the FinTech space, with companies lending out billions of dollars globally and launching enormous IPOs on the stock markets.

This subject is near and dear to my heart, since I co-authored a prediction on crowdfunding in 2013, and correctly predicted that the lending component would be the biggest and fastest growing part of the market. After the BLG FinTech symposium, I was excited to see what was going on in the lending space, and read a few articles as soon as I got home.

Although every FinTech conference I have attended trumpets the alternative lending companies as shining examples for the rest of the industry, the stock market performance isn’t nearly so exciting. As you can see from the chart below, over the last 16 months two of the most prominent lending companies have seen their share value decline by 70-80%, while the NASDAQ is actually UP nearly 20%. To be clear, I don’t follow either company closely, and I have no opinion about them or their prospects. They are just the companies that get mentioned during presentations.

[This was all written over the weekend. On Monday morning May 9, the CEO of Lending Club was forced to step down on disclosure and lending issues, and the company suspended future guidance. The stock closed Monday at $4.62, or 32% lower than the screen grab below.]


But I have seen numerous tech bubbles over the years, and a common signpost is when advocates cite a very small number of companies as success stories, focus on their IPO price, and seem almost unaware of subsequent market performance.

If you want an example, 3D printing ‘experts’ always referred to the two largest printer manufacturers as incredible success stories…even as their share prices declined 70-80% (sound familiar?) from mid-2014 to today (see chart below.) Eventually, the 3D printing evangelists realized that the market was telling them something, and they have dialled back their forecasts as they realise that while 3D printing is important, it is growing more slowly than earlier predictions, the consumer market is virtually non-existent, and significant volumes of 3D printed final part manufacturing are still years away. Once again, I am only showing the performance of these companies in the past — I have no views on their future performance.

3D chart

Of course, there are other FinTech companies that are doing well, but I do think the conversation would be more realistic if we publically discussed the fact that some of the leading players are going through growth pains. Based on the recent performance of the crowd lending companies, I would say:

“It seems that they are disrupting their shareholders even faster than they are disrupting the banks.”

Speaking of banks…

One part of the reason that the alternative lenders are seeing their share price fall is a shift in capital: part of how they have succeeded is by offloading some portion of their loan portfolio to other investors. But while they were able to offload 40% last year, that was only 26% in the most recent quarter, and at lower margins to boot. It is worth asking to what extent the whole FinTech space might have seen valuations inflated by excess capital? Across the broader tech space, we are seeing new money in declining, which has caused some to talk about tech unicorns becoming extinct, with obvious knock on effects for FinTech as well. (In addition to Lending Club and On Deck, who are both public, all of Prosper, Funding Circle, Avant, SoFi and Kabbage are alternative lenders with >$1B valuations based on last rounds. That is SEVEN lenders with billion dollar plus valuations!)

Although alternative lending is growing, it is still tiny compared to traditional lending (US consumer credit is around $3 trillion, and all the alternative lending is under $20 billion in 2015.) The whole reason crowd lending and the other forms did as well as they did was they were exploiting an inefficiency in the market: banks lent money to individuals or small business who had a credit score (these numbers are arbitrary, but give you the idea) of 60/100 and higher, and wouldn’t usually lend below that number. Meanwhile, alt lenders have lower costs, no branches, and fancy algorithms.

They don’t lend to just anyone of course, but they were able to make loans to those whose score was under the banks’ cut-off (which changes over time) at slightly higher interest rates, and still not have too many non-performing loans. Yahoo, and watch the money roll in and the market cap rise! Boy those banks are stupid and inflexible dinosaurs for not lending to those with scores under 60, eh?

Don’t get me wrong: banks can be pretty inflexible some of the time. But they aren’t idiots, and what would happen if banks saw billions of dollars of loans start moving away from them? What if they shifted their lending criteria, just a little? If they move their bar down to (for the sake of argument) 58 or higher, they would be able to take back 20% of the addressable market for the alternative lending players, and (most importantly) they would be the most profitable and least risky borrowers.

I think this is a critical point: as FinTech players exploit weaknesses of the banks, the banks (while not exactly nimble) will be able to respond.

The other thing that occurs to me is that the FinTech industry and alternative lending especially, have emerged and evolved in the period 2008-2016: the financial crisis, its aftermath, a moderately decent and sustained economic recovery with strong non-government job growth, and ultra-low interest rates throughout. I imagine they have all kinds of wonderful algorithms that tell them exactly how many loan losses they will incur over time.

But what happens if rates start going up, or the economy hits an air pocket? Even banks that have been around for a hundred years sometimes get caught offside when that happens, and they need to slow dividend growth or adjust their capital ratios when loans don’t get paid back the way you expected. The alt lending companies don’t have nearly as much history, or as much capital: they are much more levered to non-performing loans.

I would be willing to predict that the lenders (and perhaps even many other kinds of FinTech companies) are likely to do well in certain kinds of economic environments, and do less well in others. Not that they go away entirely, just that their growth or profitability might be adversely affected.

Everybody hates banks, amirite?

It makes sense that the folks from Uber are pretty negative on the taxi industry, and vice versa. They are in a zero-sum game, and they will never be working on the same side. But it is interesting to look at Netflix: CEO Reed Hastings has repeatedly said that the company is NOT competing with cable, it is a complementary service. We predicted this in our cord stacking prediction in 2014, saying that most Canadians will get cable AND Netflix, not either/or. Netflix’s approach is working well for them: a number of cable and telco TV providers are now bundling Netflix onto the set top box: the traditional TV distribution company and the internet “disruptor” are actually playing nicely together, to the benefit of both.

But every FinTech conference I have attended has a different vibe. It is impossible to overstate the contempt and hatred some of the more zealous FinTech fanboys (word choice deliberate…see below) have for the incumbent financial service providers. Whether banks, brokers, or insurance companies the traditional players are derided as slow, stupid, inflexible, unresponsive, failing to address millennials, and possessing antique IT infrastructures. Don’t get me wrong – there are grains of truth in most of those charges.

However, if I were a FinTech player, I would tone down the hostility and name calling, at least a little. 1) Don’t poke a sleeping bear. 2) A lot of banks are investing in FinTech companies. 3) A lot of banks are BUYING FinTech companies. 4) Even when it isn’t about ownership, look at Netflix: many FinTech companies have good products that the incumbent financial players would love to bundle, re-sell, white label or otherwise distribute to their existing customers. And, especially in Canada, I think that may be the biggest opportunity.

Because, unlike the folks who attend FinTech conferences, most Canadians actually kind of like and trust their banks for certain services. Take a look at the chart below, from this year’s Global Mobile Consumer Survey data for Canada. 84% of Canadians would prefer to have their banks or financial institutions handle their in-store mobile payments. That’s only one data point, but I do think that FinTech would be better off thinking about banks and other providers as “sell-with” partners rather than the Devil incarnate.


FinTech can address underserved markets!

You will hear the word “millennials” thrown around every few minutes at a FinTech conference, and the BLG event was no exception. It makes sense: many 18-34 year olds are not well-served by the existing financial industry, they love technology, and are willing to take financial advice from robo-advisors and self-provision various banking services on smartphones. But millennials are only about 30% of the population as of 2016, and are NOT the biggest underserved market. Who is?

Women are 51% of the population, are expected to control two-thirds of household spending in the US over the next decade, and in homes with over $2 million in assets are more likely than men to have sole control of making financial decisions, 44% compared to 35%. They are LESS likely to be investing, and frequently feel that financial products are not being marketed well to them.

Globally, everyone knows this, especially in the world of FinTech. Financial products that harness the power of social, the crowd, the sharing economy, mobile and that allow people to invest in the products, causes and concerns that matter to them appeal to both women and millennials. My wife has been doing research on this topic for the last six years, and her white papers on this topic cover both the problem and the solutions. In many countries, Barbara has met numerous female FinTech leaders of companies. FinTech is far from achieving gender parity of course, with Bitcoin conferences being notably and egregiously male.

But the situation in Canada seems to be worse than average. Last week’s event had a round dozen speakers and panelists, and nary a woman on stage. (Lots in the audience, which is a good sign!) I go through the various FinTech websites, and the ‘Who We Are’ pages are almost exclusively male. I meet FinTech companies, and they talk about marketing to women, but have no women executives, no women on the board, no female programmers, and the only woman is in marketing or answering the phones!

It shouldn’t be that bad here: the EU average for women in IT roles is 17%, and Canada is well ahead of that with 22% women in tech, second only to the US at 24%. That’s still a long way short of parity of course, but our bench depth in tech makes me think that one of Canada’s core strengths in FinTech could be around understanding and marketing to women.

Women in FinTech



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