The Inevitability of the Fintech Reckoning

The Fintech reckoning was bound to happen. The industry has been growing steadily since the 2008 financial crisis, but the COVID-19 pandemic was the leading enabler of forced integration into a fragile economic situation.

• Investors poured millions into private companies, birthing thousands of startups.
• The pandemic sent every industry into a path of destruction.
• Fintech firms raised more than $130 billion and created over 100 new employees in 2021.

The quicker they climb, the harder they fall. Financial technology (Fintech) has been a growing industry since the late 1960s, even though back then they had no idea where it would end up. However, fintech, as we know it today, started to take shape following the 2008 financial crisis. Ever since then, the sector has been steadily growing and flourishing, but the 2019 COVID-19 pandemic threw the world into a tailspin and forced, to some extent, fintech’s integration into what later turned out to be a fragile economic situation.

The Writing Was Always on the Wall

The 2008 financial crisis shook people’s faith and trust in the banking system to the core, much like what’s happening now across the globe in the US with the Silicon Valley Bank, Credit Suisse in Switzerland, Société Générale in France, and Deutsche Bank in Germany. At the time, investors poured millions into private companies, and by doing so, encouraged founders to try to upend an established and unpopular industry. This resulted in thousands of startups emerging on the scene. Investors started looking for yield outside of public companies in a low-interest rate environment, and traditional venture capitalists had to compete with new entrants from hedge funds, sovereign wealth, and family offices.

The Fuel to the Fintech Reckoning

Everything was going smoothly, until the pandemic hit, sending every industry onto a path of destruction as they try to overcorrect their business margins.

You see, what should have taken years in terms of digital adaptation was done in months. As a result, central banks flooded the world with money. The craze reached its height in 2021 when fintech firms raised more than $130 billion and created more than 100 new businesses valued at least $1 billion.

The Aftermath of the Fintech Reckoning

So, at that point, you had a flood of money and an idea that seemed to bloom for just about anyone, leading to copycat companies. It wouldn’t be so bad had they just offered similar services to successful companies, but they were getting funded. Take a look at app-based checking accounts (aka neo-banks) and buy now, pay later providers. Companies relied on dubious metrics like user growth to raise capital at dizzying valuations, and investors who hesitated on a startup’s round ran the risk of missing out as companies doubled and tripled in value within months. It was the finance industries’ version of FOMO.

Even an anonymous founder-turned-venture-capitalist admitted to CNBC that they overfunded fintech and over-saturated the market with almost 150 unnecessary neo-banks and more than a dozen different banking-as-a-service providers.

Who’s to Blame?

In the beginning, there wasn’t anyone really. It was meeting needs exacerbated by the circumstances. However, the investors’ rabid pouring of funds into the sector has undoubtedly ended up being its downfall. One fundamental premise underpinned the creation of many private companies in recent years, particularly those that provided credit to consumers and small businesses: low-interest rates forever. Who would have thought that the Federal Reserve would declare its most aggressive rate-hiking cycle in decades?

Final Thoughts

Fintech was and still is a stroke of genius. However, the private sector was very trigger-happy in funding several startups that offered no tangible profitable plan. And with so many of them ending up as a sunk cost, the fintech reckoning was bound to happen. In this instance, the sector was Icarus who flew too close to the sun.

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