3 reasons why fintech fails
When it comes to Fintech, it seems like the flower is finally breaking away from the rose. Once the hottest industry, fintech has seen its fair share of failures and struggles lately.
Everyone from online lenders to banking technology companies have experienced lengthened fundraising cycles, missed goals and mounting losses.
Right now, the pain is most acute in the online lending space, with industry behemoths like OnDeck, Lending Club and CAN Capital seeing depressed stock prices or worse.
Two years ago I wrote about the potential pitfalls facing online lenders; now, I am convinced that the contagion that has plagued this space is starting to spread to other aspects of the fintech sector.
While fears of a fintech bubble bursting are justified, there is good news. It is by no means too late for the sector to pivot. The first step to saving the industry is to understand why it is failing.
Reason #1: There is a fundamental strategic contradiction between technology and finance
Nearly a year ago, famed investor J. Christopher Flowers remarked to The Wall Street Journal that “fintech” would mostly end in tears for entrepreneurs.
His reasoning was that there is a fundamental strategic contradiction between technology and finance. According to Flowers, “the technological idea that you have to get big fast and dominate an industry” is at odds with the slow nature of finance, and lending in particular.
As the CEO of a fintech company, BodeTree, I’ve seen Mr. Flowers’ observations play out in the marketplace. The conflict is a direct result of how fintech companies are funded.
Investors of all kinds, from traditional venture capital groups to angel investors, are used to the growth curve of modern technology. Most funds, whether institutional or private, have an investment horizon of three to five years.
This means that investors inject capital into a company with the expectation of realizing a return on that capital over that investment horizon.
The problem here, of course, is that finance is a very slow industry. Whether you’re selling banking technology, small business solutions, or acting as a lender, it takes time to break into the market.
Unfortunately, fintech companies (and online lenders in particular) are often pressured by existing and potential investors to demonstrate so-called “hockey stick” growth. This, in turn, leads to short-term thinking on the part of the fintech company, which brings us to the second reason for the industry’s woes.
Reason #2 Market realities encourage short-term thinking
If you engage with online lenders like Lending Club or OnDeck, you would think they are data companies first, and lenders second. This is to be expected because it is through data that these companies have the potential to disrupt.
Unfortunately, market realities and investor demands are forcing these organizations to abandon data and technology in favor of traditional sales techniques. After all, growth is the only thing that matters.
This growth-at-all-cost mentality is incredibly damaging to the industry. When fintech companies start using their investments not for innovation, but for rapid growth, problems can arise.
Just look at Google AdWords prices to see what I mean. Over the past few years, the price per click (PPC) for keywords like “small business loans” has reached close to $100 per click in some cases.
As competition increases, fintech organizations are starting to make increasingly risky decisions. For companies like mine, that might mean accepting customers and offers that don’t fit our product perfectly. For online lenders, this means riskier and less desirable loans.
As Flowers notes, the only path to sustainable growth is to work with industry incumbents. This, unfortunately, has its own unique set of challenges, which brings us to our third reason for current industry struggles.
Reason #3: Market incumbents are powerful and resistant to change
I spend most of my days at BodeTree working with banks and other established financial institutions. Although each institution has its own set of values and goals, most have one thing in common: they hate change.
The incumbents in the financial sector are incredibly powerful and complacent. Most aren’t afraid of fintech companies looking to take their business because, frankly, not a single one poses a real threat right now.
Banking and financial services in general are highly regulated and therefore inherently conservative. It’s the only industry I can think of where a commitment to innovation and decisive action is detrimental to a career.
The common wisdom among bankers is that keeping your head down and maintaining the status quo is the path to long-term success.
This means that fintech companies that choose to pursue measured and sustainable growth by working with these incumbents are engaging in a long sales cycle. For BodeTree, that means a typical deal can take 12-18 months to materialize.
Now my team and I have worked hard to reduce that cycle, but even now the fastest move we’ve ever seen for a bank is six months from introduction to contract. This long sales cycle makes it difficult to raise capital and gain visible traction.
Although the situation may seem grim, there is still a long way to go for fintech to succeed. I am in no way calling for the death of fintech.
I strongly believe in the future of space; If I didn’t, I certainly wouldn’t devote my heart and soul to running a fintech company. Still, it’s important to have a sober view of the market and find creative solutions to the challenges we face.
My next article will outline the four steps emerging fintech companies should take to survive.