The FinTech Bubble

A question of trust

Since the banking crisis of 2008, the big retail banks have been working hard to rebuild their relationships with customers. This has been ever harder given the number of eager FinTech startups who are advocating a whole new way of looking at money. Their approach is positioned as benevolent and fair – a far cry from the perceived greed associated with the banks of 2008.

The rise of Blockchain, peer-to-peer lending and the growth of digital banking has led to a market bubble – a surge in the market based on speculation. This has only encouraged an explosion of activity in the sector, but the thing about bubbles is that they inevitably burst. At the moment, new and long-standing financial businesses are battling it out to gain and retain customers. The question is, will consumers really turn away from legacy companies to try out a FinTech startup?

Transforming the financial sector
FinTechs have undoubtedly disrupted traditional finance, but the key issue in banking is always trust. Banks need customers to trust them if they are going to survive as a business. Many well-known banks have been involved with scandals or financial crises, seriously damaging the faith that customers have in them. FinTechs differ in that they have no association with past problems and are starting afresh. They also deviate from traditional firms by their very structure, taking an open approach which puts the customer’s needs first. Peer-to-peer lending has emerged as a key feature of the changing financial sector, taking the power away from big banks and giving it to the public. The startup Seeds is just one company that facilitates these types of loans, focusing on women in developing countries. All of this is attracting customers who don’t want to be tied down to lengthy, complicated accounts, and investment is accelerating this trend. In 2015, global FinTech investment grew by 75 per cent, reaching $5.3 billion in the first quarter of 2016.

Bursting the FinTech bubble
Whilst all of this may sound fantastic, startups have come up against a real problem in establishing initial trust. Even though they haven’t been part of negative dealings in the past, they also haven’t got the marketing budgets that have created the brand familiarity that the established banks hold. Deloitte are among the sceptics who have questioned the reality that these innovative startups could pose a threat to banks, stating that small, emerging firms lack the scale and competitive advantage of established players. Despite their customer focus, ease of use and all of the other benefits associated with these new companies, consumers still have brand loyalty to the banks that they’ve used all their lives. That’s the power of these firms – they’re so well-established that some people even view it as a family tradition to stay with the same bank.

The key for FinTech startups is to capitalise on so-called millennials, who are disrupting established patterns. Millennials don’t associate with brands in the same way older consumers do, and are notoriously hard to reach via advertising. There is less attachment and brand loyalty to the established banks with younger customers. Therefore, the way to break the cycle is to offer a product which appeals to these types of people. . . however, the shift won’t happen overnight. The new FinTech startups, propelled by venture capital and a simple, benevolent concept, may well change the nature of banking given time.

It’s not just a battle of old versus new, though – traditional banks are adapting their business models to reflect the changing face of finance. On the one hand this is great for consumers, who will have more user-friendly options to choose from. However, the influx of new companies could be confusing, and lead people to stay with legacy banks simply because they’re bewildered by change. It’s easy to see why economists and other commentators are sceptical that the success of FinTech startups will last in the face of big banks, especially as these banks adopt technology and rethink their strategies. FinTechs (and InsurTechs) across the board have clearly developed an attractive new approach to finance, but they need continued investment to really challenge the monopolies of big banks. Ultimately, the new players in banking have disrupted the sector. Now, they need to establish brand loyalty and trust, continue to gain investment and get powerful banking companies on board. Whether the FinTech bubble is about to burst will depend on how well they can do this.

Is the FinTech bubble about to burst? Can startups persuade consumers to deviate from traditional banks? Would you trust a FinTech startup with your own money? Comment below with your thoughts and opinions.