Fintech… they are from Helsinki right?

When I first heard about Fintech I thought it was a Finnish tech firm, and I sure as heck couldn’t wait to meet a super cool bunch of Scandy coders.


I was disappointed to learn that it meant ‘financial technology’. Despite the let-down it seemed to be the talk of the town, so at the end of 2014 I took some time to attend a few conferences to investigate further.

What I found was the most incredible amount of hot air from people drinking an awful lot of Kool-Aid.

Conferences, lots of conferences, full of ex-bankers in jeans rubbing shoulders with geeks in t-shirts all repeating the same totemic ritual, reciting a few buzz words over and over….Peer 2 Peer, Big Data, blockchain, Robo Advice. Only about half of the attendees knew what the words actually meant.

The attendees and speakers claim these technological advancements as their own, which is a little rich in my opinion, as surely all industries will benefit. Some of the tech being adopted by the Kool-Aid drinkers from the established banks was actually designed to kill the banks — blockchain was once cause célèbre of crypto-anarchists intent on redistributing financial control, now for fear of missing out every bank executive wants one.

To make matters worse, there is now a plethora of interloping terms, such as ‘Insurtech’ and ‘Regtech’… presumably any industry and sub industry could be tech’d… ‘#retailtech’, ‘#edutech’, ‘#childcaretech’.

There are even sub-terms, I recently heard about #femtech - which i assumed was a company that made sex toys for women. Completely wrong again.

Each of these made up constructs has its own conferences, increasing the total conference count, and accompanying hot air, exponentially.

I must now make an admission.

I too was caught up in the excitement for a few weeks or even months. I drank some Kool-Aid and started putting hashtags in front of finance related words.

Even now, I’m not saying the excitement over the future of technology is total hysteria. I strongly believe that the industrial potential of combining machine learning with huge scalable but affordable computational power, all interconnected through open API networks, that can be reliably authenticated is profound.

But… when you take a step back. The money being poured into these financial challengers is crazy. I saw somewhere that it's now around $1bn a week globally. The only way investors would be willing to take these crazy punts is if there was no yield elsewhere.

Indeed, ultra cheap money and high prices in the traditional public markets have led to just the right conditions for stupid, bubble inflating investments. Deutsche Bank has looked at the prices of equities and bonds as far back as 1800. The average valuation of the two main asset classes is above the level of the 2007 crash and close to an all-time high.

The data show that for bonds, a combination of very low inflation and big purchases of government bonds by central banks means that nominal yields have been close to record lows; real yields (i.e., accounting for inflation, using a five-year average) have been lower only 17% of the time.

For equities, because of the lack of long-term profit numbers, Deutsche compared share prices with nominal GDP. On this basis, equity-market valuations have been higher only 23% of the time (though shares looked dearer before the 2015 sell-off).

The high prices and a faltering IPO market has meant mutual funds — and others that primarily invest in public markets — have been drawn into investing in private financing rounds from high growth Fintech ventures. They have yet to discover if this inside track is any more profitable than investment through VC funds.

VC funds — more accustomed to investing in these kind of assets — have themselves produced weak returns in recent decades. Only a small number of funds have generated returns high enough to compensate investors for illiquidity and opacity.

I recently met a fund manager from a leading London Fintech VC. After the meeting I asked how many of his c50 Fintech investments were currently turning a profit. It took some time to get an answer out of him but he eventually said 2.

This massive influx in private funding has suited the Fintech startups most in demand. They have been able to raise billions to expand operations without facing the disciplines of a public company (quarterly results and financial disclosures). In effect they have achieved the benefits of going public without the responsibilities.

There is a point to listing rules; they provide protections for absent investors. As Fintech (or any other kind of startup) companies have grown, investors in different rounds have been given different degrees of protection and special treatment. The idea that each share is equal (i.e. equity) is being seriously challenged.

The end of cheap finance

With tightening US monetary policy the era of ultra-cheap financing is ending. This combined with a global economic slowdown means that the Fintech firms are going to have to work harder to raise equity, and at valuations much lower than they would have achieved previously.

The kool-aid will run out and the hashtags will go elsewhere. The promise of private finance is being tested and there will be disappointments as the Fintech bubble deflates. Pension funds have been swept out of their depth which means we will all take a hit in one way or another.

I personally think the bubble will re-inflate; the current finance value chain is just too cumbersome. I just hope that when it does, it’s met with safer, more democratic funding.