The number of new fintech startups around the world has fallen sharply since 2015, but it’s not because the “fintech revolution” is slowing down, WealthManagement.com writes. It’s because established financial firms are getting in on the game, according to the publication.
From 1,000 New Startups to Less Than 100
The number of new fintech companies per year rose steadily from 257 in 2008 to 1,000 in 2015, according to a Atlas data cited by WealthManagement.com. But that number dropped to 501 in 2016, and so far this year, only 88 new fintech companies have been founded, according to the report cited by the publication. A similar trend can be observed around the world, WealthManagement.com writes.
But the slowdown in standalone startups is due to innovation being co-opted by large incumbents, who are acquiring the upstarts or taking technological development in-house, WealthManagement.com writes. And despite the obvious obstacles to innovation inherent at large institutions, such as inertia and red tape, the trajectory of the fintech revolution will not flatten out, according to the publication — the large firms will have to change the way they compete with each other precisely because fintech has such potential to disrupt the status quo.
Large financial firms traditionally relied on trading for the bulk of their revenue, but new technology is changing it, as are regulations such as Europe’s MiFID II, which hinders the ability to bundle services to clients to obtain value, WealthManagement.com writes. Going forward, financial companies will compete on the bank end, according to the publication. What’s more, robo-analysis rather than robo-advice will drive the next phase of the revolution, WealthManagement.com writes. So companies that can harness the power of technology for gathering and analyzing data and machine learning to integrate with their research department stand to lead the race, according to the publication.
At the same time, fintech startups that emphasized the “tech” part over the “fin” part have had a rude awakening, realizing that moving fast isn’t the best approach when it comes to people’s money, WealthManagement.com writes. LendingClub, for example, valued at $8.5 billion in 2015, suffered a falsified loan data scandal and is now valued at $2.5 billion, with its former CEO out of a job, according to the publication.
And the complex web of trust, compliance and liability issues is exactly what incumbent financial firms have been dealing with for decades, WealthManagement.com writes. Meanwhile, their extensive legal and advertising capabilities, combined with longstanding relationships with a large customer base, means such entities can better handle a scandal, even such as the one that rocked Wells Fargo, according to the publication.
Fintech startups have realized that finance is harder to disrupt than other industries, so they’re more likely to partner with the incumbents, WealthManagement.com writes. Meanwhile, the incumbents are eager to partner with young upstarts to turn competitors into collaborators while getting the technological innovation more difficult to achieve for a large institution, according to the publication.
