Was FinTech A Bubble?

A few months ago, fintech banking was a huge threat to traditional banks like ABN Amro and ING. Small banks like N26, provide clients with innovative and flexible ways of banking. This attracted many new clients, mostly younger people who are ‘not loyal’ to the bank of their parents. Investors valued these fintech companies highly, because they saw a lot of growth potential in them. The banks kept saying that the whole fintech situation is just a bubble and will burst. Were they right? 

Let’s start by explaining how the cash flow situation during the start of a fintech company looks like. Upcoming fintechs usually make losses, they are only valued high because they are expected to make large profits in the future. Currently, they are growing their customer base and that brings a lot of expenses. To fuel this growth and to be able to survive the annual losses, the fintechs need lots of investments. 

Investors do not dare to touch the fintech business anymore.

These required investments are not hard to obtain when the fintechs can show that they are obtaining users at a fast pace. However, due to corona many users prefer traditional banks. Traditional banks might be old fashioned and not offer the newest technologies, but they are ‘too big to fail’. Therefore, people feel like their money will be more secure at traditional banks. 
This is a huge problem for fintech companies, now they lost their aggressive growth numbers, investors are holding back their investments. Since the outbreak of Corona, only N26 and Judo have been able to attract new investment. Both these investments were financed by already existing shareholders. This shows that new investors currently do not dare to touch the fintech business. 

Cash is king, and fintechs do not possess enough.

So how is this going to end? If nothing happens, most fintech companies might go bankrupt. Analysts expect that large banks will buy some of the fintech companies, since they can be picked up for a very low price now they are in financial distress. Cash is king, and fintechs do not possess enough. This way, the banks also clears out the competition of these fintech companies. 
The acquisition of fintech companies can be part of a huge reorganization at the banks. For instance, ABN Amro is currently looking at their departments, since the bank is performing below the expectations. Modernizing can be done for pennies on the dollar, now the fintech companies are valued much lower than before the pandemic. It might be a missed opportunity, to not make use of this.

Banks can modernize for pennies on the dollar.

Visa has already started to acquire fintech companies and MasterCard is expected to also start shortly, since they will have to keep up. Analysts expect that in the Netherlands, banks will start to take over fintechs in the fall of 2020. This will contribute to the expected increase of acquisitions in the second half of this year. 
Why does the come-back of the M&A sector have to wait a few months? Companies are valued a lot lower than they were before, which will result in a low transaction price. The selling company will, therefore, try to survive Corona and regain its original value again. In the second half of this year, many of these companies will find out that they are unable to survive and then they will be forced to sell their company at a huge discount. 

So, what will all this mean for you? In the upcoming months, banking-wise you will not see a lot of difference. In the next academic year however, you will probably hear about many banks who are taking over small fintech companies. The result of this, will be many new inventions coming from your own bank, like tikkie. Banks are taking massive hits because of the corona crisis, but if they act well they should be able to come out of these hectic times as a more modern institution!