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Investors Need to Get a Lot Smarter About FinTech

Ben Ashby

13 Dec 2021

Rapid product rollouts, a slick user interface or innovative technology are often cited as key competitive advantages, but these are not strategies in themselves.

Original article published in Bloomberg:


Ben Ashby is a former managing director in JPMorgan's Chief Investment Office and current Managing Partner at Good Governance Capital.


The good news is that advances in financial technology, or FinTech, are going to improve customers lives. The bad news is a lot of investors are going to lose money while it happens. With a record $98 billion invested in the first half of 2021 alone, taking the total to in excess of $1 trillion over the past decade, the amounts involved are stunning.

Despite some amazing companies many FinTechs are poor investments, beset by serious flaws in their business models and operational performance. We are in an era of immense technological change, but cheap money and the need for growth has blinded many investors to the risks.

Investors need to first focus on the basic product. The key question is what problem the FinTech firm is trying to solve? Does it add value to customers and is the product better than its competitors? Surprisingly, I have seen a lot of FinTechs where these basic questions seem not to have been asked. A good example is the myriad of blockchain companies, with many trying to find a problem that can fit their perceived solution. Their products might be technically sophisticated, but are they enough for customers to switch?

The wider problem is that many firms lack a viable strategy. Rapid product rollouts, a slick user interface or innovative technology are often cited as key competitive advantages, but these are not strategies in themselves. Neither is lower cost. In many cases the competition could also reduce its pricing, thereby crushing returns. How long could firms like the money-transfer firm Wise Plc or Revolut Ltd survive if a major incumbent such as HSBC Holdings Plc started a price war by offering the same foreign-exchange rates?

A poor fundamental strategy is common and can often be detected by firms entering “Red Ocean” markets. A Red Ocean is an existing market with lots of competition. Usually, the returns are determined by market forces and disrupting these can be extremely difficult. Unless you are doing business in a very different way, you are going to be hostage to these same forces and see disappointing returns. Hence the lackluster performance of European challenger banks like Metro Bank PLC, Monzo Bank Ltd. or Peter Thiel-backed N26 GmbH should come as no surprise. They were doing nothing fundamentally different than the incumbents. As Thiel said, most firms fail because they fail to escape the competition.

By contrast, “Blue Ocean” strategies are overlooked. A Blue Ocean is one where there is a lack of competition and an opportunity to create new demand. A Blue Ocean strategy could start in a niche of an existing market but expand or even create a completely new market. This is often where true disruptors are born. The best example is Inc., which started in selling books and expanding into new markets such as cloud computing.

Unfortunately, many FinTech management teams lack the skills or an understanding of the complexities of the markets they are trying to enter. The markets they are trying to disrupt are often highly regulated with complicated dynamics. The electronic money, or e-money, payment firms have had a particularly tough time.

A deep knowledge of financial markets is often absent. Money is possibly one of the oldest “technologies” in existence, yet many cryptocurrency proponents appear to be unaware that Bitcoin is essentially an old idea – private sector money – in a new form. Private sector money has a checkered history and has often run afoul of governments seeking to protect their monopoly on money. Various well known behavioral fallacies also abound, such as the vast energy usage creates inherent value. It doesn’t, this is almost classic sunk cost.

Does this mean the entire crypto universe can be casually written off as a worthless fad? I don’t think so. It seems likely that something will emerge from the massive innovation in the digital asset space, but I doubt that the early-stage cryptocurrencies will prove to be the ultimate winners unless these significant issues are addressed. To get an innovation right the first time would be very unusual.

A lot of the problems with FinTech emanate from the wider venture capital industry. Flooded with liquidity the industry has grown enormously in recent years and there has been huge pressure to deploy capital. Red Ocean markets are already in existence and their size and value can be relatively easily quantified. Groupthink is widespread, and fashionable investment themes attract lots of capital but increase competition. By contrast, Blue Oceans might start in inauspicious places so it is much harder to conceive their true potential or where skilled management teams can take companies. They also require greater patience.

Starting with flawed business models has meant many of the FinTech start-ups seem to be too focused on getting a higher valuation in the next round of funding while the need to become profitable seems secondary. Given a lack of profitability, valuations are often inflated. Many of these businesses will struggle in the next downturn.

Technological revolutions often come in waves, and we may well only be half way through a multi-decade one. They can trigger deep change around how business and even societies are structured in ways that are hard to predict. The expansion of the auto revolution enabled suburbanisation and the way we shopped. Based on valuation, Walmart appears to have been a bigger winner from the automobile than the car companies themselves.

It may take years for the winners to emerge, and the biggest winners may be from other industries entirely. Rather than chasing fashionable themes at extreme prices, investors should perhaps consider more Blue Ocean opportunities or just be patient. Some of the best times to invest in tech in the last cycle was after the crash and history may well repeat itself.

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