We are nearing the end of this macro cycle. The next bear market is inevitable even if not imminent; we cannot know the timing but we know it is coming (it may have started already, we may just go sideways for a while or it won't happen for a few years).
What entrepreneurs, CEOs and investors want to know is how will this affect both Fintech startups/companies and incumbent Financial Services firms?
ISX has shown evidence that they have a chance to deliver on all fronts - to customers, users, investors and employees. By crushing competition or dominating their selected segment of the space they get pricing power. For example, Facebook is doing this today and in earlier generations Microsoft and Google did this. It is possible for existing incumbents to crush the startups by adapting, embracing and extending. This has not happened in earlier waves of disruption (eg in Media and eCommerce) but banks are hoping it will play out differently in the Fintech wave.
This Consolidation stage (a phase in the industry or company life cycle where segments in the company or competitors in the industry start to merge) has not yet happened within Fintech, with the exception of consumer payments (where the incumbents are winning). A few Fintech companies have gone public, but they have not yet been tested through the macro cycle. It is clearly debatable what will happen when the macro cycle turns. This is complicated by the fact that the current macro cycle is a credit boom and will therefore impact the Fin part of FinTech. However, the Tech part of FinTech is exogenous (e.g what happens to Bitcoin is not driven by macro cycles even if macro cycles temporarily impact everything).
What a lot of people want to know is, will existing Financial Services incumbents crush the Fintech startups/companies during the next market crash? Or will the macro cycle ramp up the disruption that gave birth to Fintech in 2009? This is where we need to look at the intersection of tech innovation stages with the macro cycle.
Looking for bubbles in all the wrong places
Market crashes can leave a psychological anchor of pain that many can't forget. So, it is natural to look to history to see what the next crash will be like. This can be misleading because history seldom repeats exactly.
History may not repeat, but it does rhyme, so lets look at the last two crashes within a Fintech context:
One crash was Tech and one was Fin:
-The Dot Com crash in 2001 was a Tech crash. Since that event, Tech investors have been nervously looking for the next tech bubble. Possibly because of that nervousness, there is not much of a tech bubble, despite years of easy money. Public tech valuations are mostly reasonable. Private tech valuations have some froth, but few people lose in these private deals.
- The global financial crisis in 2008 was a Fin crash. It was driven by overleveraged banks and the overleveraged consumers whom they lent to. The impact on Tech was minor – a mere blip – but because it hammered Fin it created the fertile soil for FinTech to germinate.
Who is over leveraged this time?
Macro cycles are almost all about monetary policy aka credit aka leverage.
So lets look at the macro cycle with this perspective, to see who was over-leveraged in the last two crashes: - The Dot Com crash in 2001. It was equity investors who over-leveraged (believing that stocks can only go up so they can borrow to buy tech stocks). This included some consumers who became day traders thanks to the arrival of e-broking. - The global financial crisis in 2008. It was banks and the consumers who borrowed from them who over-leveraged (believing that property prices can only go up so they can borrow a lot to buy property).
In the current cycle we can see who is not over-leveraged: - Corporates have fortress balance sheets. Even Banks have deleveraged (more so in America than Europe). - Consumers made great progress deleveraging in the West and were never that leveraged in the Rest of the World.
In this cycle it is Governments who are over-leveraged. We have not had a cycle like this in modern times. The idea that lending to governments could be more risky than lending to companies will take a long time to be accepted.
So the crash and the recovery won’t follow a trajectory that we have got used to. It might not be a U or a V shaped recovery. It might be a long slow grind it out recession like the 1970s without any sharp crashes or quick recoveries.
There is no single Fintech market
This means there is no Fintech bubble.
There are overheated valuations in individual ventures and in some sectors, but you have to look at the market segments within Fintech individually: - Bitcoin (as a currency) - Blockchain (without Bitcoin) - Lending Marketplaces - Small Business Finance - InsureTech - Underbanked - Consumer Payments - BNPL
The losers & winners in a bear market
Losers: - High burn rate ventures. Fintech ventures that rely on advertising for growth need VCs to keep funding that growth. There will be down rounds, layoffs, and high profile names going to the deadpool. - Momentum Investors. VCs and Angels who invested later in the cycle and did not get a liquidity event in this cycle are left holding stock that will decline sharply in value.
Winners: - These will be companies that are not dependent on investors to fund growth. They fund growth from internal accruals (and because of that investors will be ready to fund more rapid growth if needed). Incumbents are in this position, but they still move too slowly. The Fintech startups/companies that are growing (great revenue growth and profitable but still think and act like a startup) have the right combo of agility and scale to prosper in this environment.
