Is there really a bubble in the FinTech ecosystem?

There has been talk of a speculative bubble in the FinTech ecosystem, which is breaking the rules of the banking game, and thus, for a good number of analysts, is a risk that must be taken into consideration under the perspective of private investment and traditional banking itself.

The growing role and relevance of FinTech companies, which are often encroaching into traditional bank territory, has sparked a great deal of expectation in the stock and investment market, thanks to their technological component and fairer, more inclusive finance.

As it is often the case with any new market development, there tends to be some degree of speculation about its growth and decline, which is why Fintech companies themselves have created local and regional Fintech partnerships in several countries in the region, where they actively participate in the design of public policies and regulation. At the same time, the digital financial services ecosystem is energized through positioning, knowledge and capital strategies aimed at three main goals: Investment, talent and digital financial inclusion. These partnerships address market speculation through tools for attracting more and higher quality investment into the industry and mitigate the bubble effect through regulatory coupling.

Thus, the upswing of the sector, however, waned in 2022, experts say, since the pandemic accelerated digital transformation processes in companies that in turn needed to be part of the financial products offered by Fintech companies; but in the coming years, the trend will be towards stabilization and consolidation of these new users in the ecosystem, which does not imply the existence of a bubble but rather the end of speculation.

Dutch venture capital firm Finch Capital, which has financially backed some of the nascent Fintech companies, notes that factors such as the increasingly fierce war for top tech talent, rising interest rates, the cooling of IPOs and SPACs, and the increase in regulatory scrutiny of the sector will hamper the growth of Fintech in certain parts of Europe. The upshot will be seen in Fintech firms of the LatAm region that have their origin and their main source of financing there.

Furthermore, layoffs in start-ups have increased by 350% last year (2022), while funding has fallen by 30%. This is a trend that particularly hits the Fintech sector, but reflects the current reluctance to invest in them, fueled by the consequences of the pandemic, inflation, and the war in Ukraine.

However, it is important to clarify that this “prick on the bubble” depends to a large extent on the area in question. The latest issue of Finnovista Fintech Radar Mexico (2023) explains that during the first half of 2022, investment in Fintech in Latin America accounted for 38% of the amount invested in the region, which is a continuation of the trend of recent years as the most important sector for venture capital investment. Startups in the region attracted USD 2.86 billion in the first half of 2022, according to data from the Association for Venture Capital Investments in Latin America (LAVCA), i.e. a 27% fall from the same period of 2021, although it also represents a normalization of investment in Fintech after 2021 with growth above 200% compared to 2020.

The growth in the number of deals in the Fintech sector was higher than that of the venture capital industry, with a 58-percent growth in the first half of 2022 compared to the same period of 2021, i.e. a 15-percent rise.

Furthermore, the performance indicators, revenues and number of Fintech users continue to grow consistently year after year. Companies in the upper income and employee brackets are primarily in the Digital Banking, Lending, and Payments and Remittances segments.

Thus, the more risk-inherent areas of Crowdfunding and Wealth Management have seen a drop in investment capital compared to Fintech focusing on Business Lending, and to the technological advances that have allowed the indiscriminate incorporation of stakeholders in the ecosystem. In the lending segment, however, the business model requires a more comprehensive analysis of internal and external variables built with data-driven scoring and artificial intelligence from both the end user and the service provider.

Another element that helps predict a consolidation of the ecosystem rather than growth, is that there is not enough human talent in the technology market, especially in the LatAm region, and although work is already being done on that front, the first results will not be seen in the short term.

Lastly, regarding the market, another factor is that, unlike the dot-coms that went head to head with existing companies in the market, Fintech firms are an ally that seeks to provide solutions to the needs of customers that traditional banking has not been able to address through the use of technology. The new disruption, which is based on the convergence of emerging technologies that fully exploit the gigantic volume of created and processed data, based on analysis driven by powerful algorithms, is the differentiating element within the business model.

Clearly not all Fintech companies will become a unicorn within the ecosystem, but the outlook points rather at a consolidation of the progress made, than at a loss of market, or in the worst case, the disappearance of it.

The Fintech industry continues to grow and is a balloon, but certainly not a bubble. We should not worry too much about the collapse of the industry, as companies can come together and innovate to grow. And at this rate, innovation will be more important, and companies that become dynamic in this direction are likely to lead the race and benefit from greater stability.