Fintech’s Resilience in a Post-Boom Era

By: Martin Lukavec, Ph.D. Programme Leader at London School of Business and Finance

The fintech sector hasn’t had an easy time over the past few years. Investors are known for their short attention spans, and while fintech companies were the market’s darling for several years, investors have recently shifted their focus to AI—and, even more recently, to eco-technology companies. Compounding these challenges, rising interest rates over the past two years have destabilized the business models of many fintech startups. The industry has shed tens of thousands of jobs, and the market capitalization of crypto and fintech companies, as a share of all companies, has fallen back to nearly 2019 levels. Does this mark the end of the fintech revolution?

Not quite.

What’s driving the fintech revolution? Simply put, technology provides solutions that didn’t exist before, while much of the financial infrastructure remains outdated and inefficient. For instance, many traditional banking payment systems date back to the 1970s. Due to this antiquated architecture, their operations are clunky and labor-intensive, forcing banks to charge high fees to compensate. The Federal Reserve launched the FedNow service for instant payments only last year; before that, banking transfers took days to settle—a delay that seems incredible given modern technological capabilities.

Credit and debit cards are also outdated technology, worsened by the Visa/Mastercard duopoly. High market concentration results in high markups: according to The Economist, Visa and Mastercard have profit margins as high as 40–50%. It’s no wonder banks charge significant fees for card payments.

Fintech companies can exploit these inefficiencies by using smart technology. If you run an exchange, for example, you don’t necessarily need to buy currency from third parties; many transactions simply cancel each other out. People selling pounds and buying dollars will offset those selling dollars and buying pounds. By setting exchange rates correctly and updating them frequently based on demand for each currency, you can avoid running out of funds. However, this requires a precise data management system that tracks buying and selling trends in real-time. Wise (formerly TransferWise) has such a system, which has enabled it to outcompete traditional banks in the foreign exchange spread (the difference between buy and sell rates charged to consumers).

Some of the challenges in the fintech industry over the past two years have been warranted. Initial excitement is often followed by questionable business practices, and many businesses had dubious models. For instance, in some cases, customers needed to open an online account and deposit initial funds. Unlike banks, fintech startups do not face the same reserve or capital requirements or strict reporting obligations. If users find the service valuable and keep money in the account, the fintech can use it as collateral for borrowing and investment. While the service may be cheap for users, returns from investing borrowed funds become the company’s main revenue stream. However, this strategy requires caution and investment in low-yield, highly liquid instruments. Without these safeguards, a sudden rise in interest rates can lead to collapse.

In the past two years, we’ve seen the market separate the wheat from the chaff. Although it hasn’t been easy, the industry is likely to emerge healthier and more viable, with strong ideas and smart technologies continuing forward.

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