Fintech Bubble

Ready to Burst?

A lead zeppelin? Source: Handelsblatt [M]

David Harding is one of those rare hybrids: a scientist-turned-geek investor. The Brit studied physics before building one of the world’s most innovative hedge funds, Winton Capital, which invests exclusively on the basis of computer algorithms and statistical models. But as far as the future of technology-driven financial start-ups goes, Mr. Harding, whose fund has a whopping $30 billion under management, remains skeptical.

“As a financial man, I am always skeptical about such models, which initially devour millions and billions in investment before they really come to fruition – if at all,” he said.

Christopher Flowers, a billionaire investor and former partner of investment bank Goldman Sachs, went one step further. He told Handelsblatt that he expects nine out of 10 financial start-ups to fail, and that the current boom is actually a bubble – one that will burst sooner than later.

These fintech companies are lauded as one of the key drivers of the digital revolution in finance. Competition has heated up for the turf held by conventional banks, with a big helping hand from investors. In the first six months of this year, around $12 billion poured into emerging fintechs (see charts below). In Germany alone, some 250 fintechs have been launched since 2010, according to consultants E&Y.

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Much of this investment has been driven by hopes – some say hype – that fintechs are the shape of things to come. But their aspirations will not be fulfilled, Mr. Flowers warned. “It is quite clear that some of the business models can never work,” he added. “I’m afraid the bubble will burst.”

Prominent bankers such as Carola von Schmettow, the boss of HSBC Germany, are among those expecting a market shake-out. In a survey of bankers conducted by BearingPoint, a consulting firm, two-thirds of respondents were convinced that less than 20 percent of today’s fintechs will still be on the market in three years’ time.

Shrugging aside doubts about their longevity, these young turks are going on the attack in all business sectors, especially retail banking. Founded only in 2013, German digital bank N26 lured 500,000 customers into its fold over the past two years. And fintechs are even muscling into activities once dominated by big investment banks. The web-based firm 360T built itself into the world’s third-biggest foreign-exchange trading platform before being gobbled up in 2015 by Deutsche Börse, the German securities exchange operator, for €725 million.

Successes of this magnitude draw bulge-bracket investors seeking more of the same. Auditor-consultants KPMG estimated that more than $115 billion in investment has washed into fintechs since 2012.

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At the same time, the disappearance of onetime high-flyers is striking. “This is particularly noticeable in the field of payment transactions,” said Peter Barkow, founder of Barkow Consulting. Becoming the next Paypal obviously isn’t easy. On the other hand, there have been few market exits in insurtech, the insurance industry’s equivalent to fintechs, Mr. Barkow added.

Payment services Yapital and Avuba, and online investment agent Cashboard, are among recent high-profile casualties. Others have simply been absorbed: German online payment company BillPay, for example, was swallowed by Swedish payment giant Klarna.

Reasons for failure do not necessarily include a poor business model. “Often the start-ups do not scale their concept fast enough and win customers,” said Mr. Barkow. This is often due to meager budgets, because newcomers typically have yet to build a reputation and try to compensate by shelling out for marketing.

According to a recent survey by Comdirect, the online banking unit of Germany’s Commerzbank, only 14 percent of respondents in the country use fintechs. But that is set to change, and radically. Ralph Hamers, boss of Dutch bank ING, is among the powerful bankers who believe the digital upheaval will transform the face of finance in a few years’ time. “Some [fintechs] will survive and push the established banks forward in terms of service and management, but more as partners than competitors,” said Ms. von Schmettow of HSBC.

Michael Maisch, Robert Landgraf and Katharina Schneider cover finance for Handelsblatt in Frankfurt. Jeremy Gray adapted this story for Handelsblatt Global. To contact the authors:,,

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