Why is Fintech Crashing?

Fintech has been on the rise in the past few years, with businesses and investors seeing particular success in 2020 and 2021. However, over the course of 2022, there has been a significant crash in Fintech, with the past two years’ stock growth being wiped out, as market conditions have become increasingly uncertain and investor confidence has declined.

This does not mean the end for Fintech, of course. It is still one of the major industries in which innovation will be crucial in the coming years, especially as businesses and individuals require new ways to fund projects and make financial decisions. Whether you’re looking to get a P2P business loan or track your investments with an app, you’ll find the solutions in Fintech. But Fintech companies will need to work harder to survive in the face of low confidence.

Why is Fintech crashing? There are several possible reasons for it. Some experts point to overvalued startups, while others cite the abundance of companies merging with traditional financial institutions. Let’s go into these reasons, and others, in more detail.

Overvalued Fintech Companies

For a couple of decades now, it seems like every new Fintech startup has been overhyped. There are always reasons to be excited about this industry, especially for investors looking to capitalize on the constant turnover of funds in many Fintech companies. However, that hype grew to a fever pitch over the past few years, leading to overvalued stocks.

This overvaluation of Fintech stocks set the industry up for the consequent downfall. While it is easy to point to the stocks as the problem, they are really only a symptom. The fact is that the hype around Fintech led to a general sense that Fintech startups could do no wrong. The industry became overvalued, leading to the next issue.

A Saturated Market

How many Fintech startups can you name off the top of your head? Chances are that the ones that first come to mind are companies you use. Think about how you chose each of these providers. You will have looked at reviews of a number of alternatives before settling on the one you liked most. If you were paying particular attention, you might have started to realize how saturated the market is.

The problem is that the few companies you were choosing between were a small fraction of the companies trying to succeed. Each one may have claimed to have a unique selling point, but they all offered what was essentially the same service. Many more companies have copy-pasted the format of a successful startup hoping to cash in on the same idea.

This was not so much an error in judgment as a miscalculation. It seemed like the billions of potential customers could keep the market from becoming saturated. However, even a huge customer base has a saturation point.

It’s not just the saturation that is an issue for the confidence in Fintech companies. It is also the power of the biggest firms.

Overpowered Industry Leaders

In the same way that the smartphone wars are concentrated among a handful of companies, small businesses in every industry are struggling to stay independent. The reality is that as soon as a company starts to succeed, the big firms buy it out, becoming more powerful in the process. Any other companies trying to provide the same service do not have the resources to compete on the same scale.

One of the reasons given for the Fintech crash is that companies are becoming too ‘cozy’ with the big banks. In other words, people are losing faith in the startup boom because startups are not retaining their independence. It is no longer exciting to invest in Fintech when you’re investing in the very companies that startups were meant to disrupt.

Even regulators are becoming wary of the connection between startups and big banks. The homogenization of the industry leads to further risks, as customer accounts become concentrated in the biggest firms rather than in the many startups supposedly expanding the industry.

The next few years are going to be tough for the Fintech industry, as startups need to regroup and figure out how to build up hype once again. As things stand, Fintech startups may still be overvalued and a further correction could occur. That being said, due to the nature of the Fintech industry and the role it plays in society, there will always be room for disruptive startups to grow.