UK Fintech: Bubbles burst, that’s their nature

“You only find out who is swimming naked when the tides goes out” – Warren Buffett

2017 has been quite a year for UK Fintech companies. A lot of money chasing not so many opportunities has driven prices sky high, helping to break the normal correlations between high valuations and strong and sustainable business models. Spend a year coding in your bedroom, and maybe someone will offer you £50m for your efforts!

As a group of partners who have been working in financial services and technology since the early 1990s, we have a strong sense of déjà vu: Fintech just now reminds us of the investment frenzy phase of the dot com bubble in the late 90s. Bitcoin is another example of widespread ‘risk-on’ behaviour in the market.

Many Fintech companies we see fall into the build-a-better-mousetrap category: yet another banking platform, a slightly different payments engine, the umpteenth Blockchain implementation, etc. Their finances are underpinned by investors bankrolling spending, not by a sustainable business case.

We don’t think the UK Fintech bubble has long left before it bursts. For us, the most likely cause of the bubble bursting will be the next UK recession caused (mostly) by the impact of Brexit.

When the next recession hits, Fintech investment will evaporate, with the following consequences:

  • Many Fintechs, those that never had much real value or competitive advantage to start with, will be written off by investors and go bust
  • Some Fintechs, the ones that did have a competitive advantage but were in danger of running out of cash, will be bought by larger technology vendors or financial institutions at firesale prices
  • The lucky few, those that started early with a good idea and sharp focus, will survive and prosper in the post-recession landscape

We genuinely congratulate all those Fintech company owners who managed to sell out (even partially) in 2017 - your timing (luck?) is impeccable. For those of you who have not, perhaps now might be a good time to put up a for-sale sign.

From a Tier 1 banking / financial services perspective, it will soon be time to get your cheque book out to snap up some Fintech bargains. While many view the emergence of Fintech as a threat to the traditional business model of the incumbent banks, Fintech is just another opportunity:

  • Selectively adopt enough Fintech ideas to keep up with the changing market and complement existing banking products and customer experience – this is an evolution of banking, not a revolution.
  • Identify opportunities in Fintech to move into the cloud, reduce manual processes, improve security, and detect fraud.
  • Invest in a robust enterprise service layer, enabling the bank to quickly ‘plug and play’ with Fintech APIs as a component of a comprehensive services offering, increasing agility to respond to market changes.

Valentia Partners helps clients who want to connect new technology, including externally hosted cloud services, to legacy in house technology platforms. We can advise on how to maximise the return on your existing technology estate, and help to avoid expensive and unnecessary replatforming disasters.

We deliver suites of open or closed API services that link different systems and services together to transform the customer journey offered by web apps. We also manage the delivery of the platforms and architectures that host the APIs connecting different systems.