Fintech in 2022 and beyond: “Balloon” or “Bubble”?

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Fintech seems to be having a moment. The term encompasses companies that improve (usually by automating) financial services through technology, and its associated industry was the top sector for venture capital investment in 2021, according to News from CrunchBasemarking $134 billion in investments and growing 177% year over year.

With so much money pouring in, should you jump on the bandwagon, or is it all one giant accident waiting to happen? A closer examination of the situation suggests that fintech is not a bubble, but rather a balloon, which could remain in the air for a long time.

enter the sky

By definition, a bubble occurs when the price of something rises rapidly due to exuberant market behavior rather than guaranteed characteristics or fundamentals. In other words, the value goes up because people are unjustifiably excited, not based on what the asset actually is or offers. Once that enthusiasm cools, people sell out and the bubble bursts.

But fintech does not really meet this definition. Yes, it is seeing a rapid increase in investment, with the first half of 2021 ($98 billion) outpacing the whole of 2020 ($121.5 billion), according to KPMG. But investors decide to pour money into companies based on how big those companies are likely to grow, rather than their pre-IPO valuations. In that sense, there is nothing to sell, because so few fintechs have gone public. Longer term data from Statistical also shows that although investors have been rushing into the industry over the past decade, the amount of money they are funneling has actually declined.

With these facts and figures in mind, businesses across all industries are embracing digital like never before, and the pandemic has only accelerated the adoption of new technologies, including contactless payment and others. services. It is relatively safe to consider this change permanent due to the general state of the economy, as well as the competitiveness, growth opportunities and convenience it provides.

Although banks and other financial institutions have been slower to go digital than other sectors, they are gradually transforming their operations and offerings to reflect this new technological reality. As this happens, investors who have been able to accumulate funds are looking for alternative places to put their money. Fintechs are taking full advantage of this – grabbing a steady stream of financial war chests, which is keeping their industry afloat.

Related: Fintech companies have the power to advance financial inclusiveness

Differentiation and consolidation both work

With plenty of money available, there are plenty of opportunities for new fintech organizations to enter the game. But the ease of entry that technology offers creates a bit of a paradox: as more and more fintechs invade the space, it becomes more and more difficult to find points of differentiation.

It’s not that different from what’s already happening, for example, in carpooling and food delivery. So many restaurants and grocery stores now offer this service that it’s becoming the default, and so people choose which provider to turn to primarily based on access (e.g., “Do they have my favorite pad thai? “) Rather something particularly innovative. Similarly, many people frequent any vehicle service that has a driver available at a specific location. Fintech companies need to recognize that the line for innovation is thin and be realistic about the options they have for development.

Related: Innovation, Fintech and the future of investing

But differentiation East possible. Uber, for example, is known for transportation, but quickly pivoted to allow its drivers to also deliver food. Uber Eats is now in healthy competition with Grubhub and DoorDash, bringing in billions of dollars a year. Lyft now allows drivers to also deliver food, but intentionally chooses to continue to specialize in rides.

While fintech companies can use their war chests to pursue disruption, investor money can also be used for acquisition when companies have similar goals. This means that good ideas are not the only factors determining success – another is whether companies can see ways of consolidation that give them enough clout to stay relevant.

In the months and years to come, you’ll likely see a decent amount of acquisitions in this space, the most recent being Square’s planned acquisition of BNPL platform AfterPay for $29 billion. That said, constant reinvention will become more and more necessary, and the introduction of new distinctive signs should drive the market forward and prevent the ball from dropping. This continuous development will become the norm, but we will probably see the emergence of a group of leaders who are particularly good at it.

Related: What’s on the Horizon for Payments and Fintech in 2022?

Creative fintechs will lead, so build your ability to innovate now

Fintech is high right now, but it’s a ball, not a bubble. You shouldn’t worry too much about the sinking of the industry, as its organizations can both consolidate and innovate to grow. However, innovation will become more mainstream, and companies that become creatively gifted will likely end up dominating the space and enjoying greater stability. To secure your position for the future, develop your ability to do new things now.