London is the epicentre of fintech development, and there are a plethora of different approaches appearing, some of which are more 'tech' than 'fin', while others are more 'fin' than 'tech'.
If you look around, most people are being opportunistic, doing what has been done before, only slightly differently, using technology to make old things work more efficiently. But when you consider who is being innovative, it's a much smaller pool of people.
At some point, interest rates are going to go up and there will be a scenario whereby the environment in which fintech businesses are operating is going to become more challenging for several reasons.
Firstly, those models that can properly assess the risk of what they're taking onto their books are going to be in a much better position than those that aren't. Again, there will be a divergence between those firms that can do that well and those who cannot. That may not happen in the next 12 months, but that's certainly a trend that's going to continue to grow.
Secondly fintech firms will find their cash flows stretched in two ways. Firstly, when rates go up the flow of investment cash into fintech projects will reduce. Other investment opportunities will look better as the cost of leverage rises and return from lending improves. Second, as competition increases between fintech firms and other service providers, margins will decrease and some commercial models will be shot.
Last year we saw start-up platforms in peer-to-peer lending and bond trading go bust. Good ideas that didn’t manage to deliver. We saw a similar effect in 2008 when lots of stock trading platforms launched to compete with Europe’s big stock exchanges. They were all low-cost and hi-tech but hardly any of them made money. Consequently only those with backing from the big banks or at the real pinnacle of innovation survived.
Firms with big backing can endure in lean markets, others will struggle unless they are really exceptional. These are calm waters to launch a company in, and firms should not be lulled into complacency.
We can all see the waves getting taller and that includes the banks and investors who are currently putting funds into new fintech firms. Ideas alone aren’t going to keep firms afloat, it is the cost effectiveness of models and the proper assessment of risk that will drive success in the long-term.