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Is FinTech the next economic bubble waiting to burst?

There can be little doubt that the FinTech sector is booming. Valued at a staggering $12.4billion, venture investments are on track to double their backing from the previous year, and the UK in particular is moving at a faster pace than any other country in becoming the destination of choice for most FinTech start-ups.

Last month Chancellor George Osborne announced a bid to make London the Global Centre of FinTech. Osborne assured that British regulators will provide the space for this to happen and stated that the government is already working with professional services firm EY to draw up a benchmark to see how London compares to other international rivals.

However, as was learnt during the Dot-com bubble from 1996-2000, in four years’ time the market can change drastically. With FinTech booming for five years now, might this sector be at risk of experiencing a similar burst 15 years on?

The UK hype

FinTech is a global phenomenon, but Europe is arguably leading the way. The UK on its own has at least 4,000 active start-ups, 17 of which started in the UK and are valued over $1 billion. Overall, the number of billion dollar companies in this sector has tripled from 11 at the start of the year to 36 in mid-2015. Billion dollar tech companies are growing so fast that they are now being referred to with their own exclusive title, unicorns.

With the first wave of FinTech immediately following the global crash, at a time when bank distrust had reached its peak, the time was ripe for a new order of finance and the markets have been receptive. Cloud-based systems are making it possible for alternative financial services to launch with ease and speed and this is shooting up valuations faster than ever before.

Initiatives such as the UK Open University FinTech graduate program are evidence of the interest and optimism around this sector. The University is launching the world’s first introductory course in financial technology, which will offer 50 hours of module-based learning and will provide examples of the technologies making up this unique ecosystem.

However, alongside this optimism, the sector also faces scepticism from a number of industry analysts. There is clearly hype involved in the overheating of today’s financial technology market and industry experts can be forgiven for urging caution.

Prospects ahead

Despite the obvious risks attached to this FinTech buzz, there are also reasons to believe a number of key FinTech enterprises will survive far beyond the hype.

Many of the companies in the Dot-com crash were merely valued on buzz and excitement, and relied on user-friendly websites and a different way of selling something, In contrast, Fintech companies are in many cases proving their value in the market, by offering a core service, in need of disruption. This provides them with huge growth potential. Transferwise for example has transferred over $1.6 billion in its three years of existence, saving customers $67 million.

Moreover, the traditional financial model has relied on banks developing services and retrofitting them to their customers, while FinTech corporations have introduced flexible models that adapt to demand from customers. This plays to companies’ advantage as it reduces speed and cost associated with traditional infrastructure and allows firms to adapt fast to the changing customer needs. After all, customers are key.

Moreover, FinTech companies are in a strong position whereby they have entered into a space with strong on-going demand. So long as the global economy is growing we’re unlikely to see demand for financial services disappearing. The FinTech companies that survive a potential ‘bubble burst’ will be those that tailor their offering - whether those service includes providing, storing or transferring money – to adapt to clients’ needs over time.

A good example of this in practice is Google. Despite the 1990s proving a difficult time period for all technology-related companies, Google kept itself busy spending to create a powerful search engine.

The phrase “get large or get lost” was Google’s mantra. Now Google is valued at $372 billion and is NASDAQ’s second largest company.

Mike Laven, CEO at Currency Cloud

Image source: Shutterstock/StockPhotoAstur