As an industry, fintech has grown to the point that we can now start analysing its development. Many commentators have divided Fintech’s lifespan into ‘waves’. The first wave is centred around disruption, the second around collaboration, and the third wave – although more disputed – suggests that fintechs are maturing to look more like the traditional institutions they once challenges. Right now, I think we’re in the second wave – but on the cusp of the third.
The First Wave: ‘Disruption’
There isn’t one definition of Fintech’s waves or generations, but for me, the first wave is characterised by the period after the global financial crisis. Feisty startups, galvanised by public contempt for banks, created a zeitgeist of ‘let’s do finance differently’. And they did: complete with their open plan offices and foosball tables, Fintechs begun to take functions of banks and make them slicker, cheaper and more customer friendly. TransferWise’s take on FX is a particularly salient example of this.
However, while ‘disrupting financial services’ was a nice soundbite that harmonised with a symphony of anti-banking rhetoric, a lot of first wave Fintechs didn’t manage to disrupt much. True disruption displaces entire industries, like Uber did to taxis, or Apple to smartphones. But while they might not have overthrown financial services, first wave fintechs did do something important. They delivered some superb products and diversified the market for consumers, forcing incumbents to take notice.
The Second Wave: Collaboration
Of course, not all fintechs survived the first wave. Companies like Bondcube and Powa fell to the wayside, burnt out from a lack of cash and/or a failure to penetrate the thick web of financial regulation. In my opinion, the fintechs that are surviving are the ones that have collaborated, innovated and made increasingly experienced hires – or surfed the wave, if you will.
The second wave is where we are now. This wave of fintech was precipitated by the pressure on big financial institutions to innovate. Fintechs like Stripe and Coinbase raised big funding rounds and became regulated companies. By integrating into the financial ecosystem, these startups showed they meant business.
In response, banks made public pledges to innovation. Some, like Barclays, set up accelerator programmes to incubate and invest in fintechs. Others established internal innovation and venture capital arms to stay abreast of the competition. Banks like Nordea have partnered with startups to provide services. On a personal level, my own company recently joined forces with Heartland Bank in New Zealand. One thing is for sure: the second wave is the era of banks and fintechs working with and learning from each other.
The third wave?
It’s predicted that the third wave will see fintechs being fully absorbed by or turning into hybrids with incumbents. It’s also been argued that fintechs will become more and more like traditional financial institutions, going beyond simply collaborating and partnering. We may be starting to see this now: fintechs like Zopa and Number 26 have recently applied for full banking licenses. The opportunity for fintechs in the third wave lies in integrating with incumbent brands to access groups of consumers far larger than early adopters.
Whether Fintech’s third wave comes to fruition or not, one thing is certain: the industry is changing. And while we have been trained to look for the next plucky startup that defeats the incumbent Goliath with a better interface and cheaper service, we should exercise caution when using the label of ‘disruptive’. Fintech is evolving through collaboration and partnerships to create a richer, more competitive financial ecosystem. I’m excited to see what’s in store.