Fintech hype is reaching a crescendo in Asia, as innovators turn to the burgeoning cryptocurrency markets and peer-to-peer lending to lure investors to bet on ideas that could transform the way we live.
But take a step back ... haven't we been here before? In the late 1990s, a host of companies promised to take every aspect of life online – and investors couldn't get enough, until most of the business models proved uneconomical, and only a handful were left standing.
Is history repeating itself? Ravi Menon, managing director at Monetary Authority of Singapore, said he saw the potential for “some collapse in the bubble in the fintech space” and there will be some reckoning of the current euphoria about fintech at some point.
Speaking to Bloomberg, Menon also pointed to similarities between current conditions and the 2000 dotcom bubble that a swell of enthusiasm for internet companies promising to change people’s lives. “But I do hope that it does not sweep away everything as it did in 2001; sweep away the good as well as the hype,” he said.
The figures do suggest some of the heat is coming out of the sector. The amount of capital poured into fintech globally dropped significantly last year, posting a 47.2% decline to $24.7 billion, down from a 2015 peak of $47.2 billion, according to consultancy firm KPMG.
After the 2000 dotcom bubble, only a handful of technology companies survived the burst to become industry leaders, as network effects and winner-takes-all dynamics took effect in the rapidly-changing industry. As one tech banker with a US bank put it: "Only the number one player in each segment of the internet is profitable and captures 70% - 80% of market share; the rest struggles to survive."
In China, for example, Alibaba's online shopping sites Taobao and Tmall capture more than 85% of the market share, while JD.com, which operates its own supply chains like warehousing and delivery, only has a 10% stake.
Sources FinanceAsia spoke to pointed to another factor slowing down fintech investment: the new administration in Washington DC.
US President Donald Trump has taken a tougher stance against cross-border dealmaking, as the government tries to prevent homegrown companies in sensitive industries from falling into foreign hands, according to venture capitalists in Silicon Valley.
In September the US president blocked the sale of a US semiconductor firm to a China-funded group, sending shockwaves through the deal-making industry between the two countries. Canyon Bridge Capital Partners’ proposed $1.3 billion takeover of Lattice Semiconductor Corp was one of the biggest bids by a Chinese-backed firm in the US microchip sector and was the first announced deal for the buyout fund.
“Political instability, internal governance problems and policy directions still top the list of threats to the fintech industry, especially in the US and China,” a managing partner at a US venture capital firm told FinanceAsia. “The US has had a record of being open to the world as the foremost advocate of innovative technology, but the Trump’s protectionism may harm the appeal of making deals in the US.”
“It is right that the US government reviews its mergers regime in the area of national security,” the investor added.
Another factor was the governance scandal at US online lender Lending Club. Lending Club offered discounts on loans to keep its large customers happy and posted three consecutive years of losses, turning investors off in peer-to-peer lending, which matches borrowers and investors via online platforms.
The reputation of the P2P industry was also tarnished in China last year, when the mainland authorities shut down Ezubao in a high-profile investigation, alleging the company committed fraud and misused funds.
Established in 2014, Ezubao was one of the most high-profile online P2P lenders in China, promising investors an annual return of 15%. But it operated like a Ponzi scheme, paying investors returns from the new capital paid in by newer investors rather than from any profits earned, according to mainland authorities.
Despite its note of caution, the Singapore central bank has set aside about $165 million for a five-year plan to nurture fintech and is spearheading Project Ubin, a blockhain-based scheme to facilitate cross-border payments. In late October, the regulator unveiled a plan to create 4,000 new jobs in the finance industry, or about a quarter of that in fintech alone, for the next few years to 2020.
"Financial technology is going to be the future of financial services." Menon told Bloomberg. "We should experiment with an open mind."