For much of human history, lending has been a highly regulated business. The Depression and the associated bank runs led to the creation of FDIC insurance and other guard rails for the banking system that consumers embraced. In some ways, the lending business has always been subject to the same risks, and effective due diligence has always been a key component of success. Innovation in lending was always somewhat curtailed, in the West, at least, by significant regulatory oversight. Another great wave of regulation came after the Great Financial Crisis in 2008.
This watershed event also accompanied an influx of innovators who preferred to reform the financial system with innovation rather than by government mandate. The VC community embraced a new wave of companies dedicated to empowering consumers, increasing efficiency, and expanding access to credit and financial services. Still, as 2022 unfolded, valuations plummeted far more than the broader market. We want to dive into the newer area of FinTech and determine which public companies are the best to invest in.
FinTech has become a broad umbrella term describing companies at the intersection of the ongoing digital revolution and finance. The burgeoning area has become a venture capital term as money flowed into a cornucopia of different companies, not just in the United States but worldwide. The firms promised to revolutionize the financial experience and rectify many of the perceived abuses of the banking system that were particularly acute in the public consciousness during and after the Global Financial Crisis. There are definitely inefficiencies and rent-seeking in both the banking and credit card industries, so there is a use-case, but overall obstacles and incumbents catching up has made growth projections seem untenable for many leading publicly traded FinTech firms done during the frothy 2021 markets.
While early promises of rectifying and disrupting the financial system may have been enticing (and perhaps too well funded by VCs) after this event, the track record of many of these companies has fallen short of the initial grand ambitions. FinTech has become fiercely competitive and customer acquisition costs on the scale needed to revolutionize the financial system are high and likely only going to increase over time. There are several different areas of FinTech: Digital Lending, Payments, Challenger Banks, Insurtech, Wealth Tech, and Capital Markets Tech. There are also differing business models, as well as newer trends like Buy Now Pay Later (BNPL) that flourished in the pandemic but have since retreated.