Fintech has peaked, claims Morgan Stanley report

By David Tuckwell on Thursday 25 May 2017

Alternative LendingSavings and Investment

New report says fintech is entering endgame

This sun is setting on fintech, claims new research. 

Fintech has peaked and investment from venture capital will demise as incumbents copy their ideas and adopt their technologies.

In a pessimistic new report, researchers from Morgan Stanley have concluded that while fintech companies style themselves as disruptors they will do more to strengthen than undermine incumbents in the long term.

“Only five disruptors have survived as standalone entities out of over 450 fintech firms launched during the dotcom era,” the report said. 

“Outright disruption in financial services has proven to be challenging with few success stories.”

Fintech has been most promising in areas lacking infrastructure and where established players have been weakest. This was particularly true of blockchain and robo-advice. 

However, these trends are reversing as major financial institutions have started building their own robo-advisors and acquiring blockchain startups. 

“Independent start-ups in the robo-advisor space will struggle to be profitable given the high cost of acquisition and intensifying competition. 

“We think however that established financial advisors, banks, insurers, etc. will keep automating parts of their value chain…to improve the infrastructure for established incumbents.”

Marketplace lending and alternative credit have been the standout fintech success stories and will continue to grow. But their achievements thus far owe to regulatory arbitrage, it said.

“Marketplace lenders are poised to grow at a… moderate pace leveraging traditional institutions as primary sources of capital; in essence serving as a more efficient customer acquisition and servicing channel for traditional lenders.

“We remain bullish on the potential for marketplace lenders to take share, as they benefit from regulatory arbitrage and changing consumer behavior.”

As venture capital continues to peter out, the researchers recommend that fintech startups lower their imaginative horizons and start to work with incumbents. 

“Hitting home runs in fintech is hard because the slow pace of consumer change and the high cost of doing business in an intensely regulated industry (and high cost of acquiring customers) make getting to scale difficult.

“[Many] startups would be better off working with incumbents rather than trying to disrupt them, and while this yields a higher likelihood of success, it will probably also lower the firm's valuation.”

Sign up for our newsletters

Your daily 7am download of all things alternative finance and fintech.

Fintech and alternative finance headlines with an exclusive Editor's Note each week. Delivered Monday at midday.

AltFi's new weekly US newsletter breaking down the ins and outs of America's burgeoning fintech sector. Delivered Monday 9am EST/ 6am PST.