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Everywhere you look, there’s a new technology or company that’s changing how you travel, order food or find out the weather (thanks Alexa!). The rise of companies like Uber and Blue Apron has changed multiple marketplaces, improving users’ lives and disrupting the path for traditional companies.

But startups can be a dime a dozen, and fintech startups are particularly hard to pin down. Financial companies are a different breed of startup, and recently the market has responded negatively. Venture capital (VC) funding is finally slowing down for financial tech firms, prompting some to ask: is this the end of the fintech startup boom? (For related reading, see: How Fintech Advances Are Improving Finance for All.

Why Venture Capital Funding Is Slowing

Marketing manager Ellen Cunningham of CardFellow said venture capital funding has cooled because many firms have not seen the kinds of results they expected to with fintech. The 2017 World Fintech Report said VC funding slowed more than 10% from 2016 to 2015. “VC funding went crazy for awhile, throwing huge sums at fintech startups,” said Cunningham. “But the lackluster performance of companies like Square post-IPO as well as increasing market saturation has likely cooled things a bit.”

Unlike other industries that have low cost to entry, financial services is an area where regulation makes it harder for companies to get started. Plus, it’s harder to trust a new company with your money than it is to try a photo-sharing startup. “This makes customer acquisition costs too high, which is why banks like Chase offer you $300-400 to switch your checking account over,” said equity analyst Greg Blotnick. “In addition, regulation has always been a high barrier to entry and has become even more significant post-2008. Lending Club is a great case study in 'flying too close to the sun' and attracting regulatory scrutiny. The firms that succeed will be those who can offer reach into an under-banked segment like Millennials, who generally are untrustworthy of Wall Street."

The report also said traditional firms still have the edge on fintech startups when it comes to security and transparency, one reason that some fintech companies have struggled to gain traction after receiving VC funding. Many fintech companies also provide similar products and services, so VCs see little reason to invest in the same version of a firm they’ve already put money into. (For related reading, see: How to Formulate an Investment Philosophy.)

What the Future Looks Like

The fintech report noted that 60% of traditional companies surveyed said they were considering partnerships with fintech startups, while others are creating their own fintech-like capabilities in-house. “I think we'll see more acquisitions of fintech startups by traditional banks as they seek growth and access to new customers, particularly Millennials,” said Sean Dempsey, Partner at venture capital firm Merus Capital. “I also think we will see more combinations of fintech companies and online advertising platforms where there is a powerful combination of online and offline purchasing data, providing a broader picture of consumer buying behavior.”

Some recent acquisitions include Ally Financial purchasing TradeKing and BlackRock buying FutureAdvisor. These consolidations allow traditional banking, brokerage and credit companies to invest in fintech without having to build it from the ground up.

The Bottom Line

While recent trends show fintech startups losing funding or being swallowed up by other firms, it doesn’t mean that the industry is doomed. Many experts say that the huge influx of cash has caused VC companies to slow down and be more deliberate about who they back. If you’re investing in fintech startups or are considering backing them, review your options carefully. It’s nearly impossible to predict which company will be the next Facebook and which will be the next Friendster, especially in the world of financial technology. (For related reading, see: Top Tips for Making Retirement Savings Last Longer.)

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