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Will the Real Unicorn Please Stand Up?

Jeremy Kuiper | Payment Solutions | 12/8/2015 6:20 PM

There is so much innovation taking place within financial services technology today. It’s obvious that there’s no shortage of ideas bubbling up from enterprising firms. A growing number of non-banks, right alongside banks, are crafting new systems, processes and products, hoping to develop the future go-to application, perfect process, or must-have digital financial product.

As such, the fintech landscape has turned into a fertile hunting ground for venture capitalists looking to deploy their investment dollars and support companies seen as inventing the next big thing, or riding highest on the biggest tech wave.

According to Pivotl (f.k.a. Strategyeye), investments in private fintech companies are pouring in at exactly the same time that competition among them is heating up. Collective investments in fintech companies during just the first 10 months of 2015 are nearly double 2014 investment levels. US investments in fintech firms now top $4.4 billion. Among the notable investments, Social Finance (SoFi), a leading marketplace lender in San Francisco, raised $1 billion from a consortium of venture capitalists this past September, marking the largest fintech investment of 2015.

Despite the tsunami of fintech innovations, there are only 25 fintech unicorns in existence today – privately-held companies with business valuations of $1 billion or greater -- according to Business Insider. Perhaps the vast amount of VC money chasing fintech substantiates the energy emanating from our industry, and validates the possibilities that our industry offers.

The demand for new, reliable and sustainable financial services technology – such as a digital wallet – is definitely there. According to Juniper Research, by year-end 2015 there will have been 13 billion mobile money transfers made. One billion mobile phone users will have used their device for all banking purposes, with the forecast of that number doubling to two billion by 2020. That will represent a very significant 37% of the adult population worldwide using their devices for banking transactions.

But, as a result of hungry and enthusiastic VCs casting their nets perhaps a bit too wide, they are creating a mirage of every single fintech idea being the greatest idea ever to be conceived of. This simply isn’t true, of course. The reality is that some systems, processes, applications and devices will eventually prove to be too costly to develop, too difficult to implement, too hard to sell, too painful to maintain, too challenging to sustain, or will simply be rendered a flash in the pan as technology advances and renders them dinosaurs in short order.

Borrowing from Charles Darwin’s principle of the survival of the fittest, some fintech innovations, created by some of today’s best and brightest unicorns, will ultimately implode due to a variety of impassable challenges. Inevitably, some of today’s most magical unicorns will reveal they are actually dressed up rhinos that VCs have over-glorified and romanticized. When push comes to shove, watch for those unicorns to very well lose their special powers over VC investors.

The opinions, findings, or perspectives expressed in this content are those of the author and do not reflect the official policy or position of The Bancorp, Inc., its affiliates, or its or their employees.