Like Rocky, Fintech Perseveres
A History of Resilience through Turmoil
Philadelphia’s most celebrated character, Rocky Balboa, is known for going the distance. In the face of his toughest challenges, he perseveres and claims victories along the way. Like Rocky, financial technology firms (fintechs) show resilience through turmoil. With more agility than incumbents, fintechs can pivot, bounce back, and strike at the heart of their competition. How?
Fintechs scale and iterate faster than financial institutions. They can also cut down on overhead costs because they don’t need a big physical presence to make their mark. For example, E*Trade launched in 1991 to disrupt incumbent brokerages, which charged around $100 per trade. The fintech cut transaction costs by more than half — charging investors just $40 per trade — by moving trading online.
Within 5 years of launching, the pioneering fintech had 73,000 accounts, processed 8,000 daily trades, and had a quarterly revenue of $15 million. By the time E*Trade IPO’d, the firm was adding nearly 500 accounts per day and taking in as much as $10 million in assets daily. E*Trade’s digital leanness helped them reach more people faster and outperform larger organizations — a story as old as the stock ticker.
From Stock Tickers to Mainframes and Electronic Trading
When stock tickers were invented in 1867, financial heavyweights like John D. Rockefeller were coming of age. Rockefeller saw this new technology as a way to outmaneuver his competition. And he did. The storied businessman used stock tickers to react to financial data faster than incumbents could. He made trades and investments that positioned him for success, and put his competition in a tough spot. As a result, he built an empire that created lasting value for society. Railroads and oil helped people become mobile and economically empowered, while the Rockefeller Foundation went on to become one of the largest philanthropic organizations in the world.
Fintech innovation didn’t stop there. In the 1950’s, early computers called mainframes debuted and revolutionized finance in short order. These new machines enabled more complex operations to take place in less time. By the 1960’s, mainframes were used to facilitate trading. Soon, they displaced stock tickers and gave way to electronic trading in the 1980’s. Rockefeller adopted financial technologies because they provided a lasting advantage. The same holds true today.
Fueling Creative Destruction
As fintech progressed, it fueled creative destruction — a concept made famous by Austrian-born economist Joseph Schumpeter in the 1950’s. The term describes the “process of industrial mutation that continuously revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”1 Plainly, industry continually innovates, economically destroying the old guard to build up new, more efficient businesses from the ashes.
Economic innovation and business cycles feed off each other at a quicker pace with each new technological evolution. These advancements then accelerate the rate of change until they eventually become bubbles. We saw this in the 2000s when the dot-com bubble bursted and tanked the economy. But the innovations created went on to generate long-lasting change. For example, Amazon and Paypal emerged from the 2000s as fintech giants by helping everyday people create and transfer value. Their contributions improved the way we interact daily, even some 20+ years later.
Rising from the Ashes
A new iteration of financial technology is rising from the ashes today. This one is even leaner and more purpose-driven than the previous generation. In 2021, a major investment theme was blockchain technology. Blockchain innovations like decentralized finance (DeFi) were designed to reduce trading costs and pass savings onto consumers by removing friction and value-extracting intermediaries. While the technology was incredibly innovative, real-world use cases were hard to come by. So, many DeFi companies crumbled.
Now, new firms are building on the advancements brought on by these financial technologies. They are connecting real-world assets like real estate and infrastructure to the technological engines underlying DeFi. So, instead of relying on expensive, slow payment rails to do things like lend and borrow money, people can now transact faster with new tools for less. This helps folks in emerging markets access capital — that is otherwise out of reach — to improve their lives.
Opening Bell
Having seen the societal benefits of new technology before, fintech investors are coming out swinging. According to a recent report by FT Partners, private fintech financing rose 53% to reach $17.7 billion in Q1 2023 — up from $11.6 billion the previous quarter. Deal volume was also up in Q1 2023, reaching 794 fintech deals — a 30% increase year-over-year.
Significantly, smaller sized and early-stage deals are driving volume, while bigger companies like Stripe, which gained $6.5 billion in financing in Q1, account for most of the capital raised. Annualizing the deal count from Q1 2023 would bring FY 2023 to 3,176 deals — just shy of figures from FY 2021 and FY 2022 — and continue fintech’s march forward.
If the fintech deal count continues to grow, this upswing may just be the first round of another expansionary cycle. The companies that fought through the last 20-month bear market will have survived because they provided long-term value. And they will have learned the power of perseverance. After all, “It ain’t about how hard you can hit. It’s about how hard you can get hit, and keep moving forward.” — Rocky Balboa
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