New research indicates a significant risk of a dramatic collapse within the European fintech start-up industry. These start-ups have managed to secure more than $12 billion in funding from both venture capital and institutional investors, with the aim of lending capital to small businesses and consumers. However, the study warns that many of these fintech companies lack the necessary expertise when it comes to investing within different credit cycles, and their technology may not be up to the task. To gather these findings, interviews were conducted with approximately 100 fintechs specializing in lending, which unveiled that only a small proportion of them have staff members with relevant experience in the credit market. Furthermore, the study discovered that many of their underwriting models consist of basic analysis tools that fail to adequately assess loans under various credit market conditions. The author of this research goes as far as to compare the discussions they had with fintechs to the conversations that preceded the global financial crisis of 2007.
One of the primary issues identified within the fintech sector is that numerous start-ups may have overestimated the potential size of the markets they aim to target, such as lending to e-commerce players. Additionally, concerns have been raised regarding the economically sustainable models upon which many fintech companies have established their businesses, especially when compared to the fragmented European market. The research points out the risks faced by venture capital backers, who have invested roughly $550 million into these fintech start-ups. Should these fintechs fail to turn a profit, these backers' investments may be at stake. Furthermore, there are widespread worries that a substantial collapse within the fintech sector could cause significant problems and potentially destabilize the entire financial system. Although fintechs possess fewer liabilities compared to traditional banks, international regulators have grown increasingly concerned about the shadow banking sector, which encompasses fintechs as well, and its potential to disrupt the financial system. Mercier, however, counters the idea of utilizing regulations to tackle the prevailing obstacles faced by credit start-ups in the fintech sector. Instead, he advocates for investors and fintech firms to diligently scrutinize their models and place risk reduction at the forefront, cautioning against delay, particularly in light of the considerable decline in venture capital funding accessible to the sector.
