Fintech start-ups have long had trouble turning feel-good rhetoric into profitable growth. Competition is intense, consumers tend to want things for free, and dinosaur banks are far from extinct. To make matters worse, finance just isn’t as addictive as messaging or catching up with friends. That counts in an era where billions are made through monetising attention.
Back in 2016, the cryptocurrency was on nobody’s strategy white-board, but it turns out all that was needed was a 15-fold price increase in as many months. Rather than try and undercut banks, or chase millennial savers’ pennies at a loss, fintech firms are now leaping at the chance to make serious cash through a technology that most banks won’t even touch. What’s more, bitcoin has the power to take over people’s lives. One trader says it’s worse than gambling; Korea calls victims “zombies”.
Here’s a roll call of recent converts: Mobile-payments firm Square has rolled out bitcoin trading; social-payments app Circle splashed $400 million on Poloniex, only about 15 months after it had stopped offering bitcoin trading; and money-transfer company Revolut has started offering crypto trading facilities.
Given that bitcoin wasn’t always a part of the core value proposition of these businesses, it seems more than a little unsettling to see their slick marketing machines kick into gear. At Square, Jack Dorsey’s team offers a fairytale picture-book, “My first bitcoin”, which buries all the health warnings right at the bottom. Revolut compares cryptocurrency exchanges to local farms trading “juicy” produce at the town market.
Still, if this is what customers and investors want, where’s the harm? Trading platform Coinbase booked more than $1 billion in revenue last year, according to Recode, which, if true, is more than peer-to-peer marketplace Lending Club and more than Square. On top of the money to be made from trading fees and asset-price gains, bitcoin could also act as a lure, helping start-ups cross-sell their other products to a bigger audience.
The problem is that we don’t know how long this boom will go on for. Start-ups may end up acquiring assets that fail to create long-term value, or that destroy it. We have seen investors miscalculate chip-makers’ ability to profit from cryptocurrency mining in the past.
There could also be reputational risks too. We don’t know how the impact of potentially widespread investor losses would affect brands that rely on fuzzy, consumer-friendly values. Banks are used to paying out billions in compensation to victims of product mis-selling. Would smaller start-ups survive the same treatment?
And regulators, long the scourge of the risk-hungry entrepreneur, are beginning to crack down on the sector, with Bank of England governor Mark Carney last week calling for an end to the cryptocurrency “anarchy”. In the US, the Commodity Futures Trading Commission (CFTC) is subpoenaing bitcoin exchanges and the Internal Revenue Service (IRS) is collecting user information while the G20 is eyeing a global regulatory approach. If bitcoin really does lead to “greater financial access for all”, as Dorsey puts it, it won’t be without a fight from the authorities.
Many start-ups will feel like they don’t have a choice but to ride the wave. Others will assume they can manage the risk. If they miscalculate, those old bank dinosaurs will have another day in the sun – and less competitive pressure to boot.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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