How flawed fintechs are running out of gas

The recent slump in fintech stocks has exposed fatal flaws in the business models of some so-called ‘new economy’ companies. An analysis by the Financial Times found that almost half a trillion dollars had been wiped off the value of listed financial technology companies this year. While the broader Nasdaq Composite was down 29%, recently listed fintechs had fallen by more than 50% on average. 

Fintechs (like most internet-based start-ups) all share one thing in common: their asset base is almost entirely composed of intangible (non-physical) rather than tangible (fixed or physical) assets.

There are 12 core categories of intangible assets including software, brands, data, patents, confidential information and customer and supplier relationships, among others.

According to recent research, intangible assets have skyrocketed from 17% of the value of S&P 500 stocks in 1975, to over 90% in 2020. Technology-related stocks such as Google, Amazon and Microsoft began to dominate more traditional bricks and mortar and industrial companies of the 20th century such as AT&T, Walmart and General Motors. Numerous studies have shown that companies investing in the accumulation of powerful intangible assets tend to materially outperform those that do not. For example, McKinsey identified that companies in the top quartile of growth experiencing median growth rates of 20% invest 2.6 times more in intangible assets than low-growers (those in the bottom quartile whose median growth rate is 3%).

However, the fact that a business is a new economy company and therefore likely to be light in terms of heavy (fixed) assets is no guarantee of growth. Likewise, the mere possession of intangible assets does not make a company any more valuable. While intangible assets behave differently to their tangible cousins, they do share two important characteristics:

  • a poor-quality fixed (or intangible) asset will contribute less to company value than a high-quality one; and
  • the mere possession of fixed assets does not (in the absence of efforts by management to monetise it) make the company any more valuable.

Many fintechs face this problem; although they are tangible asset light, they are also intangible asset weak. When one analyses the intangible asset position of fintech companies, it becomes apparent that many of them have easily replicated software, non-sticky customer relationships, little brand recognition and few protectable features. Very few seem to have been able to chart a path to monetise their customers’ data, or they simply have similar data to their competitors due to the less-than-loyal behaviour of fintech consumers.

The race to network economic effect

Instead of attempting to build a strong defensible intangible asset position (composed of multiple integrated layers of different intangible assets) these organisations seem to have largely adopted the Silicon Valley mantra: ’acquire more users and damn the cost’. The logic of this approach is that with sufficient users, network economic effects kick in (ie, where the value of a service increases as more people use it, as in a telephone network), resulting in winner-takes-all outcomes.

The standard venture capitalist-funded strategy for many fintechs has therefore been to raise mountains of cash, burn said cash to acquire users faster than their competitors, then achieve network economic effect and high-five their management team.

It is analogous to drag car racing: put gallons of high-octane fuel into the tank, burn off the competitors and pray you do not run out of gas before you reach the finish line. Theoretically, this makes sense: network economic effects can be incredibly powerful.

But there is a problem. Some industries and business models generate more powerful network economic effects than others. Compare AirBnB with Uber. To compete with AirBnB, one would need to build a sizeable network of holiday accommodation providers and an even larger network of people who want to rent holiday accommodation. Holiday accommodation is a valuable asset and owners would not simply rent their home to anyone, nor would users just rent any old place. Therefore, the curation and value added by AirBnB must be high, resulting in sticky relationships across the platform.

Uber, though it may look similar, is different. You would need to build a pool of cars and drivers on the one hand and users on the other, but the similarity ends there. A car is not an especially valuable asset, so most drivers likely will not care who gets into their car (within reason) and most users do not care what type of car they take, thus less stickiness and less power in the network economic effect. As a result, ultimately, it is easier to compete with Uber than with AirBnB. The proof of this is that in most large cities, the driver of a ride-share car will have two or three different ride-share apps and many consumers will have the same. In contrast, it is rare for owners to list their homes on multiple hosting sites. AirBnB also offers their customers key benefits (eg, $1 million host damage protection), thus encouraging stickiness to the platform. Consequently, AirBnB has far fewer effective competitors.

A race to the bottom

Many fintechs have focused far too heavily on trying to chase illusory network economic effects and have failed to build other crucial (and powerful) intangible assets, such as defensible software improvements, monetised data resources and well-recognised brands with sticky consumers. As a result, there is a demonstrable weakness in their intangible asset position. They are, in turn, left inherently vulnerable to being copied by competitors, which leads to a race to the bottom on margins and price. This, combined with burning substantial amounts of capital, led some venture capitalists and investors to realise that many fintech organisations are not going to make it, resulting in significant drops in market value once sentiment turned and fundamentals reasserted themselves.

Looking ahead

In short, this downturn highlights the need for investors to rethink how they assess the value of new and innovative businesses. By focusing on the intangible assets of a company, regardless of whether it was founded four months or four decades ago, one can see inherent strengths and weaknesses in their competitive advantage and business model and how this is (or is not) likely to convert into mid- and long-term value creation. This is a very different perspective than what can be achieved by looking at traditional financial statements (which are almost entirely intangible assets) or by evaluating the company on the basis of business model, technology or consumer trends.


This is an insight article whose content has not been commissioned or written by the IAM editorial team, but which has been proofed and edited to run in accordance with the IAM style guide.

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