The hot FinTech industry may be in for a rude awakening.

This is the opinion of reputable IMD professor Goutam Challagalla, who sees an equivalence between the preoccupation with modern-day financial technology companies and the period leading up to the dot-com bubble during the '90s, when investors more or less threw large amounts of money at anything IT-related.

"I'm pretty sure that we are in a FinTech bubble," says Goutam Challagalla, a professor at world-renowned Swiss business school International Institute for Management Development (IMD).

FWAM meets professor Goutam Challagalla, who specializes in marketing and digital business models, in Danske Bank's Dome Hall, where he has given a presentation on digital business models to an audience of accountants.

"I believe that many will lose money because there is too much capital out hunting too few companies. However, compared to the dot-com bubble, where there were many individual investors, there are more institutional investors now. That's an essential difference, so I don't think that the FinTech bubble will be as severe as the dot-com bubble," says Challagalla.

High valuations

The term 'FinTech' stands for financial technology, covering a wide range of new players that are trying to enter the financial sector by means of smart and often more user-friendly financial services than what customers are accustomed to.

Since the financial crisis, investments in financial technology companies have grown almost exponentially, and according to a report from consultancy firm Accenture, investments were made in 2015 totalling about USD 22.3 billion(about DKK 154 billion) in financial technology companies globally. That was 75 percent more than the previous year.

Goutam Challagalla believes that this is a bubble due to the fact that the companies' valuations are rising much faster than the fundamental values in FinTech companies would suggest.

"If you look at the valuations of some of these companies, they are very high. This is due mainly to how difficult it is to create returns in other places. And when options are limited for where to place your money, the investments go to 'hot' companies. It was the same thing that led to the dot-com bubble in the '90s," says Challagalla to FWAM.

CEO of entrepreneurial organization Copenhagen FinTech, Thomas Krogh Jensen, has previously said that the FinTech industry "may be slightly overheated."

"But on the other hand, there's still room for much innovation," Krogh Jensen said to FWAM last year.

Finans Danmark, a lobbying group for the Danish financial sector, has previously denied that there is a FinTech bubble underway.

"In Denmark, we measure the number of FinTech entrepreneurs in hundreds. They measure in thousands in Stockholm. We can easily accommodate more FinTech entrepreneurs in Denmark," said Michael Busk-Jepsen, digital director at Finans Danmark, to FWAM.

Low interest rates provide breeding ground for bubble

Professor Goutam Challagalla bases his assumption on the fact that private savers, venture capitalists, and institutional investors have gradually been drawn away to new places to invest their money due to the low interest rate environment.

After IT companies began collapsing in droves in the early '00s, investors began seeking towards the real estate market, says Goutam Challagalla, and now the turn has come to the financial technology companies.

"In the '00s it was seen as implausible that a bubble could happen because houses represented a physical value, but that was a grave mistake. Now we see investments going to different assets. The money goes where the opportunities are," the professor says.

"The problem is that way too much money is drawn to too few companies. And when interest rates are low, more investments are made instead of savings in the bank. Now we see that investments are even made in FinTech companies of which the business concepts are not actually very original. So I believe that there will be many unsuccessful investments, and many investors will lose money," he says.

Only few companies will be successful

Challagalla explains that the overall way that FinTech is described as what it features and its potential to change society resembles the situation leading up to the dot-com bubble in the early '00s.

According to Challagalla, only few financial technology companies will be successful. The reason, according to the professor, is that small entrepreneurs have no eye for the magnitude of the demands that financial regulations put on the the sector.

There has been talk of FinTech companies potentially 'disrupting' banks, but you disagree?

"In some areas, FinTech companies are quick to understand the banking sector. But compared to the advertisement industry, for example, which is underregulated and very fragmented, it's much more difficult to to start a business in the banking sector. Conversely, it's not uncomplicated to learn how to manufacture a jet motor, or understand Basel 3 and other regulations," says Challagalla.

The other way around, what could banks learn from the new FinTech players?

"Some of the new players frequently adjust their products based on user feedback. Some adjust their products as often as every three days. If banks, on the other hand, focus mostly on staying in line with regulations, they might not be as diligent with adjusting their products as some of the new players. Banks need to break with that mindset, without breaking the law, of course," says the IMD professor.

Predicts fewer banks in the future

Not only do FinTech companies have to familiarize themselves with financial regulations and law – they also have to adapt to national implementations of European regulations, Challagalla points out.

"And if you make a service that offers transfers across country borders, you need to understand national legislation in the countries of operation. This protects the banking sector.  I believe that FinTech companies will take a much longer time to learn these things than for banks to adapt to the digital development," says Challagalla.

"Very few FinTech companies will become success stories compared to technology companies in other sectors. And then the successful FinTech companies will be taken over by banks," he says.

According to Challagalla, the regulations can protect established banks, but he still believes that the growing digitalization could, on the other hand, become a challenge to banks that fail to adapt to the development.

"There were about 10,000 banks on the American market before the financial crisis. After the crisis, that number was down to 6,000. In a few years it will be 2,000. But due to the complexity of the sector, I don't see the banking sector actually being eliminated," Challagalla assesses.

Do you expect that large banks will mostly be the ones to survive?

"No, not necessarily. The banks that survive will be the banks that manage to read the market faster, developing digital solutions based on that, and that's not necessarily the large banks," says Challagalla, professor at the International Institute for Management Development in Switzerland.

English Edit: Marie Honoré