The FinTech bubble is floating toward a $64 billion pin

At issue are the requirements on verifying online transactions under a new EU regulation

Employees hold a card payment terminal and display the Wirecard AG Boon app on a Fitbit Inc. smartwatch at the Wirecard headquarters in Munich, Germany, on Wednesday, Sept. 5, 2018. Commerzbank AG, part of the DAX Index stock gauge since its inception in 1988, will be replaced by fintech company Wirecard AG, index provider Deutsche Boerse AG said in a statement late on Wednesday. Photographer: Matthias Doering/Bloomberg
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Flashy FinTech start-ups love to cultivate their cool, customer-friendly vibe in ad campaigns and at big conferences, where slogans like “delight and deliver” get pride of place and the fine print of financial regulation is dismissed as “the unsexy stuff”.

The cuddly mask slips sometimes, though. Trendy US online payments company Stripe, worth some $22.5 billion (Dh82.63bn) according to private-market valuations, is joining Amazon and Apple in warning about the impact of EU rules aimed at getting customers to double-check payments going out from their accounts. The campaign reveals a lot about the state of FinTech.

At issue are the requirements on verifying online transactions in the EU’s new Payments Services Directive, which must be applied by mid-September. Any payment above €30 (Dh123) will need additional customer authentication - usually via a text message or biometric fingerprint - unless it meets the criteria for low-risk or trusted status. For the regulators, it’s an extra step to protect consumers from fraud, even if it's not perfect (these so-called two-factor authentication systems have been hacked in the past, including at the British lender Metro Bank). But the FinTech industry isn’t happy.

The problem for payments processors and e-commerce companies is that this extra customer protection creates a speed bump on the road to growth. According to the Financial Times, Stripe's chief executive expects a "huge negative effect" on conversion rates (the industry jargon for when a web user actually buys something). The FT also cites an executive from another payments company, Worldpay, who criticises regulators for turning a "noble goal" on beating criminals into potentially "catastrophic or business-ending" proposals. Strong stuff. Stripe has even helpfully commissioned a survey putting a number on the potential hit to economic activity from the new rules: €57bn.

We’ve seen this kind of regulatory push-back in the past from banks, which complain regularly about more red tape meaning fewer loans to households and businesses. But the economic logic of online payments is even cruder. If consumers were just to think twice - if a smartphone purchase on Amazon took two clicks instead of one - that might indeed be a serious brake on business. And if volumes dropped off, that would mean less money for the people like Stripe who take their cut along the way.

The pressure to keep boosting transaction volumes is made worse by the incredibly bubbly valuations ascribed to many of these companies, combined with the “very intense” competitive environment, as Dutch FinTech star Adyen NV put it last year. Adyen trades at a gob-smacking 110 times this year’s earnings, with a market value of €20.8bn. That’s almost twice the worth of Deutsche Bank, even though the Dutch FinTech only employs the equivalent of 1 per cent of the German lender’s staff. Stripe is the sixth most expensive private company in the world, according to researchers at CBInsights.

With some payment processors charging fees of about 1 per cent of each transaction, it’s small wonder that the cost of new regulations would lead to such lobbying resistance. And this is happening to a business where competition might already wipe out some firms over the next five years, according to the FinTech adviser Mark Hartley. Expect more start-ups to preach a Bob Dylan classic in their lobbying efforts: “Don't think twice, it's all right.”