Revenge of the nerds

02Aug13

An explosion of start-ups is changing finance for the better.

@ The Economist

A wave of financial-technology (or “fin-tech”) firms, many of them just a few years old, are changing the ways in which people borrow and save, pay for things, buy foreign exchange and send money. In doing so they are finding and mining rich seams of profit, challenging the business models of existing institutions and inflating a bubble of excitement among investors that technology and the internet are about to change banking for good.

uch of this may sound like hype, particularly to those whose memories take in the unmet promises of internet banks at the height of the dotcom bubble, or that go back earlier still to the statements of Bill Gates, the co-founder of Microsoft, that banks were dinosaurs. Yet the growth rates of some of these start-ups seem to warrant the excitement.

Take Xoom, a San Francisco-based firm that is little more than a decade old. It specialises in sending small amounts of money across borders. By collecting the money online, and using technology to minimise fraud, it is able to undercut the fees charged by traditional money-senders such as Western Union that have huge networks of agents to collect and distribute cash. Its stock has more than doubled since its IPO earlier this year, valuing the company at more than $1 billion, a heady figure for a firm that reported revenues for 2012 of just $80m and a net loss for the year of $5m. In an echo of the valuation methods used before the bursting of the dotcom bubble in 2001, its shares are priced not in relation to its profits or even its revenue but to its extraordinary growth.

Read the full article here

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