Welcome to the 'Havoc' Phase of Fintech Disruption

In recent years, investors have poured money into startups, giving 152 of them vaunted "unicorn" valuations of more than $1 billion — and more than a dozen of them are in the fintech space. But now, investors are starting to back off and valuations are beginning to deflate. In the past four months, Social Finance Inc. has canceled its IPO, while OnDeck has seen its valuation fall significantly since its own IPO, for example.

One experienced venture capitalist, Jim Breyer, founder and CEO at Breyer Capital, told Business Insider he believes 90% of unicorns will be repriced or die, and calls it "blood in the water." Our company's research supports this view and indicates that devaluation is leading to consolidation, acquisition, and — perhaps most importantly — fewer unicorns in the near future.

Executives at financial providers tend to have one of two reactions to signs of trouble in the fintech world: smugness or a killer instinct. Some see devaluation as proof that fintech was always more hype than a true-blue market shift that they should lose sleep over. The other reaction is to make some acquisitions on the cheap.

Both reactions are dangerous.

While some fintech firms are indeed just smoke and mirrors, digital disruption itself is here to stay. Consumers, who are increasingly empowered with more information, more access, and more options than ever before, are the main driver.

Startups have used digital technology to target underserved customer segments, to deliver new value to customers or to attack ingrained inefficiencies. These opportunities are still there, although they're probably not large enough to justify inflated valuations. Well-funded and carefully managed startups will survive and come back stronger. The weaker ones will be snapped up by banks eager to pick up emerging technology and talented employees at a discount.

But this is where incumbent firms need to be careful. While devaluation among fintech firms does increase the leverage and opportunity for incumbent financial providers, it also amps up the competition among incumbents and exposes them to the risk of poor acquisitions. Chaos in the fintech space makes razor-sharp focus and strategic matchmaking crucial to digital strategy.

This phase of disruption can be described as the "havoc" stage, and it's one of the three phases that all technology markets go through: a market pivot driven by disruptive innovation, the havoc of consolidation and acquisitions, and the apparent emergence of stability. The havoc stage is typically marked by a tumultuous set of acquisitions and mergers as both startups and incumbent players reposition themselves. Executives at incumbent firms tend to approach this in different ways: buying up fintech firms, as BBVA has done with its acquisition of Simple; partnering and collaborating with fintech firms, as Toronto-Dominion Bank has done with Moven; or starting their own fintech projects or venture funds, as Umpqua Bank has done with its Pivotus Ventures subsidiary.

For acquirers with eyes set on a specific disruptor, this is indeed the time to act. However, tread lightly and only invest in companies that are addressing a genuine problem; that do so with sophisticated, patented technology that is scalable and can be integrated into your company; and that fit into your business strategy.

Compared to the other disruption phases, the havoc period has a relatively short time window. The market will soon stabilize. When it does, what will remain are either weak fintech companies that are barely surviving or those that have emerged from the shakeout successful. Financial firms — particularly the ones with new and inexperienced venture capital and acquisition teams — should be wary of "walking dead" disruptors.

So yes, there are wounded unicorns among us. And many fintech firms are being forced to think more realistically and pragmatically about their relationships with incumbent providers. But disruption in financial services will not stop or dramatically slow. In the long run, the role of digital leaders at incumbent financial firms will be to embrace digital business transformation and to partner with fintech companies that center on customers' increasing empowerment and evolving needs.

Peter Wannemacher and Oliwia Berdak are senior analysts at Forrester.