Some call it "frothy." Some call it "contagious enthusiasm." Some call it "immature." The funding of fintech companies continues to proliferate.

Almost $14 billion has been invested in fintech startups in the past year, a nearly 46% year-over-year growth rate, according to CB Insights. The company's data shows a steady rise in fintech funding since 2010. The top categories include online lending, payments, cryptocurrency and personal financial management. All told, venture capital and private equity firms have invested about $50 billion in fintech companies in the last five or so years, according to the London consulting firm William Garrity Associates.

"It's a lot of money going to fintech these days," said Mariano Belinky, managing partner at Santander InnoVentures, Santander Bank's venture capital arm. "Fintech has become one of the hottest sectors in venture capital. We face valuations that are completely insane in some cases."

Bankers, investors and analysts stop short of calling the situation a bubble. Many companies in the fintech space, such as online lenders and payments firms, have proven their worth and made their early investors happy — Lending Club's $1 billion IPO being the leading example. But the fintech startup and investor fields are getting crowded, and there's bound to be a culling of the herd.

ORIGINS OF THE FINTECH BOOM
As Matt Harris, managing director of Bain Capital Ventures, sees it, the first drivers of the fintech craze were a handful of talented entrepreneurs, including Jack Dorsey at Square, Renaud Laplanche at Lending Club, Noah Breslow at OnDeck and Bill Ready at Braintree, who started companies with innovative approaches to retail financial services.

"That got people's attention," he said. "Then the financial crisis created this idea that banks and regulated institutions of all types were vulnerable. So you had this early validation from the likes of Jack Dorsey, plus a newly widespread feeling that there was opportunity in the landscape and all the incumbents were in their foxholes. That brought entrepreneurs who historically had not been drawn to these kinds of projects, and got them thinking about payments, lending, capital markets, finance, insurance and all these historically uninteresting parts of the economy."

Venture capitalists quickly followed the entrepreneurs into this market.

"What we've all learned is if the best people are doing fintech, then by gum, we're going to do fintech," Harris said. "Investors are prone to a contagious form of enthusiasm that feeds on itself and concentrates entrepreneurs' minds on what's fundable, because things that are fundable are more fun to work on than things that are not fundable. It's an ecosystem of excited people getting more excited."

Some say the interest in fintech companies stems at least in part from investors' struggle to generate acceptable returns in a low-interest-rate environment.

"Venture capital right now is hot in fintech but also overall," said Cathy Bessant, chief operations and technology officer at Bank of America. "We have the perfect macroeconomic storm: We have a bull market, so people are optimistic. We've got a low-interest-rate environment, so people are highly motivated to find returns that are outsized; and generally speaking a highly liquid market. I see it across more than fintech, but there's no question that there's multiples year-over-year in VC money in fintech companies."

A SHORTAGE OF EXITS
To some, pouring money into fintech firms is starting to look like a fad.

"When you see the top tier of funds almost blindly investing in every fintech company out there, the not-so-smart money tends to follow," Belinky said. "You see deals and syndicates, and you look at the partners in the syndicates and you ask yourselves, who out of all these guys really understands fintech?"

Harris, who has been investing in the fintech industry since 2002, said it has gone from being underserved to being appropriately served and now, potentially, overserved by investors. This year about 20% of the venture industry will be in financial services, by Harris' reckoning.

"That feels like overshoot to me," he said.

Technology investment has not, however, matched the excesses of the late 1990s, when a company name with a dot-com suffix conferred instant mystique and capital.

"Today what you're seeing is more sustainable businesses," said Robert Sureck, senior market manager for the southwest region at Silicon Valley Bank, speaking of the tech sector in general. "While valuations are certainly extremely high, there's substance, more than there was back in the dot-com bubble."

Bessant had a similarly measured take.

"I think as in any hot sector, there will be people who do extremely well and there will be failures," she said. "We haven't seen every company go to market and be successful, but I don't think it's a tech sector bubble. It feels like a liquid capital environment chasing good investments, but not desperately chasing them."

One concern is that there have been few exits for fintech startups. Except for a few online lending companies, IPOs and acquisitions have been rare. Yet there are dozens of fintech startups that have earned the label "unicorn" by being valued at more than $1 billion.

"I heard a very smart economist say the trouble with credit valuations is you only have the optimistic guys in the room," Belinky said.

"There's a bit of a reality crash when these companies try to IPO and people with more experience look at it and say, 'good luck with this unicorn.' More strategic investors shy away from creating unicorns."

Anand Sanwal, CEO and co-founder of CB Insights, noted that this issue is not unique to the fintech sector. "In general, the exit environment has not been great for companies," he said. "The financing environment has been very good, but at some point investors need a return."

NATURAL SELECTION
As the market cools, only the fittest will survive.

"I think you'll get a culling of existing startups going forward, because some of them won't be robust enough, the management will not be good enough" to deal with tougher times, said Ian Dowson, founder and principal of William Garrity Associates.

Overall, he said, he's been impressed with the professionalism of fintech startup staff.

"One startup I came across had five people who came from the No. 1 investment bank in the world," Dowson said. "It occurred to me that if these individuals had stayed with the bank, within two years they would have been managing directors. They were of that caliber. That really intrigued me – that you're seeing the brightest and best making a very considered career decision to go into the startup arena." Such startups have a greater chance of survival because the people involved have already succeeded in financial services.

Other firms have recruited prominent veterans of the financial services and policy worlds. Marketplace lender SoFi, for instance, in September hired former SEC chairman Arthur Levitt as an adviser.

Harris says it's the fintech startups with fresh ideas and unique intellectual property that will make it.

"I led the investment in OnDeck, and people literally laughed at the idea that you could start a lending company," he said. "Now it's a highly conventional notion."

OnDeck and others like it that have distinctive underwriting models and resilient funding models will be survivors, in Harris's view. The online lenders that simply make loans based on FICO scores and sell them off to investors without doing anything new or innovative are doomed, Harris said.

"When the tide goes out, companies like that will be exposed to be swimming naked," he said. "There's nothing proprietary about their origination strategy or their funding strategy, they're just relying on a benign credit environment, a low yield environment and a frothy equity funding environment."

Similarly, in payments, capital markets and personal investing, companies that provide services in a distinctive fashion that's hard to copy will be durable.

"There's no free lunch," Harris said. "Things that are easy to build will probably be hard to protect when life gets more challenging."

Competition and government regulation could also thin out weaker companies, he noted. For instance, a regulator might set a rule that online lenders can't charge more than, say, 36% interest.

"Or certain states might say you can't get a license or a bank charter to do that kind of thing or you can't leverage the ACH rails to collect on loans like that," Harris said. "Or various other broad stroke things the government can do to make life difficult for lenders."

Regulators may have banks do the work of reining in startups, by forbidding them to work with companies that are in violation of rules such as disparate impact guidelines in lending, he said.

The message is mixed, though. "On the one hand, they say, 'Let's make innovation happen, share your rails with entrepreneurs,' " Harris noted. "On the other hand, they say, 'Make sure nothing bad ever happens.'"

"So it's still very much on the edge," he said.

THE BEAT GOES ON
In the meantime, Belinky expects to see further acceleration in fintech investment next year.

"Everyone I know that has a fund is talking about raising more money," he said. "You see funds come online every week or month. There's only a handful of banks like Santander that have deployed a VC arm. There will be latecomers to that party, but in a year or two every bank will have a VC arm like ours or some vehicle that allows them to invest in VCs."

According to Sanwal, the rate of investment in fintech companies is not sustainable, simply because the growth numbers have been so high. But the dollars will continue to flow.

"There's going to be momentum in fintech for a while," he said. "Not just the venture investors, but now we're seeing even the financial services players making bets. Everybody from Goldman to JPMorgan to Visa and MasterCard, Amex, and Citi is making investments in these companies. There's a lot of capital sloshing around to invest."

Dowson expects fintech investment to taper off in 2016 and 2017. However, certain segments will continue their meteoric growth. For instance, investment in electronic payments is expected to double over the next five years.

In any event, fintech has already changed the landscape by challenging banks to raise their game. And that may ultimately matter more than whether these young companies are overvalued

"For the last seven years I've been hearing people proclaim a bubble," Sanwal said. "It's the old adage: even a broken clock is right twice a day. At some point, if you keep proclaiming it, you will be right. That said, things are pretty frothy right now. It would probably be good if there was a bit of a rationalization."