“Fintech exists because there finally is a need, and that need was born in the economic crisis.”
This is a verbatim (translated) quote from a talk given by a financial technology expert here in Madrid just last week. I have been to so many conferences where the economic crisis has been credited with the explosion in fintech enthusiasm and creativity. And I would like to take this opportunity to say that that just doesn’t make any sense. It may be a good sound bite, and it may provide an easy-to-sell story line, but we’re looking back along the wrong path. And in so doing, we are being very unfair to the innovation that the fintech movement is generating.
First, we can agree that the economic crisis was brought about by dubious leverage and weak compliance on the part of banks. Not all banks, but many. Subprime mortgages, securitization and shadow banking built a flimsy structure based on the delusion that money would always generate more money, and that free markets are self-sustaining. So far so good (or bad, whatever).
Some banks behaved badly. Although it wasn’t the banks as much as it was the people running and working for those institutions. And in most cases, those people are no longer there. In most cases, the banks in question were rescued, bought or shut down. Regulations were tightened, transparency increased and measures put into place to avoid the same mistakes. While it may seriously rankle that justice was not fairly dealt, we can’t reasonably claim that our current banks are eager to repeat what happened.
And sure, we may be pissed off with the banking sector, we may have lost a lot of respect for it (if we had it in the first place). But that does not mean that we don’t trust them with our money. Let’s face it, the big banks are insured. And governments around the world have shown that they will not let their big banks fail. However much we blame the banks for the economic crisis, we are still more likely to trust a bank with our money than an uninsured startup.
Here’s another way to look at it: if our traditional banks were better, faster, cheaper and more transparent than the new solutions cropping up, we would stick with them, trust or no trust. If the new solutions turn out to offer better conditions, better returns and better security, then it is likely that we would overcome our resistance to change and switch, especially if we see our friends doing the same.
The economic crisis is not responsible for the interest in fintech.
So, what is responsible for the surge in fintech solutions? Innovation and connectivity. Smart entrepreneurs coming up with clever solutions started the ball rolling well before the crisis hit. The concept actually goes back to the 1950s, with the introduction of the credit card. Online stock trading can be classified as fintech, and that’s been around since the early 90s. Paypal revolutionised payments in 1998. Zopa and Prosper started the peer-to-peer lending upheaval in 2005. Lending Club joined them in 2006, the same year in which online personal financial management became possible with Mint. The innovation was well under way by the time of the banking collapse of 2007-8.
To be fair, the economic crisis may have contributed to the boldness of some of the entrepreneurs, who for the first time in living memory saw the powerful incumbents become politically weak. It’s possible that several were emboldened by the fact that the established business fortress was vulnerable. And the freeze on loans helped the P2P platforms (crowdfunding and crowdlending) appeal to a wide market. Had the banks been eager to lend to individuals and businesses, one of the key fintech sectors would not have enjoyed such explosive growth. Furthermore, the closure of many financial institutions and the bleak outlook for the sector gave many financial experts the push they needed to become entrepreneurs. So the crisis and resulting banking crunch were certainly peripheral factors. But they’re not the reason.
Innovation does not need a crisis to flourish, or even to sprout. While “necessity is the mother of invention”, and creativity often results from having a problem to solve, the connectivity of new technologies has created the ideal environment for ideas and solutions to proliferate. Almost all sectors are being questioned, poked at and disrupted, and it’s not because of lack of trust of the incumbents. It’s because it is now easier than ever to get new ideas off the ground, and to find tech-savvy people willing to give them a try, open-minded businesses prepared to collaborate, and a news-hungry media eager to talk about it. We innovate because we can, and because we are tinkerers by nature.
The past decade has seen staggering upheaval and innovation in retail commerce, which did not arise because of cataclysmic crash in the traditional retail sector. It arose because there was finally a more convenient way for a segment of the population to purchase things. We have seen huge “disruption” in media, without a high-profile ethics-based media crisis. Transport is being reinvented, and we haven’t suffered a get-rich-quick-damn-the-ethics transport crisis. Ideas generate ideas, technologies build on each other, and all this is happening in real time, in our homes, on our screens and in our wallets.
So, again, the economic crisis is not responsible for the interest in fintech. It would have happened anyway.
As for a lack of confidence in our banks, a recent Gallup poll from September 2014 shows that US banks’ image is on the whole positive for the first time since 2007. It seems that we trust our banks again. And yet fintech is booming. Investment in fintech in the US in 2014 was almost $9.9 bn, three times greater than the previous year. Venture capital investment in London-based fintech companies jumped from £24 million in 2010 to £312 million in just the first 6 months of 2015. And the map is getting more and more crowded.
Few fintech startups want to replace banks. Several have applied for banking licenses, but most would like to work with banks, offer a complimentary service, or improve on something that the banks are not doing particularly well, like lending, payments, financial planning or international transfers. We are seeing an increasing number of established banks working with or even buying fintech startups, and this trend is likely to accelerate. Banks realise that they need to modernise, focus on the client and improve their image. They can do this by increasing transparency, lowering fees and showing that they are aware that the future will be very different from recent history. Fintech startups may well be a strong threat to the banks of the past. But they will more likely prove to be an ally or a colleague of the banks of the future.
We have today more choice than ever in the providers of our banking services. And most of us no longer rely on just one institution to handle all our financial needs. The innovation in the financial sector puts more opportunity and responsibility in our hands. But the long-term effects of this will probably not become clear until the next financial crisis rolls around. Then we will see if the upheaval has generated more stability or not. Then we will see what happens to trust, of both the banks and the alternative solutions. And hopefully we will realise that innovation is inevitable, that crises create opportunity, and that easy explanations don’t do justice to complex situations.
(I also write about fintech – with a focus on Bitcoin – at fintechblue.com.)