You’ve heard it at conferences, in meetings and maybe even bandied about at dinner parties. Ever since a wave of financial technology startups emerged after the 2008 subprime mortgage crack-up, "fintech" has become shorthand for a digital revolution that could sweep away antiquated banking practices. But its definition has become so elastic that it’s hard to know precisely what it is, let alone what it augurs for a global financial industry in dire need of innovation. Here’s a primer.
1. What, exactly, is fintech?
It’s a catch-all label applied to companies using the internet, mobile phones, cloud computing and open source software to make banking and investing more efficient. It’s divided into two spheres: consumer-facing companies that offer digital tools to improve the way individuals borrow, manage money and finance startups, and back-office ventures that help financial institutions streamline their operations behind the scenes.
2. Why all the buzz?
Fintech could reshape the financial industry and disrupt some of its biggest players. Already, peer-to-peer lenders use the web to match borrowers with investors, a model that’s shortened loan approvals to hours versus weeks at traditional banks. Online U.S. loan volume is expected to reach $120 billion by the end of the decade, up from $20 billion in 2015, according to Morgan Stanley. In investment management, giants such as BlackRock Inc. and Vanguard Group Inc. are using algorithms called "robo-advisers" to automatically adjust portfolios in accordance with a customer’s risk preferences. Some hedge funds are experimenting, with varying degrees of success, with artificial intelligence to make algorithms self-learning. In the capital markets, startups as well as stalwarts such as Goldman Sachs Group Inc. and the Bank of England are experimenting to see if blockchain, the freely available database that underpins the digital currency bitcoin, can replace existing methods of transmitting assets and currencies. Scores of institutions are also racing to use blockchain to simplify the way securities are traded, settled and recorded. All these endeavors fall under the fintech umbrella.
3. Who’s policing all this?
Watchdogs around the world have generally welcomed fintech because it promises to make financial transactions easier, cheaper and more transparent. Janet Yellen, chair of the U.S. Federal Reserve, has said blockchain technology could help improve the creaky global payments network, the system that links banks so they can move money around the world. Mark Carney, governor of the Bank of England, said fintech could fundamentally change how banks, companies and consumers manage credit, spending and saving. But regulators, he said, must also consider how these technologies might affect the financial system’s safety and soundness.
4. What threat could fintech pose?
While fintech companies offer an array of financial services -- online mortgages, auto loans and retirement accounts of all kinds -- the convenience may lure some consumers into commitments they don’t understand or can’t keep. Fintech could also supplant neighborhood brick-and-mortar banks, leaving low-income households without access to checking and savings accounts or credit cards. Some high-flying firms have also stumbled. In May 2016, LendingClub Corp., the San Francisco-based pioneer of peer-to-peer lending in the U.S., ousted Chief Executive Officer Renaud Laplanche in a corporate governance scandal. Its shares lost half their value in five trading days.
5. What are regulators doing so far?
They’re in the early stages of figuring out how to protect consumers and the financial system without stifling innovation. The U.S. Office of the Comptroller of the Currency in December said it would begin issuing modified charters to fintech firms that would require them to follow some federal banking rules. Britain’s Financial Conduct Authority runs a "sandbox" program that works with early-stage startups to ensure they comply with regulations. Some fintech companies, meanwhile, are looking to limit regulatory scrutiny and expand their influence in Washington under President Donald Trump by forming and joining lobby groups.
6. Are investors betting on fintech?
Yes, big-time. Venture-capital firms plowed more than $17 billion into fintech startups globally in 2016, a sixfold jump from 2012. Last year, China overtook the U.S. as the top destination for fintech investment. Singapore alone has more than 100 fintech startups. Only a handful of ventures have gone public, so investors are anticipating a wave of share offerings and acquisitions as banks hunt for technology they can use and fintech startups mature.
7. Are the big banks worried?
Most definitely. After initially disregarding these startups as marginal, lenders now accept that technology is going to upend their industry the same way it has other sectors. While robo-advisers and other applications may help banks better serve their customers, these innovations could also displace thousands of jobs. Banks, brokers and other traditional players also worry that, as the rules are being written, fintech firms are using the advantage of being unregulated to grab market share.
8. What are they doing about it?
They’re trying to get in front of the parade. Some banks are leveraging their name brands and computer technology to experiment with fintech, often using approaches honed in Silicon Valley. Barclays Plc, for example, has supported 60 early-stage ventures in its "accelerator" programs in London, New York, Tel Aviv and Cape Town. The bank, which doesn’t take a stake in the companies, invites its favorites to develop proof-of-concept projects that could lead to a deal. Other lenders such as Citigroup Inc. and Banco Santander SA have formed venture funds to take stakes in fintech firms. But it’s difficult for some large banks to integrate new technologies into aging computer systems. As a result, big banks have been slow to make fundamental changes in their operations even as they invest more money -- and hope -- in fintech.
The Reference Shelf
- Bloomberg QuickTakes explain the major fintech components, including bitcoin and blockchain, crowdfunding, peer-to-peer lending and robo-advice.
- This U.S. Federal Reserve paper says fintech will change the global system for payments and trade settlement, but it’s too early to say how much.
- Carney’s speech on "the promise of fintech."
- Bloomberg Intelligence has a video analyzing fintech’s 2017 outlook in Asia.
- A Bloomberg News article explains why fintech entrepreneurs might not want to become unicorns.
- A Bloomberg View columnist writes that fintech is ending money management as we know it.
— With assistance by Elizabeth Dexheimer