Not so long ago, homebuyers, entrepreneurs and college students went hat-in-hand to the bank to apply for a mortgage, small-business credit line or student loan. Financial technology, or fintech, is rapidly changing all that by making it easier to save, borrow and invest online or with a mobile device, without ever dealing with a traditional bank or broker. For old-fashioned banks and money managers, fintech is causing dramatic upheaval, possibly the most since mainframe computers first whirred to life on Wall Street in the 1960s. It’s caught the attention of wary regulators. Industry veterans are watching, too — some cheering, others booing — to see if the hype becomes reality and threatens competitors or perhaps their own jobs. Will the promise of a digitized and democratized financial-services industry bring more competition, lower costs and greater access for all? Or will the dominant players ultimately stay on top, with their hefty fees, commissions, compensation and gatekeeper roles largely intact?
Some bankers scoffed when fintech upstarts promised to reinvent their business. Now they’re joining the revolution. One example: BNP Paribas SA in April acquired a French digital bank called Compte-Nickel to access younger and lower-income customers. Surveys of financial-services companies show that half plan to acquire fintech firms over the next three to five years. Upcoming changes could stir the market even more. European Union banks next year must give qualified fintech firms access to account data, such as credit-card transactions, of bank customers who request it. This way, customers can learn about lower-interest mortgages or higher-interest savings plans than those being offered by traditional banks, and lenders will come under pressure to compete with the new apps and online services. All this could be good news for investors: Venture capitalists and corporations have plowed more than $125 billion into fintech startups since 2010. It's less welcome news for those employed in financial-services jobs. In September 2017, Vikram Pandit, who ran Citigroup Inc. during the financial crisis, said technology could replace some 30 percent of banking jobs in five years. The fintech label applies broadly to financial-services companies using the internet, mobile phones and the cloud, including:
- Peer-to-peer lending — Going by such names as Funding Circle, LendingClub and Prosper, they use an eBay-like model to match borrowers with investors and shorten loan approvals to hours versus weeks at traditional banks.
- Crowdfunding — EquityNet, Indiegogo and Crowdcube are examples of websites that provide entrepreneurs with alternatives to venture capital and angel investors.
- Robo-advising — Giants such as BlackRock Inc. and new firms like London-based Scalable Capital Ltd. are using algorithms to automatically adjust portfolios, in accordance with a customer’s risk preferences.
- Blockchain and bitcoin applications — Finance veterans are developing new applications using blockchain, the free database that tracks transactions in bitcoin, the digital currency. Stock exchanges and clearinghouses see blockchain’s technology as a way to simplify the trading and settlement process.
- Mobile payments — Entrepreneurs have started fintech companies in emerging markets like India (Unocoin), the Philippines (Coins.ph) and Africa (BitPesa), using blockchain and the internet to transfer money and convert currencies for less than banks charge.
Financial services had largely fended off Silicon Valley until 2008, when the global financial crisis caused big banks and money managers to lose consumers’ trust. At the same time, free software and cloud computing made it easier than ever to launch a tech company. Soon enough, fintech startups were appearing everywhere, but mostly in California, New York, Berlin, Shanghai and London. Once fintech pioneers showed that financial transactions could be as simple as shopping on Amazon, the banks swung into action. Now, Barclays Plc and Mastercard Inc. run fintech accelerators — programs that provide startups with office space and seed money — to unearth promising innovations they can adopt. Citigroup Inc. and Banco Santander SA have acquired stakes in dozens of fintech firms. Bank of America Corp. and others are turning to digital-payment platforms like London-based Earthport Plc to move money around the world. As more consumers switch to mobile devices for financial transactions, traditional banks are closing brick-and-mortar branches.
Watchdogs have generally welcomed fintech because it promises to make financial transactions easier, cheaper and more transparent. But they’re scrambling to issue rules that keep pace with the burst of new business models. In the U.S., for example, fintech lenders that don’t take deposits or offer checking accounts aren’t technically banks. A few high-flying firms have already stumbled, including the U.K.’s Powa Technologies, a developer of payment systems for online stores. It went bankrupt and was sold off in pieces in 2016 after blowing through more than $200 million. In the U.S., some states have stepped up oversight, leading one federal regulator to propose a special bank charter that would let fintech lenders avoid a patchwork of state rules in exchange for oversight less onerous than national banks’. For all its wizardry, fintech may need the support of the establishment and the watchfulness of regulators if it’s to truly reshape finance for the better.
The Reference Shelf
- Bloomberg explores fintech more deeply with QuickTakes on peer-to-peer lending, robo-advisers, crowdfunding, artificial intelligence, mobile payments and bitcoin.
- Consulting firm Accenture published this report on fintech’s global evolution and outlook.
- This McKinsey report says "fintech companies are undoubtedly having a moment."
- A webcast of a November 2016 fintech forum held by the U.S. Securities & Exchange Commission is available here.
- The U.S. Treasury’s Comptroller of the Currency, a bank regulator, is proposing to issue a new bank charter for fintech companies.
- Jamie Dimon, the chairman and CEO of JPMorgan Chase & Co., previewed the bank’s move into fintech in his annual shareholder letter.
First published April 12, 2017
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Paula Dwyer at email@example.com