Fintech is a sector that is talked about a lot in the tech world. The reality is that Financial Technology companies are nothing new. You could argue that the greatest innovation we have ever seen come out of Fintech is the credit card and that is nearly 70 years old! Despite this history, for many of us, the way we interact with financial services has not changed. The reason for this is simply that Fintech is a tough industry. There are massive incumbents with vested interests in maintaining the status quo (or to at least slow progress down enough that they can get ahead of it). Regulatory agencies present hurdles that can easily trip young companies up and even once they have been overcome in one state/country, regulations are often different in others. There is opportunity here. There is a deep and fundamental need for innovation in this sector and if your company can be the one to solve the challenges and overcome the regulatory hurdles, the rewards will be massive.
I am optimistic about the future of Fintech because of three trends.
Democratization of Financial Services
According to a 2015 FDIC survey, approximately 7% of American households are unbanked with a further 19% being underbanked. If you look beyond our shores, the numbers are even more troubling. Over 2 billion people worldwide don't have any access to financial services whatsoever. Financial services are key to people's ability to access socioeconomic mobility. Without savings, there is no safety net. Without loans, there is no buying homes or starting businesses. Without investment, there is no progress.
Fintech has an opportunity to fill this crucial gap for people. With the proliferation of cheap smartphones across the world, people can have access to critical services and infrastructure that they would never be able to have previously. One company that is facilitating this is Branch. Branch is focused on bringing banking services to those that don't have access to traditional financial institutions. They are primarily focused in Africa and use someone's smartphone as a micro-loan platform. This onboarding into the world of finance will start small, but it is not hard to envision a future where everyone has access to at least the financial basics.
Not only will financial access spread, but Fintech has the potential to disintermediate legacy institutions. If you wanted to send money to a friend or family member you used to either have to give them cash, a check or execute a wire transfer that would take days to clear. Then along came Venmo. Venmo totally changed the game by allowing people to instantly send money back and forth with no wait and no fees. They even added a social angle that became surprisingly popular (and no you are not fooling anyone with "Your half of the 🐻"). Person-to-person money transfer was the first part of the finance industry to have big institutions cut out, but it won't be the last.
More than simply bringing financial institutions to those that have never had access to it, Fintech can make financial services affordable in a way that was never possible before. Robinhood has created zero-fee stock trading. Trading fees are a massive disadvantage for retail investors. It is impossible to make any sort of return on a trading strategy if you are a small time investor and you have to pay $8 for each and every trade you make. Free trading has opened up the public markets to more people than ever before. Fintech companies can tear down the walls of market inefficiencies with elegant technologies and business plans.
The issue of trust has always been at the core of financial services. Money, at its very heart, is an agreement of mutual trust that some intermediary object can be exchanged for goods or services of a certain value. Fiat currency has no intrinsic value outside of this trust and the agreement that it is worth a certain amount. People need trust in order to transact, save, or invest. This need for trust has only increased as money has moved further and further away from cash transactions that people can hold in their hand. A big hurdle for Fintech of any kind is developing the fundamental trust that is required for a user to allow an outside service to hold or use their hard earned money. Luckily for Fintech, there are two major tailwinds regarding the issue of trust: millennials and blockchains.
Millennials are digital natives that grew up with technology and witnessed the invasion of smartphones first hand. Their willingness to transact over technology is far greater than their parents' generation. A 2016 Gallup poll found that millennials were significantly more likely to trust institutions with sensitive information, even as they were more cognizant of security risks than previous generations. Willingness to entrust bank accounts/savings/retirement plans to Fintech products is only going to increase as younger, more digitally native, generations enter the workforce. On top of this generational trend, there are a growing number of Fintech startups that are not only trying to build trust with their customers but have built their customer's wellbeing into the very heart of their products. Companies like Affirm, who has created transparent and easy to understand financing options without any hidden rates or fees, are building win-win situations where customers are vastly better off than if they were to use traditional financial services.
All this talk of trust may become irrelevant if blockchains have anything to say about it. Yes, blockchains are the buzzword of the day (this blog is no exception). No, not all blockchains are created equal (many people can't even agree on what exactly a blockchain is). What we can say with confidence is that blockchain technologies involving distributed, self-verifying ledgers could lead to massive changes in the Fintech space. These "trust-less" networks pair strong incentives to self-verify with distribution technologies that make them extremely difficult to compromise. You hear about bitcoin exchanges being hacked today, but the reality is that no one has ever successfully stolen from the bitcoin protocol itself (not for lack of trying). The beauty from a security standpoint with decentralization is that since pieces of the network are stored across many different "nodes" all over the world, you cannot hack just one node, you need to hack the whole network. Security will always be a concern anytime money is involved, but with the evolution of blockchains and distributed networks, we are likely not too far from a future of at least partially "trust-less" commerce.
My first trend discussed the importance of opening financial access to those that don't have it. The final trend that has me optimistic for the future of Fintech is an evolution from simply adding access towards adding value. In an age of artificial intelligence, Fintech has the power to not only give you access to exciting services but to introduce new financial instruments that have the potential to drive tremendous value and growth for society. A company that perfectly exemplifies this shift from access to value is Wealthfront. Similar to Robinhood, the initial value proposition of Wealthfront was as a cheap alternative to traditional money managers or mutual funds. As the advancement of machine learning and artificial intelligence has accelerated in recent years Wealthfront has broken new grounds by leveraging AI to optimize portfolios, manage risk, and reduce unnecessary fees. With this strength of new technologies like AI, Wealthfront can react instantaneously to rebalance or make adjustments to your investment portfolio. These sort of capabilities have never been available to retail investors previously.
Another way for Fintech to add value is through the personalization and customization of finance. In the past, investment opportunities had to be selected from a limited universe of options. Yes, you could gain exposure to certain geographies or technologies, but the average person has never been able to really invest in a way that is personal to them and their values. That paradigm is shifting through companies like OpenInvest. OpenInvest allows you to optimize and customize your investment portfolio to align with impact issues that you care about. You can build an environmentally conscious portfolio, a portfolio that doesn't include any companies associated with the weapons trade, or a portfolio of female-led companies. Or you can mix and match all of the above. OpenInvest automatically manages your portfolio according to your values and rebalances overtime as new issues may become important to you. This is just one example of how Fintech is adding value through the sort of personalization that has previously been completely foreign to the financial services industry.
Fintech is hard. No subject is more sensitive for people than their money, how it is managed, and how it is protected. Overcoming pre-conceived notions, regulatory hurdles, and centuries of built up bias are massive obstacles to any new Fintech company, but Fintech is here to stay. I believe that the impact and empowerment that Fintech companies will be able to achieve in the future by democratizing financial services, building trust, and adding value will truly change the world.
Fintech. It's not easy. But it's worth it.
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