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Fintech & Beyond

Financial technology is hot. Abbreviated to Fintech, it is the financial spinoff of the tech start-up and has been making waves across the world. Big banks and financial firms are channelling significant amounts of money into fintech. Even “nuchter” Holland has not escaped the hype: fintech is being actively supported by the Dutch government and large banks and on the 14th of April Amsterdam will welcome the second annual Fintech 50 conference. A lot of words and money are being spent on the topic of financial technology.

But what exactly is fintech?  Does it have the potential to be more than just a phase and how relevant is it to our everyday lives? While the discussion on whether fintech is just a bubble or a real revolution is far from being settled, this article discusses some perspectives on fintech’s future potential and highlights several ways in which fintech can support the broader economy.

Before getting into this, first a quick definition for those less familiar. In general, fintech firms are those providing services normally provided by banks (or other financial institutions). These firms try to gain a competitive edge on traditional financial services by using innovative technology in pretty much the same way Uber is taking on taxis and Whatsapp has conquered text messaging.

Deciding on the potential of these fintech firms is today’s billion-dollar question. Providing an adequate argument on a business’ potential (let alone that of an entire sector) requires business skill, solid understanding of the market and most of all intuition. For fear of lacking most, I present a fairly straightforward perspective on looking at this issue. Fintech’s potential rests largely on two factors. The first is their ability in the long run to obtain customers and built a sustainable business from just a “good idea”. To a large extent, I have discussed this challenge for tech start-up’s in general in another article for Rostra. This same challenge applies to fintech as well. The main difference when discussing fintech is that these innovations often directly involve people’s wallet or pay check. Whether this makes people more open to advancements that solve inefficiencies or more reserved to changes in general is a key, but as of yet unanswered question.

A second factor playing a large role in determining fintech’s potential is inefficiency in the financial world; or in other words the need for (or lack of) innovation in the sector it’s trying to take by storm. Text messaging on mobile phones was using outdated technology and failed to innovate, creating a chance for Whatsapp to sweep in and take over the market. The same essentially goes for fintech firms: their capability comes from the incompetence of today’s entrenched financial corporates. From this point of view there appears to be room to gain for fintech. The financial sector is one of the most heavily technology investing sectors. But even though a lot of advancements have been made in certain fields of finance such as trading (through for example HFT), the “ordinary” finance that deals with everyday customers and businesses has experienced less revolutionary changes. Aside from additions such as online banking apps they have benefitted relatively little from technological investments. This provides opportunities to disrupt the market and partly explains why people are so excited about fintech. However, as stated before, big banks are putting a lot of sources into acquiring and promoting fintech start-ups. When these disrupters are being so generously funded by the old guard they are supposed to overthrow, this places a big question mark to if they will act “disruptive” at all.

Overall it seems, the case for fintech success appears to be strong. The question that remains is how will the rest of the economy gain from this? This question is highly relevant. Before the crisis, financial deepening and widening was believed to support economic growth almost unconditionally. Now, financial innovation is accepted as one of the origins of the Global Financial Crisis of 2008. Financial innovation; including derivatives, default swaps and collaterized debt obligations (in order of destructiveness), worked together to substantially weaken the financial system to the point where it almost collapsed. Financial growth and innovations have its limits and in the past years both academics and politicians have become increasingly aware of this. New financial innovation, including fintech, should therefore be judged on the benefit it brings to the broader economy.

Most of the innovations done under the name of fintech are at the business-end of finance, which means they are in general directly targeted at consumers or other businesses. On the consumer-side, fintech can improve the financial health of individuals by allowing them to more optimally smooth their income and thereby consumption. Large financial institutions are often bound by strict regulation and corporate rules preventing a more optimal allocation of funds to its customers. An example of this is how fintech is helping the advance of micro-finance in both developed and emerging economies. According to the World Bank, 48% of adults in Africa are making payments using their mobile phones. Fintech has the potential to support financial inclusion and bring the benefits of finance to those currently left out.

On the business side, fintech provides businesses with new ways to acquire funding. The financial sector is not isolated, but connects to the rest of the economy through primarily the issuance of credit and the saving of deposits. A renovated financial sector could in turn drive business ventures in other sectors across the economy as these now find easier ways towards capital resources. An example of this can be found in the rise of manufacturing start-ups around the world. A new well-received book (by two Dutch authors) argues that abandoned industrial cities around the world are reinventing themselves and are at a rapid pace becoming “the hotspots of global innovation”. In part, this revolution is made possible by easier access to capital through fintech solutions such as Kickstarter.

It’s too early to provide a final verdict on fintech. There is a real potential for the sector itself as well as benefits to be gained for the overall economy. The financial sector is ripe for disruption, particularly  from the supply (bank) side. From the demand (consumer) side, the necessity and eagerness for financial innovation are less assured. When we judge fintech for its ability to support the broader economy, the verdict is more positive. There is evidence that suggest the fintech supports start-up activity across the economy and that it is allowing more people around the world access to financial products. In the long run, a key determinant of fintech’s success will be the consumers’ openness to change in the way they deal with money. These changes are not likely to succeed overnight but will need time to root themselves in consumer behaviour. But if cash can slowly become history, why can’t fintech slowly become the future?


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