What is Fintech? Is the Revolution Upon Us?

The fintech revolution hasn’t materialized. Thousands of graduates every year move into corporate America expecting a monumental shift in the way that we do business.

Innovations promised in payment processing, mobile banking and all spurred on by the disruptive forces of Silicon Valley. Yet we still face the same credit card companies that continue to charge transaction fees. We haven’t moved to a digital currency and it’s still just as hard to take out a loan. It’s actually more difficult to do today than 10 years ago.

Fundamentally, the problem is that the financial system hasn’t changed. Fintech has not evened out a system that was built to benefit certain key players. These financial structures just grow stronger. It will take a far greater force to deliver change to the American public.

Last Mover Advantage Theory

It’s long been true that the developing world has had a last mover advantage when it’s come to internet infrastructure. Those with archaic systems continue to struggle. However, there are now plenty of examples of countries that have more advanced information technology grids.

It’s a fact that mobile cellular speeds are not that fast in the United States. Actually, we lag behind 24 other nations based on an OpenSignal 2020 report. This shows how less developed nations are able to apply their resources without having to worry about old system’s compatibility. Additionally, their political systems don’t protect the oligopolies that stifle change.

The US Continues to Fall Behind

It’s difficult to see how stagnant the banking system in the United States is. That is if you haven’t seen how other countries have adapted.

You would think that we lead the world in digital payments. Especially given that the pandemic accelerated the adoption of touch tap payments through Google Pay and Apple Pay. These systems are only a minor fraction of the total mobile payments that are completed every year globally. Especially when compared to their Chinese competitors WeChat Pay and Alipay.

WeChat Pay, as an example, has 900 million users in China, while Apple Pay has half as many users worldwide. These payments are done without transaction fees in China. The closest things that we have to these technologies in the United States are PayPal and Venmo.

In the meantime, China has been pushing in this direction for a decade. They are now moving to a complete digital currency that will complete this evolution. These are truly disruptive technologies that deliver significant benefits to the consumer rather than protecting incumbent financial services companies.

International Startups Continue to Affect Change

The developed world has also seen some startups that have made a significant dent in everyday life. Afterpay is an Australian company that has broken into the credit card industry. They allow consumers to purchase retail products without charging them credit card interest.

Instead, the consumer pays back in four installment payments. The retailer ends up paying them a per transaction fee. It is these kind of truly innovative business models that speak to the rebellious nature of what fintech should be. Afterpay recently announced that it is being purchased by Square.

This act, in itself, has changed how we interact with brick-and-mortar retailers. Yet, we are still reliant on credit card companies as the backbone of how consumers pay for products; fundamentally things haven’t truly changed.

One More Example

A final example of how fintech was “more hype than reality” was in the mortgage industry.

A decade ago, Wells Fargo came up with the idea that the mortgage industry could be transformed. They wanted to eliminate the human component. Instead, connecting lenders more directly to their customers. Loan officers across the country can be replaced by mobile apps.

To compound the fear of oncoming technology, a new brand was being developed called Rocket Mortgage. It had the goal of creating the first fully online mortgage experience. The reality is that these technologies made the tasks of taking loan applications easier, but also sacrificed detail and accuracy. With every home loan that is done, you are approving a borrower and a property in parallel.

To create a true technological solution, one needs to address the following:

1) navigate all of the variability that comes with each differing household in America

2) compensate for a myriad of collateral issues that could arise when an appraisal was simply too ambitious.

These platforms instead became pseudo lead generating applications that promised to significantly improve user experience. Ultimately, they have yet to make the process a trivial exercise. The industry has instead focused on using their branding to attract consumers and technology to make certain tasks easier.

These technologies have not fully delivered on their original goals. They probably will not do so until the lending products change. Or until artificial intelligence systems are developed that are robust enough to deal with human randomness.

Moving Slowly – Now an American Tradition?

In this sector, fintech has proven to be a more gradual evolution rather than a significant game changer for consumers. It’s clear that the real change will have to come in the next decade. As new advanced technologies disrupt the first generation of mobile financial solutions. The winds of disruption we thought were coming have been more like a gentle breeze of evolution.

The next decade will allow us to begin decentralizing financial tasks and removing the middleman.

There are a number of blockchain technologies that have already built the foundation for a world without a bank. The speed of change so far has been slow. Enough that current market makers have been able to adjust and reposition themselves to prosper at the detriment of consumers. I believe smart contracts, in particular, will become a major force that changes how business is done.

It isn’t a time to be overly pessimistic if you’re an incumbent financial market maker. Artificial intelligence will be applied in a way that it has a real impact on the world and will adapt to a wider array of unique situations.

The products that are currently provided will only become better and more convenient to use. The banking and lending industries will provide significantly greater value to their customers. Thus differentiating themselves in a world of vanilla brand names. This will truly be the fintech age that we were hoping for.

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