Every industry has its own insider baseball — the type of stuff you can really only understand by spending time within the field. Fintech is no different. It continues to pique the public’s interest because of how big the financial industry is and how deep run the feelings of wanting it to change.
Hop onboard the fintech “revolution”
While the public’s trust in the financial services industry has rebounded somewhat after the 2008 Great Recession, it still ranks lowest among all industries, according to Edelman’s Trust Barometer. In an environment that’s supported Occupy Wall Street and Bernie Sanders, people are rooting for the incumbent financial services industry to lose.
The thing is, it’s not losing. At least, not in any meaningful way. Sure, finance is shedding certain jobs (trading, for instance) and financial apps are becoming popular but they’re not really a threat to usurp the roles of banks in our economy. So instead of a revolution, what’s happening now looks more like an evolution. Finance is undergoing an iterative change, not a whole hog uprooting. All the excitement about the fintech startup industry and adoption of new customer-facing tools has had an impact on the incumbents, who are investing in improving their service levels and bringing them up to meet demanding customer expectations. But it’s an ongoing process that will take years, not an overnight change.
Banks are being replaced
Sorry, but banks aren’t really going anywhere. Sure, they’re shedding retail branches all over the world, in favor of automated ATMs. But with all the development in the fintech space, all the billions of dollars of venture capital plowed into the industry, banks still remain relatively inured from direct competition. A recent report by the The Institute of International Finance found that compliance and regulatory activities can cost banks $1 billion per year. It’s too hard, expensive, and laborious to take banking head on.
Instead, fintech firms have done an end-around on banking regulation. They’re been able to provide services on top of existing banking infrastructure without being regulated as banking institutions. They’ve been able to provide online lending services without taking on deposits. Regulation is changing and it won’t be so easy to be a fintech startup in the future but the point remains: banks play an important role in our financial ecosystems and the future is more about how they can work with innovative startups than it is about said startups replacing banks.
It’s sexy to build a fintech startup
If you think figuring out how to comply with state and federal regulations sexy a tower high, then, yeah, fintech is sexy. Otherwise, it’s hard — and expensive — work trying to onboard new clients. An estimated 10-15% of total human capital costs are spent just on compliance. It’s also hard to identify people with the right skillsets to lead fintech initiatives. Are they software people or are they banking people?
Because the timeline of building a financial company is longer than in other industries, fintech startups are constantly raising money. It never ends — as soon as one source of capital is secured, it disappears and CEOs of top players in the space are sent scrambling, looking for other sources. Just ask Lending Club. Or Prosper. Or SoFi. The list is long…
Fintech as the great equalizer
Many see fintech as the great equalizer — by putting powerful tools and technologies in the hands of the unbanked or underbanked, opportunity gaps are closed. No longer is good financial service and products relegated to the rich and powerful. We all have universal access and power and…Unfortunately, that’s not true. At least not yet. There are some cool apps that have have provided automated tools that approximate good, quality financial advice and service. But for the most part, you get what you pay for.
Most emblematic of this false equalization are the roboadvisors. These software-enabled portfolio managers provide standardized investment advice that’s cheaper than a lot of other options. The problem is that the bar for what’s good or standard is continuously moving. Wealthier clients still get better risk-adjusted products and services. Delivery of financial services has always been tiered in favor of people with more money and fintech is no different. Baseline financial services have improved, though, and that’s a good thing.