BLOG VIEW: Gone are the days when shopping malls dominated retail. Streaming services are replacing DVDs, which, in turn, replaced VHS tapes. Technology has disrupted almost every sector of the economy imaginable, but what does that mean for the financial services industry?
A “disruptive technology” is one that creates a new market and overtakes an existing market. These disruptions offer something novel to consumers. A disruptive technology is not simply a great invention sitting on a shelf at consumer’s homes, unless, of course, it is Alexa, the peppy voice behind Amazon’s Echo. However, if a technology – an invention – is introduced to the marketplace and surpasses current industry leaders, then it is considered a disruptive technology.
There is no definite way to identify exactly what constitutes disruptors. Some technologies disrupt with a gradual trickle, while other disruptors arrive to the forefront in a flood-like manner. Electric cars are slowly disrupting the auto industry while, in contrast, almost immediately upon the iPhone’s release, sales of point-and-shoot cameras and handheld game consoles entered a freefall. Identifying disruptors can be difficult, but there are some common threads across industries.
First, outsiders and entrepreneurs, with the benefit of clean-slate perspectives, are most often the source of disruptions, not industry leaders. Second, the business model, not the technology itself, is the priority for those business leaders taking hold of the disruptor. Revolutionary products have to be able to withstand resistance from current industry offerings long enough to effect a disruption.
Maintaining a long-term, sustainable competitive strategy is a constant challenge for any business. When evaluating potential business disruptors, executives examine the specific needs that such technology is fulfilling, the strengths and weaknesses involved with implementation of the technology and how this compares with the current business model.
With a full understanding of the potential utilization of disruptive technology, a business can thwart being cast into obsolescence. This is easier said than done. The financial industry is facing revolution from a quickly-growing and adaptable micro-industry known as fintech.
Fintech is a necessity, not a choice
The term fintech means “financial technology” and is a broad term that applies to banking and investment businesses using the Internet, mobile phones, cloud computing and open source software. Fintech companies often use existing technology and existing financial services, but offer the two combined in ways that offer something new to the marketplace.
There are two main subcategories of fintech: (i) consumer-facing, meaning that consumers interact with the technologies, and (ii) back-office, in which such technologies help companies increase efficiency and productivity behind the scenes.
While some might be concerned that fintech advancement could hurt our economy by arguing that automation and robots are taking human jobs, this is not necessarily true. Employees’ skillsets may become more versatile as fintech requires them to gain familiarity with technology.
Fintech may change the essence of some jobs, but there will still be jobs for qualified employees. In fact, fintech could make people better at their jobs. Technology-embracing companies are more likely to offer remote work plans and more flexible schedules. A 2016 survey conducted by TINYpulse, an employee engagement firm, found that remote workers are 7.1% happier than their office-dwelling counterparts. The same study reports that 91% of remote workers feel that they are more productive when working remotely as compared with working in an office.
Examples across industries
While fintech has the ability to drastically change the lending industry, it is also making strides in other financial services such as insurance and debt collection. Examples of fintech in lending include peer-to-peer models, as well as in more traditional business models.
In peer-to-peer models, fintech has allowed the traditional aspects of lending – institution to consumer – to be transferred to a model which allows consumer lending directly to another consumer. Peer-to-peer fintechs are the largest segment of the fintech industry, with a market value of $21.5 billion in 2016, up 19% from 2015, according to the 2017 Americas Alternative Finance Report. The same report also found that business-to-business fintech market volume is growing at a rapid pace, up 160% in 2016 to $6 billion.
Fintech company Lending Club promotes that it is America’s largest peer-to-peer lending network. Lending Club offers a website in which consumers in need of a loan and investors who are interested in funding are able to find one another for a direct transaction. Lending Club advertises that both the lender and borrower are benefited by the efficiency of online lending, more so than with traditional channels of lending, and that the loan approval process can be shortened to hours. Lending Club sets forth on its homepage that since 2007, over 1.5 million people have used its service. In 2016, the peer-to-peer lending market volume in the United States was $21.1 billion, an increase of 17% from the previous year.
2017 Americas Alternative Finance Report
Fintech is also prevalent among traditional lending institutions. Well-established mortgage lenders are working on methods to reduce closing times by focusing on eliminating paperwork and automating portions of the lending process.
One of the first companies to advertise such advances was Quicken Loans, when it started moving its Rocket Mortgage product forward about two years ago. Rocket Mortgage aims to streamline the mortgage application and approval process by allowing consumers to complete all the necessary application steps for a mortgage online. Quicken Loans recently announced several partnerships, including one with e-closing company Parvaso, which allows it to now fully perform mortgage closings online.
The process of mortgage lending and of online services is not new. However, the powerful combination of mortgage lending via a simplified online platform easily accessible to consumers is what has disrupted the mortgage origination process considerably. Quicken Loans promotes that Rocket Mortgage closed $7 billion in loans in 2016, its first year in operation.
Fintech has even been evolving in the debt collection industry. TrueAccord states that more than 90% of its customer interaction in its debt collection practices is automated. The company uses software that targets debtors through social media, email and text messages signed with real names, such as Susan Anderson, Aaron Munoz and Gabriel Vasquez.
According to the company website, consumers are able to pay and dispute their delinquent accounts through TrueAccord’s platform. The company further promotes that it utilizes a less confrontational, more understanding attitude and computerized learning system to provide increased collection measures with a more pleasant repayment experience for borrowers.
Lastly, fintechs have proven popular with venture capital investors. In 2016, venture capital firms invested more than $17 billion in fintech.
Ant Financial, a subsidiary of Alibaba, acquired Texas-based money transfer service Moneygram for $880 million. Oscar Health, an online health insurance Fintech that offers free 24/7 telemedicine visits to policy holders, raised $400 million in funding in 2016 from three venture capital firms.
Costs and benefits to consumers
Fintech opens doors for consumers by offering products they need in places they can easily access. Peer-to-peer lending networks may shorten loan approval times to hours instead of weeks. In addition, lending alternatives provide more options to borrowers with poor credit or who lack credit history. They do not have to go through a traditional lender, explaining unusual circumstances, and instead may have the opportunity to be looked at in a new, unique perspective. For example, new and high-risk borrowers can talk directly to an investor to negotiate the terms of a loan. This streamlined online approach to approval could not only open up the market to non-traditional borrowers, but might also ease the stress to consumers as they apply for a loan.
While embracing technology in financial services can provide advancements in the lending industry, it is not void of some downsides. For example, not all consumers are tech-savvy enough to take advantage of these technology disruptors, and some lack easy access to computers, smart phones or the Internet. It is also possible that as lending becomes easier to access for consumers, there could be an influx of more applicants who impulsively decide to borrow, resulting in uncontemplated debt that they cannot afford.
The other concern regarding fintech is the oversight of regulatory bodies. The financial services industry is restrained by complex laws and regulations, and those companies innovating or partnering with such visionaries need make sure that they align with applicable regulatory oversight. Fintechs may be subject to routine state and federal audits, both in paper and in person, and may even need to have a dedicated support team to address such inquiries so that there are not unexpected negative consequences. Companies must ensure that they are adhering to all laws and regulations in these areas and hire compliance experts who can help them review the laws so that they do not run afoul of regulatory compliance requirements.
Fintech is quickly growing in size, and fintech leaders are adapting and overcoming barriers to entry into the financial services industry by forming their own internal structures or by partnering with experienced lending institutions. New entrants must quickly assemble teams to confront regulatory compliance, marketing, employment, legal and financial issues. Collaborating with established industry players has allowed the innovators behind fintech companies to focus on their core business models.
Fintechs, lending institutions, governmentsponsored entities and others have leveraged the power of partnerships to bring their businesses to the next level in technology. This type of partnership allows lending institutions to have a fresh perspective in integrating technology into processes, but also provides fintechs with the deeper understanding of industry compliance, regulations, structure and players – and would not be known to a new player.
While the idea of becoming innovative and changing an industry seems practical in theory, it is also extremely competitive, and not all fintech companies will survive. In some cases, they do not understand the industry – in others, the financial backing may not be strong enough.
Some of the companies that seem to have the most potential have failed. Sindeo, an online mortgage lender, announced it was going out of business in June but was later acquired by Renren, one of its investors. Wesabe, a personal finance website that provided automated financial advice on how to save money, was not able to withstand competition from other fintechs. These stumbles illustrate the importance of having a strong business model to back a disruptive technology.
Innovative ideas are just that: ideas. To put the ideas into practice, a keen business intuition is essential to compete in the financial marketplace.
The growth of fintech – to both institutions and the consumers they serve – could result in a seismic shift in the role of financial institutions in the economy. As with any disruptive technology, predicting specific future innovations is difficult.
But one thing is certain – fintech is here to stay.
Debbie Hoffman, Esq., is managing partner, Symmetry Blockchain Advisors, LLC while Evan Reid, is a juris doctorate candidate at Wake Forest University School of Law.