Dace Medne: Financial revolution or evolution?

October 5, 2016

During the last decade, technological development has influenced virtually all industries. Also people’s attitude regarding usage of the technology has excessively changed. If at the beginning it seemed a bit ridiculous to buy a phone with nearly no buttons and with some kind of computer characteristics (because we used to think that phone is meant for calling and texting only), then now this seemingly small gadget has taken on itself quite many of the everyday functions. Financial sector is no exception in implementing technology, and financial technology companies (hereafter – FinTech) is definitely part of this development. However the question is whether this FinTech revolution is indeed a revolution or only a name for a normal development, which of course is faster than it used to be, but in other characteristics does not differ much from the past.

One of the FinTech aspects is that the activities of the financial institutions are split into functions and the respective FinTech company can do a specific function better and more efficient than a bank (for example, lending, payments, investments etc.). One of the reasons why banks cannot do it as efficient is the size factor. FinTech companies are smaller, more innovative and can make decisions faster, in that way overtaking banks in this development phase in the specific niche.

However, in my opinion it is only a matter of time until the (successful) FinTech companies will no longer have this size advantage. These companies are growing organically, are being acquired by larger financial institutions, and it will be in no time when they will start to merge between themselves. As some of the driving forces for such advancement, I can mention the desire for cross sales of different platforms and other synergies, as well as the clients’ desire for a one-stop shop. Of course, it is possible that you make investments in one platform, borrow in other, make payments from the third one etc. However, in a long run such scenario is unlikely, since at one point there will be a demand for a single platform (or bank…).

If we look more closely to a specific FinTech sub-sectors, then there is a need to mention the peer-to-peer lending platforms or the hybrid lending which is gaining popularity (banks invest in lending platforms in that way indirectly investing in smaller projects which in other cases wouldn’t pay off to review and invest in). Taking into consideration that small and medium size companies are mostly the driving force of the economy and the hybrid lending is the most favourable for them, then such direction should be encouraged. Moreover, with different technological innovations, these platforms has made the investing and borrowing functions more efficient. However, we cannot ignore the risk of these investments. Many of those underlying credits have high systematic risk (déjà vu?), which means that by diversifying the portfolio the risk becomes only seemingly smaller. I am not saying that the lending platforms would be more risky than it is implied in the rates of return; however, it is very important for both the investor and the regulator to understand these risks.

To finish off on a little more positive note, I do strongly believe that there are number of technological advancements that will change the financial sector and will maybe drag along other industries as well. As an example I can mention the blockchain technology, which can change the necessity for the presence of a third party in verifying a deal. Already now many banks invest in the implementation of the blockchain technology in their services and deals. So we can expect that in the future a platform that was in the beginning meant only for the virtual currency Bitcoin will become an important part of the transaction process (similarly as the mobile phone at first was meant only for calling and texting).

Overall I can say that the development and emergence of the FinTech companies is necessary and needs to be promoted at least so that the financial sector would keep up with the overall technological progress. However it is naïve to think that every company that calls itself a FinTech will change the banking and insurance industry “beyond recognition”. Of course, some of them will improve the industry overall. Therefore, the intriguing question is what will be the changes among TOP sector players, not if the industry of thousands of years will disappear.

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