What is the real promise of fintech? This catch-all term is routinely attached to any venture that uses internet-based technologies to deliver financial services in a new way. As such it covers everything from automated financial advice and online investment platforms to new payment providers, peer-to-peer lending, equity crowdfunding, new types of settlement and asset registries based on blockchain, and even app-based banking via smartphones.
There’s no doubt that these are all interesting and innovative uses of technology and that in some cases they could ultimately transform the way we access financial services and manage our money. But in most cases the promise runs miles ahead of the reality and for all their novelty (and towering valuations in some cases), the new entrants remain minuscule by comparison with those they seek to disrupt.
This is not meant to suggest that financial technology is all hype or that the entrants are doomed to underachieve. Far from it – some very valuable companies are being created that one day will command huge valuations based on real profits and margins. That day, however, is still some way off.
A new culture
My point is that fintech is much more than just a synonym for a new type of financial services business. Arguably, it doesn’t have to be about companies at all. Of course the media loves famous faces, and especially young and free-thinking entrepreneurs, so it’s no surprise that fintechs have come to be seen as a breed of start-up that have trained their sights on the stodgy, bureaucratic world of traditional banks and asset managers. This is the narrative that dominates coverage of the fintech world and it is one we all instinctively understand. But there is more to it than that. A lot more.
In mid-May, the Competition and Markets Authority announced its proposals to “reform retail banking, to improve competition and get a better deal for customers”. It rejected calls to break up the major banks. It decided against a ban on ‘free if in credit’ current accounts. Instead, at the heart of its thinking was the need to make better use of data to create a more transparent marketplace and allow consumers to make better informed choices. “To transform the market the CMA believes banks instead need to be made to provide their customers with the right information so that they can easily find out which provider and type of account offers best value for them,” it said. This included enabling customers to share their personal banking history “safely and securely” via an open application programming interface (API) with other providers to enable them to offer alternative deals.
Change takes time and technology will always be an imperfect antidote to consumer inertia
A few days earlier, Steve Webb, former Minister of State for Pensions, was lambasting the Government in the Financial Times
for its slow progress in bringing forward a “pensions dashboard”. “The idea of a single place where you can see your state, company and private pensions is not new,” Webb wrote. “For example, in 2014 the Financial Conduct Authority … recommended the creation of a ‘Pensions Dashboard’ to help people know what pension rights they have.
Yet, while other countries already have dashboards in place, in the UK we remain stuck in the slow lane with only a Budget promise of something by 2019.”
Again, the key to securing better outcomes is to improve access to information and present it in a way that makes it much more valuable for users.
The parallels in just these two examples are striking. This is fintech in action – and it is nothing to do with groups of entrepreneurs, start-ups with unusual names or grandiose claims about disrupting multi-billion pound industries. Instead, it is all about using technology to structure information so that it will influence behaviour and enable markets to function better.
However, because neither of these examples involves visionary founders creating an innovative, entrepreneurial company with a colossal valuation, it’s hard not to be under-whelmed by them. Who feels their pulse start to race at the mention of open APIs or a Pension Dashboard?
Despite this, I suspect that this under-appreciated facet of fintech will ultimately prove much more valuable to more people than almost all the start-ups that we read about so frequently today. Sceptics may argue that similar tech-based efforts to transform other markets have proved disappointing: witness the low rate of energy switching even though excellent comparison services exist. It’s a fair criticism.
Change takes time and technology will always be an imperfect antidote to consumer inertia. But if we allow ourselves to believe that the promise of fintech begins and ends with the fate of scores of start-ups, most of which will inevitably fail to live up to their own claims, then we are missing an important trick. Fintech is not about creating companies. It’s about harnessing data and delivering services.
This article was originally published in the July print edition of The Review. The print edition is available to all members who opt in to receive it, except student members. All eligible members who would like to receive future editions in the post should log in to MyCISI, click on My Account/Communications and set their preference to 'Yes'.