Fintech – revolution or bubble?
Prof. Dr. Thorsten Hens, University of Zurich
June 12th 2016
A quick look at google trends reveals that the interest in fintech has recently exploded. While it was stable for 10 years, in 2014 it doubled and since 2015 it has taken off into the sky – or as the fintech guys would say into the cloud. Definitely it dwarfs other finance terms like factor investing, the interest in which has also increase rapidly, as the following figure shows.
Figure 1 Results from google trends. Blue curve fintech, red curve factor investing
What is fintech?
So what is fintech then? Fintech is the combination of finance and technology. It is the portmanteau for the digitalization through which the financial industry currently goes.
Almost all aspects of finance are currently transformed by a digital revolution. Payments are no longer made in cash or with cash card or credit card but with smart phones. New solutions like paymit or google wallet become increasingly popular. Lending is done in peer-to-peer lending clubs on the internet. New investment strategies are conducted that are faster than light and use much more information than traditional strategies. Also areas in which handholding was a key element like financial advice now get replaced by robot advisors. Betterment and Wealthfront in the US were the innovators and similar companies get established world-wide. Finally, central banks lose control of their ultimate power: issuing money. Bitcoins can now be used not only to pay in the internet but in groceries and coffee shops, for example. Interestingly, one motivation for bitcoin was to counter the explosion of the money supply created by quantitative easing. To do so a complicated system for the creation of bitcoins, the mining, has been invented but of course people are inventive and siblings to bitcoin like ether popped up!
Fintech a global revolution
Coming back to google trends shows that the region in which the word fintech is searched for the most is Asia. This does not come as a surprise since people in Asia love all sorts of digital gadgets. But this also indicates that people living in Asia think more globally than people in the US or Europe, for example, since one important aspect of fintech is that — like the internet – it has no borders. Traditional sociological distinctions like American, Asian, European will have to be replaced by Digitalian or not! As usual some benefit and some lose. A really nice aspect of fintech is that payment systems like monetas enable the poor to become part of the financial system – which is crucial for their economic development, as many studies have shown. Today there are more than two billion people that lack access to basic financial services, i.e. they are not banked – so why not get fintech-ed then?
Fight it or embrace it?
As there is no simple way one could possibly stop the internet, there is no easy way to stop fintech. Some financial centers have understood this and started to embrace the fintech revolution. Fintech start-up centers have been set up in London, New York, Singapore, Hong Kong and Switzerland. Venture capital funding for fintechs has exploded summing up to more than 20 billion dollars in 2015 – not counting the funds which are collected through fintech itselfs by using crowd funding platforms!
While regulators in many countries seem to miss this revolution, the Federal Conduct Authority in the UK and the FINMA in Switzerland started to embrace it by offering special deals for fintech companies. The FCA proactively consults fintechs how to deal with its regulations and the finma proposes banking licences light when the scale of the fintech is still small.
The most interesting aspect is the positioning of the old economy financial intermediaries. Some have created a digital branch and hope to insource the fintech revolution but many have lost their key employees to fintech start-ups.
Where will we go from here?
The multi-billion-dollar question is whether the fintech revolution gets integrated into the existing structures. Looking back at the biotech revolution a symbiosis of start-ups and old economy has emerged. In the vicinity of large pharma companies a whole ecosystem of small start-ups experiment and innovate new products whose patents eventually get bought by the existing companies. But in contrast to this business model fintech could also flourish outside traditional financial intermediaries. This depends on how well established internet companies like google will deal with them. The advent of google wallet signals that google is working in this direction.
In any case, the finance and banking of the future will look much different than today. And this also has impact on academia. Our focus needs to be shifted from the traditional financial institutions and static financial models like the CAPM to innovation, evolution and dynamics. These and other questions are, for example, researched in the new Swiss Fintech Innovation Lab set up by the University of Zurich.