The Rise of Fintech

Although finance and technology have been merging for more than a century – starting with the first wire transfer of money via the telegraph machine – it was the Internet that allowed for the conversion of money into gigabytes and unleashed the power of fintech. It started in the back offices of banks and investment houses, with the application of technology to accelerate the movement of money, streamline processes, and globalize commerce.
Consumers were introduced to fintech through their banks with online account management and bill pay. Investors were introduced in 1982 when E-Trade executed the first electronic trade outside of a brokerage house. Early fintech innovators such as eBay introduced consumers to an ecommerce world they controlled. PayPal began the movement towards a cashless society. Since then, fintech has gradually burrowed its way into the financial lives of consumers bringing more convenience, lower costs, and quicker gratification.

Fintech Unleashed

It was in the wake of the 2007 – 2008 financial crisis when the relationship between consumers and the financial services industry truly soured that the fintech change occurred. The World Wide Web had just undergone its transformation to Web 2.0, expanding the opportunities for online collaboration and dynamic interactivity. Consumers were looking for alternatives to high banking fees and tight-fisted lenders. That is when online startups like Prosper emerged as non-bank alternatives, empowering consumers with the freedom of choice. Companies like Prosper, Lending Club and Kickstarter were at the forefront of the shared economy that brought consumers together with investors and entrepreneurs to form financial alliances outside of the traditional financial services industry.
In 2010, nearly two billion dollars flowed into fintech startups from venture capitalists that recognized the profit potential of digital banking. That figure would grow to nearly $20 billion in 2015. For a while, the fastest growing segment was in the payments space as new technology led the way to quick, frictionless, cashless transactions. Suddenly, PayPal was competing with a host of payments startup companies, each adding a new layer of technology to make payments more frictionless, more secure, and more convenient. These companies caught the attention of high tech behemoths such as Google and Apple who gobbled them up with the intent of dominating this highly profitable space.
Next, was the emergence of online lenders, such as OnDeck and Kabbage, that attracted the attention of investors. The credit vacuum left by traditional banks created instant pent-up demand for online lenders who could offer loans at reasonable rates to the underserved business market. Both companies raised more than a billion through venture capitalists anxious to capitalize on the burgeoning shadow banking industry. The growing popularity of online lending has even attracted the attention of one of the world’s largest banks, Goldman Sachs, which is ready to launch its own online lending operation. Although Goldman Sachs has the potential to grab significant market share of a fledgling industry, its entry is a validation of its potential and will bring more attention and investor money.

Where Fintech Goes From Here

The rise of fintech is not likely to end the reign of traditional banks, at least not any time soon. Lending Club, which is one of the bigger upstarts in the online lending space, has arranged $9 billion in loans through its marketplace, which is small change compared with the nearly trillion dollars in credit card debt held by banks. However, fintech will continue to reshape the financial service industry and force banks into a position of having to adapt or shrink. Fintech innovation will continue to cut costs and improve the consumer experience. Its ability to access and analyze data in ways banks have never imagined will expand the market for underserved consumers.
The rise of fintech may eventually stall due to the challenges inherent in fast growth, especially as profit margins shrink due to increased competition. Also, online lenders are coming under increasing scrutiny from regulators. In 2008, Lending Club was forced to shut down for more than a year to bring its practices in compliance with the Securities and Exchange Commission rules on selling securities. Prosper was also hit with a cease-and-desist order. Although both companies have since recovered, they continue to be hounded by regulators. Investors increasingly want solutions for the perceived lack of transparency with their loans, sparking memories of the 2007 banking crisis. If the supply chain of capital from hedge funds, venture capitalists and other investors dries up, online lenders may not be able to survive.
For now, fintech is still experiencing a high level of irrational exuberance over the prospect of further disruption and the profits that can be taken from traditional institutions. But, it may not be as quick and easy as it once was. However, one thing is for certain: the proliferation of new financial technologies is leading to the development of new lending products, services and easier to use technologies that help companies achieve their goals.