Fintech Didn’t Fail—The Prophets Did
Is fintech a failure?
That’s the question that Jake Fuentes, co-founder of Level Money, posed in an article on Medium late last year. Fuentes points out that, while some tech firms have had success in the world of finance (Stripe and Square being obvious examples), we haven’t yet seen the sort of fundamental, disruptive changes in the finance industry that thought leaders had predicted at the beginning of the fintech boom. Fuentes writes:
Winners certainly exist, but tech has yet to revolutionize banking in any real way. The tone of the fintech space has shifted from disrupting incumbents to partnering with them, and VC dollars have started to shift to more promising fields. Perhaps we just haven’t seen the right company yet, but the oracles of disruption would have painted a very different picture for 2017 than where we are today.
And on that point, I agree: if we evaluate fintech by the predictions made 10, or even just 5 years ago, we’ve largely fallen short. But rather than looking at why fintech has failed to meet the lofty expectations set by those “oracles of disruption,” I’d question whether they were ever realistic in the first place—and point out that the industry has actually been more successful in disrupting the established financial order than it might appear.
Heavily-Regulated Industries Are Difficult to Disrupt
Cryptocurrency mania is sweeping the globe, but it’s important to note that a major factor of their success has been that these payment systems operate outside the ambit of regulations placed on companies dealing with fiat currencies. It’s that strict regulatory oversight which makes evolution in other segments of the financial industry such a slow process.
Just take a look at healthcare, pharmaceuticals, and energy: all huge industries with significant legislative barriers that prevent disruption from happening overnight. It’s not as simple as developing an app—you have to ensure that every part of the ecosystem is in step with your innovation. Even in more loosely regulated industries such as transportation and hospitality, disruptors like Uber and Airbnb run into trouble with governments as soon as they reach a certain scale. Their focus then shifts to security and compliance.
Finance is the same way. No one was ever going to flip the entire ecosystem on their own. Instead, we’re seeing separate companies targeting smaller segments at a time. When was the last time you went to a physical branch to perform a transaction, or used an ATM to deposit a check? Instead, we’re trading global stocks and sending money across the world from our smartphones. Sure, these innovations don’t always feel like earth-shaking transformations of the financial sector—bit by bit, though, they’re bringing much-needed modernization to the industry.
The Parameters of Success for Fintech Were Skewed
Let’s think about the timeframe within which fintech was expected to change the game in finance. Back in 2011, most payments experts would tell you that success meant the ubiquitous use of mobile—and it seemed like it was just around the corner. But while services like Apple Pay and Google Wallet have gained some ground, digital wallets still only accounted for roughly one percent of all transaction volume in 2016. If you asked someone to guess today’s digital wallet adoption rates a few years ago, I guarantee that it would have been a lot higher than it actually is. But consider that it took credit cards 28 years to hit just 50 million users. There’s no doubt that the pace of change has increased significantly.
In that same vein, most industry observers predicted that payments would be disrupted under a zero-sum model: one new digital payment method would emerge as the preferred way to transact and it would dominate the market. Of course, that wasn’t realistic either—even before fintech, we saw individuals using a range of payment methods depending on things like their age, or their socio-economic conditions. Younger people were quick to adopt debit and credit cards, while older people continued to write checks. The unbanked or underbanked (typically lower income) preferred to work with cash. What fintech has done is increase the breadth of payment options, providing more flexibility and convenience across the board.
Fuentes notes in his article that fintech companies have mostly given up on the idea of toppling financial incumbents, and now are looking to build partnerships with them instead. But to think that these startups could replace the networks and relationships that took legacy institutions decades to build—and do it in just a few years, no less—was misguided from the beginning. Disruption doesn’t always happen by dismantling. Partnering was (and still is) the clearest path to real change in the financial industry, and it should have been the goal all along.
There’s More to Fintech Than Technology
Which brings me to my final point: most fintechs have focused their efforts on the cosmetic—improving the user experience in financial transactions rather than addressing the fundamental issues (the ‘plumbing’ problems) that have plagued the industry for so long. For the most part, these companies have succeeded—they never set out to fix the underlying layer, and in disruptive cycles, the cosmetic friction is typically the first to be addressed. Softcard, for example, was just employing near-field communication (NFC) technology to let consumers use their credit cards at a retail store.Disruption doesn’t always happen by dismantling. Click To Tweet
There’s a smaller segment of the fintech industry, though, that has centered its attention on the root causes of financial frustration: newcomers like Ripple, Traxpay, and—yes—Hyperwallet. Though progress is slow, these companies are starting to see success. For example, a recent McKinsey report highlights how a number of digital innovators have targeted the correspondent banking model and driven positive change in cross-border transactions, improving the speed, cost, and transparency of international payments.
Finance Isn’t Transportation or Hospitality
Financial disruption isn’t sexy. It doesn’t happen fast. There aren’t any outright winners. It would be great if there was a financial Uber or Airbnb that could flip the industry overnight, but that’s just not the nature of the space.
Rather than criticizing the industry’s shortcomings or writing it off as a failure, I feel that we need to do a better job of recognizing just how much fintech has accomplished over the last few years. These are real victories in a sector notorious for its glacial pace of change. If they don’t match the glamorous expectations set earlier this decade, perhaps the fault lies with the oracles—not the industry.
You can check out some of my own predictions for the payments industry in 2018 (and criticize me if I’m wrong) in this video.