Thanks to Fintech, tech-speak for financial technology, you can send money to a friend via PayPal or deposit a check by snapping a photo of it with your smartphone. You can take a taxi ride without handing the driver cash or even your credit card. Over the past decade, these transactions have become so woven into the fabric of day-to-day existence that they no longer seem revolutionary.
And these innovations are only the beginning. Fintech is disrupting nearly every area of the financial industry, and these transformations show little sign of letting up. According to a 2016 PricewaterhouseCoopers (PwC) report, investment in fintech leapt from $5.6 billion in 2014 to $12.2 billion in 2015. In addition, while fintech is changing how payments, investing, and numerous other areas of finance operate — even altering the very nature of money itself — there’s also hope that new technologies will help expand access to banking, spread financial literacy, and create opportunities for people across the income spectrum. In short, says R. A. Farrokhnia, adjunct associate professor in the Economics Division, who, with Professor Stephen Zeldes, has taught Fintech: Consumer Financial Services, and who is developing a new financial technology curriculum at the School, “We’re on the cusp of the next revolution.”
Here are just a few areas of everyday life that fintech is transforming:
The Neighborhood Bank
It’s consumer banking that will be at the “epicenter of disruption” over the next five years, according to the PwC fintech report. As Scott Belous ’04, managing director of digital client experience at TD Ameritrade, explains, technology will produce dramatic shifts in how and where people do their banking. “The very nature and business model of providing branches in every single town is going to change,” he says. Gradually, the number of services that require a visit to a physical bank will dwindle. “You slowly cross the things off the list that you used to have to go to the branch for, which removes low-value interactions — such as questions about a balance — from the branch and replaces them with more impactful conversations about how best to meet the client’s financial goals,” Belous says.
He adds that customers already want managing their finances to be as seamless and mobile accessible as every other area of life is. “Their expectations aren’t set by the experience they have in other financial services. Their expectations are set by what they see from the other apps on their phone,” Belous says.
Among those betting big on fintech is Vikram Pandit, PhD ’86, former chairman and CEO of Citigroup, now founder and CEO of Orogen Group, which invests in financial services companies. He says customer expectations may be outpacing banks’ ability to keep up. “The challenge for many conglomerate banks is that they have legacy operating platforms and systems that are expensive and costly to maintain. This cost structure, combined with a complex regulatory system, makes it expensive to provide services to everyone.”
Providing financial services to everyone—or at least dramatically extending their reach — is among the chief promises of fintech.
Until a series of technological and regulatory breakthroughs in the mid-1970s, the prohibitive cost of executing even a single trade meant investing was a serious financial option only for the wealthy. Beginning in the 1980s and ’90s, regulatory changes coupled with new technologies enabled consumers to execute their own trades. Still, trading required a high level of knowledge of how markets and securities worked.
But in the past two decades, new technologies have democratized investing by giving rise to robo-advisors, which use computer programs that provide algorithm-based automated investment guidance. According to Farrokhnia, robo-advising has even changed investment patterns more generally, in some cases proving likelier than humans to steer customers’ money toward long-term plays in low-risk index funds and causing, he says, a significant overall market “movement from active investment to passive investment.”
One of the leaders in robo-advising is Betterment. Founded in 2008 by Jon Stein ’09, Betterment, which now has over $5 billion in assets under management, uses proprietary algorithms to determine where to invest clients’ money. Betterment focuses on passive investing, citing research showing that robo-advisors, relying on increasingly sophisticated algorithms, perform as well as, if not better than, their human counterparts.
Betterment was initially aimed at correcting a fundamental tension in investing. “We started with this vision that people could live better lives and be happier if they could make the most of their money. And yet no firm out there seemed to be helping them do that,” Stein says. “All the firms seemed to have conflicts of interest: banks wanted to sell their own mutual funds; brokers wanted to make the highest commission. Nobody was giving advice for the mass market.”
Stein believes that online financial advising, at least as Betterment practices it, eliminates those conflicts while making investment advising affordable enough to be within reach across much of the income spectrum. He emphasizes that the company’s dedication to reaching underserved customers represents an important alternative to legacy investment services. “Part of our mission is to be accessible to everyone,” he says.
For students or others looking to rent their first New York City apartment, there is little more daunting than the city’s rental market, where landlords demand that renters either have incomes far higher than the monthly rent or acquire a co-signer.
This was the experience of Julien Bonneville ’12, who had trouble finding an apartment when he moved from France to attend Columbia Business School. After he graduated, Bonneville decided to build a company that would use new financial technology to allow aspiring renters to get a lease, even if they have no credit history or a modest income. “[I wondered ], ‘What if we were to design a product that would really make the transaction happen and that would align or secure all the parties?’”
Thus was born TheGuarantors, which runs on a business-to-business model; New York landlords sign up for the company’s services. If a renter doesn’t have a guarantor, TheGuarantors can co-sign for the apartment by issuing the landlord a bond backed by an insurance company. Fintech makes it all possible: TheGuarantors’ platform allows the company to process applications within a matter of hours, and quickly informs the company when a renter’s payments are late.
As co-founder Larry Solomon ’03 says, the company, which works with landlords that manage over 70,000 units across New York City, is successful because it streamlines an otherwise common transaction. “[Like] other fintech models, [TheGuarantors is] doing something that’s been done for hundreds of years — it’s just that we’re accelerating the transaction so quickly with technology that we’re allowing it to be used in ways that haven’t been done before.”
Children's Savings Accounts
It’s not purely technology that’s driving the fintech revolution. Some of it has to do with changing social norms around money, says Amy Moses ’89, founder of Ballooning Nest Eggs, a company that allows parents to crowdfund their child’s savings account. Her company turns the modern-day propensity to live out life online into a framework for donating to a child’s savings account. “Money is inherently money. Talking about it is awkward; asking for it is even more so,” she says. Ballooning Nest Eggs aims to remove this discomfort by functioning like a social media platform, with a child’s pictures and life events posted on their profile. The Ballooning Nest Eggs profile updates subtly nudge followers to donate to a child’s long-term savings account. “Our platform strikes at the heart of what’s missing in the marketplace — all the social tools for parents to tastefully steer and conveniently enable [the parents’] network to gift money to their kids,” she says.
Moses’s idea doesn’t just take advantage of shifts in technology; it also capitalizes on changes in attitudes toward money. She notes that over 22 percent of engaged millennial couples have cash gifts on their wedding registries. Moses hopes to use technology to capitalize on the rising generation’s greater comfort with giving and receiving cash.
© The Project Twins
Fintech has also been a key game changer for entrepreneurs, making it easier for startups and small businesses to secure loans, manage payroll, and process payments. Payments and business services were one of the first areas of finance that new technologies touched, thanks to such platforms as PayPal, which enabled the secure electronic transmission of money while allowing small businesses to avoid the hardware and transaction fees required by major credit card companies.
One company that has changed the payment-processing landscape is Square. When its card-swiping smartphone attachments debuted in 2009, everyone from restaurateurs to produce sellers at farmers’ markets could run secure debit and credit transactions. Kalyani Iyer ’14, who has been a product manager in the payments space since graduation, including at Square, says fintech companies such as Square, and fintech more broadly, allow companies to serve previously overlooked customer segments. True, the use of machine-learning models and sophisticated analytics tools has helped companies mitigate the risks inherent in payment platforms. But the real impact, she explains, is that these new technologies are changing banks’ perceptions of new enterprises. Fintech has helped small businesses, which financial institutions have historically viewed as high-risk, prove that they’re deserving of larger banks’ attention — and lines of credit. “We’ve shown with the right kind of models that we’ve been able to mitigate a lot of that risk that [financial institutions] didn’t want to deal with,” says Iyer. “We’ve sent a signal to the market in general that there is an opportunity here.”
Economic Equity and Access
Creating opportunity for those to whom it has traditionally been unavailable is the focus for many fintech entrepreneurs. The fintech field is dotted with newcomers who are posing challenges to long-tenured financial institutions, often by marketing to nontraditional customer bases. “On the consumer side of things, you’re seeing interesting innovations where the big companies are no longer the gatekeepers,” says Farrokhnia.
With the elimination of gatekeepers come opportunities for addressing long-standing equity and access challenges. Some companies, such as Betterment and TheGuarantors, expand the availability of a type of financial transaction that, until now, has been difficult for most people to access. Other startups are looking at how they can confront economic inequality head-on. Among them is PayPerks, which incentivizes low-income users to gain financial literacy.
Founded in 2009 by Arlyn Davich ’09, PayPerks is unusual among fintech enterprises in that its work is almost entirely aimed at lower-income customers. The company produces literacy and personal-finance management. In exchange for viewing these lessons and playing these games, users get the chance to compete for cash prizes.
PayPerks partners with government programs, adding its benefits onto Social Security and food stamp cards and using these programs to reach new users. The company applies technology to a segment of the market that both financial services providers and startups tend to neglect. “Businesses are realizing the importance of inclusive growth,” Davich says. “The financial-inclusion movement isn’t just about providing financial products; it’s about making sure all consumers benefit from improvements in commerce and technology.”
Finally, fintech might turn the very concept of money itself into something totally unrecognizable.
Some experts predict that cash will one day become obsolete, and currencies such as the dollar or the pound could see serious competition from digital platforms — thanks to blockchain technology. Blockchain technology allows for the reliable use of cryptocurrencies, which create spaces for the decentralized electronic exchange of value. Among the most well-known of these is Bitcoin, an open-source technology that operates peer-to-peer with no central authority or bank. A growing number of retailers are accepting Bitcoin, and investors like Pandit and even the New York Stock Exchange have sunk money into companies that facilitate the use of digital currencies.
Still, cryptocurrencies aren’t backed by governments — or, at the moment, by much of anything. They’re also popular partly because they can be spent anonymously, another barrier to widespread legal and regulatory acceptance that’s keeping the technology from having an even more radical impact on the global economy. Farrokhnia doesn’t rule out the possibility of blockchain technology upending finance, but he still cautions patience. “It’s hard to dislodge habits and current constructs in short order,” he says. “Not that it can’t be done.”
What Lies Ahead
The future of fintech is potentially limitless. Yet finance is fundamentally different from the many industries that technology has upended in recent years. It’s more closely regulated than retail or communications, and just about every fintech company takes responsibility for its customers’ money and financial well-being at some point in its interactions with them. “Financial services in general hits people where it matters the most, and that’s their wallet,” says Farrokhnia. “If something goes wrong with my finances, you’ve lost my trust and you’re done.” Regulation and high customer expectations make it inherently difficult for an immediate Facebook- or Uber-type disruptor to emerge in fintech. take place. Both startups and legacy financial institutions are focusing on technologies with dramatic long-term potential, and the rate of investment in fintech means they’re likely to have both time and investor interest on their side. As Pandit notes, “Banks are basically in the business of storing cash, moving money around, making loans, and saving and investing. We are seeing a lot of activity in these areas and in areas that transcend the basic businesses of banks.”
In some areas, technology will be the key to transcending the basic businesses of what financial services companies do. For instance, banks and investment-advisory services are beginning to use artificial intelligence to streamline how the customer experience is organized, since AI allows customer-facing platforms to better understand which features users might need at any given time. “AI will first solve pragmatic, practical client-experience issues,” says Lule Demmissie ’01, managing director of investment products and guidance at TD Ameritrade. Banks and investment-advisory services are already incorporating AI into some of the more basic aspects of their businesses. As the technology becomes more developed and widely trusted, AI may eventually work its way into the higher-stakes or more closely regulated areas of finance as well.
A future where AI-boosted investment and advising platforms, or blockchain-technology-enabled cryptocurrencies, are pervasive in every area of commerce and finance might be a way off. But even in a relatively cautious industry, technology has already brought widespread changes that would have been difficult to envision just a decade ago.
Even bigger things lie ahead—along with new opportunities and challenges. “In the future, finance will have more and more technology embedded in it,” says Farrokhnia, adding that anyone going to work in the financial services field will essentially be working in tech. “Creating the right balance between financial knowledge and technological knowledge is becoming critical,” he says.
In Spring 2018, Farrokhnia will teach Blockhain and Digital Tokens Demystified and Zeldes will teach Fintech: Consumer Financial Services. For more, visit Advanced Projects and Applied Research in Fintech.