Until about a year ago, I thought FinTech [financial technology] was just another breathy buzzword – lots of hype, but not a lot of substance. Three recent “ah-ha” moments have changed my mind. It is not hyperbole to say that the impact of technology on finance will be revolutionary, which is why I am all-in on Wharton’s new Stevens Center for Innovation in Finance that launched last week.
1. FinTech Has Transformative Power.
Businesses like CommonBond and Wealthfront, both founded by Wharton alums, are transforming the worlds of student loans and financial management. Seeing what these companies are doing has given me a crisp definition of FinTech: the impact of information technology on the disruption of business models in financial services. The transformative power of data and technology on financial services is evident everywhere. Even the scions of Wall Street are now embracing FinTech, for example, Goldman Sach’s consumer banking arm, Marcus.
2. FinTech’s Democratizing Potential Is Revolutionary.
At a conference in Shanghai late last year, I heard MIT Nobel laureate Bengt Holmstrom say this about the revolutionary democratizing potential of FinTech: “Information is the new collateral.” Instead of lending to people based on their existing assets (the traditional collateral model), FinTech broadens the funnel of potential borrowers by allowing lenders to gain confidence about them based on how their businesses are performing rather than the assets they have in the bank.
Jack Dorsey founded Square to turn smartphones into one stop payment solutions for small business. He then hired Wharton alum Jackie Reses to build Square Capital to lend back to the same small businesses, using all the information they have about the businesses (because they process all their payments) to tailor and target loans — more loans to more businesses at lower interest rates.
3. Cryptocurrencies Offer Solutions to Critical Problems.
Finally, NYDIG founder Robby Gutmann and his coauthors stripped all the hype out of bitcoin and revealed that something very real remains. In their paper, “Buying Bitcoin,” they make one empirical point and one theoretical point.
Empirically, there is already a bitcoin market that eliminates the worries about nefarious activity (and meets industry AML/KYC standards) – because it is regulated by the New York Department of Financial Services. This market is much smaller (roughly $5B 30-day volume) than the unregulated exchanges outside the US (nearly $200B). But it is real, and it is regulated. One reason this market is small is because demand for cryptocurrencies is likely to be largely outside the US and the other developed economies.
Theoretically, cryptocurrencies potentially solve a critical problem for many emerging markets with some combination of high political risk, high volatility, and high inflation – think about Venezuela today. If you keep money in the local currency, you run the risk of the government inflating away all its value. If you peg to the US dollar, you have to accept US monetary policy that may be off kilter with the local economy. Cryptocurrencies with no home country are therefore in some sense global currencies moving with global market sentiment — are potentially very appealing to asset holders in these countries.
Put this all together and I am not only bullish on FinTech. I am also proud that Wharton’s faculty, students, and alumni are not only studying the future of FinTech, but also creating it.