Venture-backed upstarts fill void in business, consumer lending
A fundamental shift is changing the world of finance as well-funded, venture-backed upstarts take on lending roles traditionally played by banks.
These changes in lending were the focus of the “Future of FinTech” panel at the Milken Institute Global Conference. The central question is whether the seeming transformation is being driven by technological innovation or by banks’ pullback from lending to businesses and individuals. The answer isn’t clear, said Phin Upham, partner at Thiel Capital.
Banks are unwilling to offer high interest rate products, have pulled back on issuing smaller loans and are far behind the tech curve, Upham went on to say. Increasingly, new entrants are challenging big, established players, as Arjan Schütte, founder and managing partner at Core Innovation Capital, said.
“It is a cultural challenge” for banks to change and preach innovation, said Robert Antoniades, co-founder and general partner of Information Venture Partners. It is tough to change the mindset of a firm with 200,000 employees that has operated largely the same way for over a century, he added.
To overcome this challenge, banks are increasingly relying on partnerships with established startups, with Citi, for instance, “boldly stepping into disruption” with companies that can run to scale, said Debby Hopkins, chief innovation officer of Citi, and CEO, Citi Ventures.
In addition, startups are not as encumbered as banks by the mountain of regulation that emerged after the financial crisis, which has allowed the new firms to fill the void left by departing banks. As these companies become larger and more prevalent, it is “inevitable” that more regulation will be applied, participants noted. It is important, however, that the government stay away for a long period of time before applying “thoughtful” regulation rather than applying the same rules that govern banks. Otherwise, “that would just crush the new things being developed,” Upham added.
“I would like to see more data-driven policy,” Schütte stated. Regulators have the capabilities to create “protected sandboxes,” like the Consumer Financial Protection Bureau’s (CFPB) Project Catalyst, to allow firms to develop and experiment with their products. This acts as a safety net for innovative firms, while allowing regulators to learn and understand the technology behind the financial products. That said, Project Catalyst needs more attention from within the CFPB, Schütte added.
Panelists also provided their views on current innovative financial products and what the future holds for FinTech. Panelists, including Igor Tulchinsky, founder and CEO of WorldQuant LLC, were quick to point out that the payments space is “overrated.” Hopkins described digital wallets as a “solution looking for a problem.” Antoniades viewed crypto currency as both underrated and overrated, as the business model still has yet to be figured out, even though the underlying technology holds great promise. Upham viewed big data as overrated and said attention should be turned to machine learning, which allows information to be used more thoughtfully and systematically.
In 10 years, finance will become more “utilities-based,” Upham said. Going forward, people will log into a dashboard when they have a need, which will present a set of offers, and you will choose the best offer. Schütte was of the view that the changes occurring in the next decade will be nearly invisible as the back-end systems and infrastructures of modern finance will be transformed, allowing money to move at real-time speeds with enhanced underwriting capabilities that will drive financial inclusion.
Similar to Upham’s remarks, Hopkins said there will be opportunity to “to truly have [the transactions services business] platformized and be able to take advantage of external developer capabilities with APIs is where it has to be.”
Antoniades predicted changes that might include car-insurance rates based on the mile, health-insurance payments based on the FitBit, and so forth. Everything we do will be priced, he said.
“I think we are going to advance the pricing algorithms of financial services to such an extent that you won’t recognize it,” he said.
Whatever the developments, FinTech will continue to transform the ways in which consumers and businesses interact and transact. The Milken Institute’s Center for Financial Markets will continue to monitor the FinTech sector and provide comments, where appropriate, to regulatory authorities on building an effective regulatory toolkit responsive to 21st century innovation.