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Fintech is Coming

I recently was invited to participate in a conference in NYC covering the burgeoning yet still nascent Fintech industry, which is essentially comprised of non-bank lenders emphasizing technology in their business strategy.   The conference was organized by a group called Lendit, and this was their 3rd annual such event.  I was told that attendance approximated 2,500, which was up from 800 last year and 300 the year prior.   I was there to moderate a panel that was comprised of the founders of five Fintech mortgage finance companies, all aiming to disintermediate the more established non-tech channels, each with a focus upon a niche of the industry from which they hope to grow.

Immediately prior to my panel, former U.S. Treasury Secretary Larry Summers gave a keynote address that I decided to sit in on.  I’ll admit to not being a huge fan of Dr. Summers, but did find it interesting that an establishment figure such as he was there at such an anti-establishment event.  It turns out that he is a board member of Lending Club, one of the leading pioneering companies in the Fintech world.  His remarks were basically an attack on establishment finance (aka:  Commercial Banking).  He pointed out that traditional finance was not serving society in any way: they are not extending credit broadly enough, not producing suitable returns to their stockholders, their use of deposit insurance has cost society deeply in what has been a recurring cycle of bailout, and they offer no return for their depositors. He pointed out that Finance, as an industry, should exist to benefit society – which is true but seems like such a novel concept today.  Example after example of financial innovation in the past few decades has been introduced to benefit a small group of intermediaries at the expense of the broader public, he claimed, quoting Paul Volcker as saying that the ATM was the last industry innovation of value to society.  He explained that information is at the root of finance, and that firms that can properly utilize technology in finance will make the best use of that information to benefit both investors and borrowers alike.

I agree with Dr. Summers.  I had thought that with the advent of securitization-based lending in the 1980’s and 1990’s, combined with the introduction of insured money market checking accounts, banks would largely become obsolete, or at least lose their prominence.  However, the repeal of Glass-Steagall by the Clinton Administration extended the period of bank-dominated finance.  Summers explained that in life things take longer to happen than anyone thought they should, and then, all of a sudden, they happen faster than anyone thought they could.  I came away from the Fintech conference with a combination of excitement for the future of finance and some degree of trepidation that many of the first crop of companies might crash and burn.

Technology will ultimately make a huge contribution to finance:  taking out the friction cost of intermediation and helping to allocate capital efficiently. Data will lead to better credit decisions and more accurate capital allocation.  As power shifts generationally to a group who has never been inside of a bank or even met a teller, or transacted in any way other than via a computer, Fintech will seize the day from banks.  The future is coming and it will be damn exciting.

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