Why Fintech Battles Ahead Are About More Than Banks

The field known as fintech was pioneered by startups dreaming of toppling financial giants and democratizing access to credit. But now many of those behemoths have joined in. JPMorgan Chase & Co. has a history running back to the days of Alexander Hamilton, but it’s also got 50,000 employees working on its technology. It’s not just banking giants getting in on the fun. Recent steps by Walmart Inc., the world’s largest retailer, to create a fintech division has sent shivers across Wall Street. In another sign of fintech’s maturity, regulators are doing as much to shape its progress as coders or dreamers. Take Ant Group Co.’s plans for a public offering in November that was projected to value the app, which moves money for 1.3 billion people, at about $280 billion. That was before the Chinese government stepped in and derailed the listing.

1. What is fintech?

An effort to revolutionize financial services by extending them to smartphones and applying new technologies such as artificial intelligence. It encompasses a wide range of areas from mobile payments to cryptocurrencies. LendingClub Corp. helped create a new field of person-to-person lending, initially as a way to match up small investors and small borrowers, while services such as Betterment and Wealthfront sought to make wealth management accessible to more people through “robo-advisers,” portfolio management programs available for a fraction of what a human financial adviser might charge. Meanwhile, payment apps like Revolut in the U.K. made sending money overseas faster and cheaper.

2. How did it develop?

Banks have been big users of computers since the 1960s, but it wasn’t until the 1990s that Wells Fargo & Co. and other institutions began offering online services to their customers. The field exploded after 2008, when the spread of smartphones and the global financial crisis created new opportunities, as big banks both lost consumers’ trust and pulled back on making loans to smaller customers, opening the door for upstarts to offer up their services instead.

3. Where has it taken off?

Almost everywhere, but with sharp regional variations.

  • In China, Ant’s Alipay and WeChat Pay, offered by Tencent Holdings Ltd., handle more than 80% of mobile payment transactions. Ant also offers insurance and other financial services. Alibaba founder Jack Ma had described its future as an open platform for fintech apps, although that has been clouded by new regulations restricting the growth of the sector.
  • In Europe and the U.K., new laws require banks to open up their systems to allow consumers to share their financial data with outside apps and services. The move drove a wave of services that allow consumers to use apps without having to shift their money out of their bank.
  • In many ways, the fintech landscape in the U.S. is still dominated by traditional banks and well-established large technology companies. Venmo, the popular person-to-person payments app, is owned by PayPal Holdings Inc., a company founded more than 20 years ago. Now, it’s being rivaled by Zelle, a payments platform created by a company owned by seven of the nation’s largest banks. Goldman Sachs Group Inc. launched Marcus, an online bank aimed at attracting the masses. But two top executives who had set up Marcus were lured away by Walmart, generating speculation about its effort to become a one-stop shop for consumers’ financial needs.
  • In Africa and other emerging markets, big telecommunications companies have dominated the field, as companies like M-Pesa, founded by a Kenyan partner of Vodafone Group Plc, signed up large swaths of the population that never had a bank account but carry a mobile phone.

4. What are the downsides?

New approaches bring new pitfalls. Online peer-to-peer lending boomed with little oversight in China until collapsing in a swirl of fraud and defaults in 2018, leaving investors with more than 800 billion yuan ($121 billion) in unpaid debt. Many fintech companies are replacing traditional credit evaluations with decisions driven by algorithms — a process that research has shown can produce results tainted by racial or gender bias. While consumers may gain from new efficiencies, by one estimate as many as 30% of financial jobs could disappear. Fintech companies themselves have found that they’re having to spend more than they expected to meet traditional regulatory requirements, like making sure their systems don’t fall prey to fraudsters and aren’t used by terrorists to launder money.

5. What else are regulators looking at?

The Chinese government has begun to roll out new requirements and restrictions that appear to signal that the unusual freedom Ant and Tencent had enjoyed has come to an end. To the U.S., the potential expansion of Ant and Tencent around the globe is a national security issue akin to the use of Chinese-made telecom equipment in new mobile phone networks. In both cases, American officials have raised the question of whether data could be vulnerable. It’s not just Chinese fintech giants that has the U.S. worried. The Department of Justice in November sued Visa Inc. to block its planned acquisition of the data aggregator Plaid Inc., saying it would threaten competition in online debit card payments. The two eventually called off the deal.

The Reference Shelf

  • California has created a Department of Financial Protection & Innovation.
  • Bloomberg explores fintech more deeply with QuickTakes on peer-to-peer lending, robo-advisers, crowdfunding, artificial intelligence, mobile payments and Bitcoin.
  • The U.S. Treasury’s Comptroller of the Currency, a bank regulator, is proposing to issue a new bank charter for fintech companies.
  • Jamie Dimon, the chairman and CEO of JPMorgan Chase & Co., warned fintech firms that the bank would fight back against any unfair competition.

©2021 Bloomberg L.P.

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