FinTech and the Melting Ice Cube Theory

By Sarah Biller | Co-Founder, FinTech Sandbox

It turns out that the challenge of predicting when incumbent financial services firms will actively partner with FinTech start-ups is a lot like understanding when ice starts to melt. If you are amused by this comparison, you aren’t alone. The theory seems straight forward — above a certain temperature, ice transitions from a solid to a liquid. That change happens when things heat-up seems like a good metaphor for our industry’s adoption of new processes and technologies.

The reality is that the study of melting ice, like the adoption of emerging technologies in financial services, is far more rich and complex than what most of us have gleaned from a diluted drink on a summer day. Did you know that the earliest phases of ice melting have never been observed by scientists? Atoms that make up ice are both hidden by the cube’s solid structure and too small to be observed.

The characteristics scientists use to describe atoms that make up ice seem a lot like the start-ups we support at the FinTech Sandbox. Often, these start-ups are too tiny to be considered viable by large incumbents. Other times, the rigid structure of a legacy financial services firm’s procurement processes or culture create obstacles to collaboration.

Just as scientists struggle to quantify precisely when the process of melting begins, the biggest and best financial services firms struggle to identify risks percolating in the capital markets before a meltdown. It doesn’t have to be this way. Let’s consider the first of these trends — retirement — and consider the work being undertaken by FinTech Sandbox teams.

A Slow Motion Melt in Financial Services

A study released by the St. Louis Fed in February of this year contrasted saving rates between 1967 and 2017. It found that individuals socked away 12.4% of their earnings fifty years ago versus just 5.6%, today. The research flatly concluded that, “Without an adequate amount of savings, consumers run the risk of running out of money during their retirement, which is a common fear among workers.”

What if this conclusion is wrong? A recent Transamerica survey revealed a shift in perspectives about retirement. It found that individuals are increasingly engaged in saving not for retirement, but for long-term financial freedom. The same research noted that a good portion of respondents grouped by age (63 percent of millennials and 45 percent of boomers surveyed) are saving to live their “desired lifestyle”.

Merriam-Webster defines retirement as a withdrawal from one’s occupation or from active working life. It — retirement — is a concept that has been around since the Roman Emperor Augustus began paying pensions to Legionnaires with 20 years of service. This model has driven the financial services sector since. But, what if the nugget buried in all this conflicting research that the definition of retirement may be changing? Who will address the slow, but clearly evolving desires of investors that most assuredly flip modern asset management on its head?

We are already witnessing the “desire” of a segment of the population to shift their investments into causes that matter. Morningstar recently reported that 84% of millennial investors were interested in sustainable investing and were twice as likely as investors overall to make sustainable investments. This is easier said than done as the current efforts at aggregating and analyzing these non-financial datasets are in their nascent stages and often lack the timeliness, consistency and / or quality necessary to develop an investable strategy. We are closely watching FinTech Sandbox alum Data Simply’s efforts to combine company reporting AND investor views to define material ESG factors.

What if financial freedom means staying connected to professional passions by taking jobs long past 63, the average age of retirement in the U.S.? The need for extended return streams and, perhaps obvious, securitization of traditional assets in new and risk sensitive ways is clear. One interesting approach to this problem is being tackled by the team at Income& who are building next generation fixed income instruments.

FinTech and Cracks in the Ice

Recently, scientists released a breakthrough study (pun intended) that supports what most of us have suspected all along: When ice molecules acquire energy they are able to agitate and transition from a solid to a liquid. In other words, ice melts when fundamental structures begin to crack. This June, I’ll join members of the FCA and Monetary Authority of Singapore at Money 20/20 to discuss new structures to drive innovation, most notably our individual efforts to build sandbox environments that accelerate the build and adoption of new technologies in financial services. In these regions, partnerships are rising up to help start-ups and institutions engage around emerging financial technologies. In many instances, these efforts are removing barriers to adoption.

But, why stop with solving for new visions of retirement? We know we can leverage technology to extend financial services to individuals who have long been outside of mainstream banking, lending, and insurance channels. These are the first of many questions we will seek to understand in future posts. The capital markets are a powerful accelerant of change. Let’s make it happen together.

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