“Fintech” — applying technology to finance — is nothing new. Innovation starting way back with the abacus has continued across decades. Major milestones include the wire transfer launched by Western Union in 1872, the credit card introduced by Diner’s Club in 1950, and the first ATM installed in Chemical Bank’s Rockville Center, NY, branch in 1969.
Then, the advent of the Internet changed everything, and we collectively stepped on the accelerator of progress across nearly every industry, fintech included. Within the last twenty years alone, we’ve seen two major cycles of fintech innovation. First, pioneering payment startups made the digital economy possible. Second, online lending emerged out of 2008’s global financial crisis.
A third fintech epoch is taking shape in 2017, made possible by the innovations that came before. Let’s look at the first two development cycles to understand what has brought us to this point, and then we’ll unpack the third.
Introduction of the Digital Economy
Widescale consumer adoption of the Internet in the mid-1990s offered businesses an entirely new way to connect with consumers on a direct, individual level. Trusted, digital payments became crucial, and PayPal and x.com launched in 1998 (and later merged) to make online payments simple — whether a consumer wanted to pay a corporation or another individual.
PayPal spawned a number of successful entrepreneurs that went on to found companies like Affirm, LinkedIn, Palantir Technologies, SpaceX, Tesla Motors, YouTube, and Yelp. Further fintech innovation came with the introduction of mobile commerce. Companies like Braintree launched in 2007, and Stripe in 2010, in order to provide businesses and people with safe, easy ways to transact on mobile devices.
As the economy tightened with the 2008 global financial crisis, it became nearly impossible for individuals or businesses to receive credit. As a result, consumer sentiment toward traditional financial institutions became increasingly negative, coalescing into expressions like the Occupy Wall Street movement, and igniting the second era of contemporary fintech: digital lending.
Digital Lending Sets the Scene
A new crop of peer-to-peer lending companies emerged to provide the country with the credit it so desperately needed to fuel economic activity.
Companies like Lending Club, Prosper Marketplace, and Zopa emerged and began offering alternative ways to meet consumer needs that the more traditional institutions could not — and the impact was dramatic.
People embraced the new financial brands and all of the transparency and conveniences they offered. Small and medium-sized businesses could access new sources of capital with less overhead. Individual consumers could refinance student loans, or obtain a mortgage without having to interact with a broker. These startups challenged the way traditional finance companies engaged with their customers, changing the expectations customers had of the online buying experience, for purchases, both big and small — an important part of the era that we see emerging now.
The Next Epoch is Insurance
We are seeing a third epoch in modern fintech take shape around insurance. The United States is the largest insurance market in the world with more than $1 trillion of gross premiums per year. And yet, while insurance is an important financial tool for business and consumers on a massive scale, it has seen remarkably little innovation over the years. That is about to change.
There are examples of early innovation in this space. The Climate Corporation was founded in 2006 to provide crop insurance for farmers (and subsequently acquired in 2013 by Monsanto for $930 million). More recent innovation includes companies like Metromile introducing pay-per-mile car insurance in 2011, Oscar taking on health insurance in 2013, Lemonade tackling renter’s insurance in 2016, and Ladder, the company I co-founded, launching in 2017 and innovating in life insurance.
Why has it taken so long for changes to materialize in insurance? It isn’t market size. In the US alone, more than $1 Trillion of net premiums is written every year.
In short, it just wasn’t possible before this moment. For this market to ripen, online payments needed to be fully built out, consumer loyalty needed to shift away from large financial institutions, and consumer behavior needed to mature — evolving from buying small items like books and tennis shoes to making major financial decisions online comfortably. Online insurance also benefits from multiple process efficiencies. These reduce paper and time, resulting in a better consumer experience with lower costs and a faster decisions (a proven formula for success). It’s better for everyone — consumers and companies.
With such a markedly improved experience and transparency available for consumers now, entrepreneurs and investors are eyeing insurance in the same way that PayPal identified the early opportunity in online payments. It’s a new frontier, full of possibility. I believe we’ll see more breakthroughs in insurance in the next two years, than we have in the last twenty — and it’s an amazing product and an exciting new era to be part of.