What is FinTech?
Originally published on the Wharton FinTech blog on September 4, 2014.
First Things First
I’ve been at Wharton for four weeks now and have had the chance to meet and get to know some truly incredible people; students and professionals from an array of varied backgrounds, all of whom have accomplishments in their respective fields to be proud of. When I begin to explain to people my background and what I plan to do, inevitably the topic of financial technology, or FinTech, comes up. The question that seems to arise more often than not is, “what exactly is FinTech, anyway?” People often have experience in some part of the industry but don’t necessarily appreciate the breadth of the whole financial technology space. I admit that after discussing this with the rest of the club, we found ourselves without a simple definition that encapsulates the plethora of firms and opportunities that inhabit the FinTech landscape. In order to rectify that glaring omission in our repertoire of FinTech evangelism, the Wharton FinTech Club would like to present the following definition:
Fin·Tech noun : an economic industry composed of companies that use technology to make financial systems more efficient
While my Wharton FinTech Club colleagues and I think this definition succinctly and comprehensively captures what we mean when we use the terms “FinTech” or “financial technology”, I am sure there are people in the industry that will disagree with us. This definition may be too narrow or too broad, or perhaps “efficient” is not exactly the correct word to use as the defining adjective to classify the goal of FinTech companies. That said, we are open to discussion on whether this parsimonious definition can be improved upon and if it is a formal description that the industry is willing to embrace. However, my colleagues and I are going to use this as our working definition for the time being.
So, now that we’ve got a definition of “FinTech”, I should probably elaborate on exactly what it entails. FinTech companies cover a wide range of sub-industries, from crowdfunding (Kickstarter) and peer-to-peer lending (Lending Club) to algorithmic asset management (WealthFront) and thematic investing (Motif Investing). FinTech companies also operate in payments (Xoom), data collection (2iQ Research), credit scoring (ZestFinance), education lending (CommonBond), digital currency (Coinbase), exchanges (SecondMarket), working capital management (Tesorio), cyber security (iDGate) and even quantum computing (QxBranch).
Despite operating in such a diverse set of domains, these companies share a common attribute: they build and implement technology which is used to make financial markets and systems more efficient. And while the companies I mentioned above represent only a handful of the spaces and companies that are included under the umbrella of FinTech, I hope to learn and write about these and many more over the coming months.
A recent report by Accenture and the Partnership Fund for New York City, “The Rise of FinTech — New York’s Opportunity for Tech Leadership”, indicates that global investment in FinTech ventures has tripled from around $1 billion in 2008 to nearly $3 billion in 2013. This growth is exciting for obvious reasons. However, what is most interesting, and I think somewhat unique to FinTech, is the fact that this investment in innovation appears to be occurring in a relatively geographically decentralized manner. In the US for instance, Silicon Valley and New York rank as the number one and number two clusters for FinTech, with $376 million and $151.4 million of total investments in the first quarter of 2014, respectively. While these numbers are not exactly on par, growth in the New York market has been double that of Silicon Valley over the last five years and NYC is making a push to establish itself as an equal complement to it’s West Coast counterpart. Investment in the space is a big focus for the Wharton FinTech club so expect to see more on this in the coming weeks.
Lastly, there is a lot of very cool technology being developed and deployed by FinTech companies. Whether the application of cryptocurrency block chains to problems such as online identity or leveraging large unstructured social media data sources to make better underwiritng decisions, there are a lot of reasons to care about the space beyond the economic and business potential. Again, this is a perspective that we will be covering in detail so stay tuned.
I’d like to end with a thought that has come up during a number of conversations I have had with entrepreneurs, investors and students: the biggest obstacles to success for financial technology companies appear to be neither financial nor technological, but rather psychological. By this I mean that there are lots of ways that FinTech companies can improve financial systems with existing technology and technology in development. However, the space has for decades been dominated by big firms that can often be resistant to change, the big banks being prime examples of this. Overcoming regulation and institutional inertia, and gaining the public’s trust will be key to ensuring widespread adoption of new financial technologies.
After having reshaped almost every aspect of our lives, technology-enabled startups are poised to genuinely disrupt the domain of these sleeping giants and I think the big firms know this. Nearly all the major banks and financial services firms are either actively incubating or facilitating the development of startups and their technology in the FinTech space. The Wharton FinTech Club is looking forward to writing about, and being a part of, this trend in the years to come.
If you’re interested in this sort of thing, join us at Wharton Fintech.