Let's be Honest about the Fintech Hype

While I may make myself unpopular, I feel the need to declare that I am sick and tired of the hype and untruths that are repeatedly spun into myths about the world of fintechs and how they are leading us into a glorious new future.

Please note I do not say that I am sick and tired of the use of technology in finance; indeed technology is an extremely important component and there are thousands of good people working in companies (large and small, new and old) to deliver benefits from its use in financial services. We need to work together to make the industry better rather than have one part rather fatuously disrespect the other.

Today there is a whole ecosystem, encouraged by the government, that has grown up to support fintechs, with thousands of coaches, advisors, investors and other support services who all rely on the fintech wave for their own prosperity. In protecting the system that rewards them, I understand why members build the hype and filter the truth in order to support the wider perception and belief in the story, but history tells us that flying in thin air is rarely the recipe for long term success.

The most recent trigger for my frustration was a viewing of a rather self-congratulatory documentary on the growth and success of the UK Fintech scene since the crash of 2008/9. I listened to a rather one-sided, hugely optimistic, backslapping account of how fintechs have saved the world and are THE future.

Now I feel like the boy who pointed out the fallacy with the Emperor’s new clothes, but maybe someone has to start this. I will do so by first laying out my three main issues, before articulating why we have a sector that is starting to defy gravity. Firstly, though I should explain why I used the term “untruths”. I have intentionally not used the word “lies”, because I don’t believe that there is a malicious intent to mislead, but rather a community that chooses not to look at or past the evidence and era that spawned it. A community that champions “old is bad, new is good” and “we know better”. In doing so, it ignores decades and centuries of experience (good and bad) and real-world wisdom. They are told “you can do anything you want to”, and “don’t listen to anyone who says different.” In doing so, they discard valuable contributions, checks and balances. This is rarely a good thing in the long run, but then maybe most are only taking short term perspectives.

The first issue I will raise, and it was stated recently on stage by one at a public presentation by one of the movement's thinkers, is “Technology is a driver of change”.

No, no, no and no!

Technology is not and never has been a driver of change. It is an effective, often valuable and sometimes essential ENABLER of change, but it does not drive change. The issue is rooted in the number of discussions I have had around fintechs, where the founder is a technologist and surrounds themselves with mates who are also technologists. This group is then heavily focussed on using loads of new technology, behaving as if their solution is divinely blessed and infallible…...because it is fintech after all!!

My second is that these same fintechs often believe they have reinvented financial services whereas they are in my opinion just the latest incremental chapter in a long, long story in financial services albeit moving faster and wider than those before; but then that is true of life in general today.

The truth is that the core products of financial services have existed for aeons:

1. Provision of safekeeping
2. Facilitation of payments
3. Extension of credit
4. Management of investments
5. Insurance to manage risks
6. Deal making to bring parties together
7. These are supported by
8. Information gathering, processing and storage
9. Decision making & risk management
10. Robust record keeping and reporting
11. As they say, it is not rocket science even if some of it is obscured by higher mathematics, organisational complexity and marketing gloss.
12. It is also true that across the centuries, from collecting seashells and money lending in the temples, bankers and other financial service providers have a long history of tweaking products to make them look new and relevant
13. Combining products to serve specific and current needs
14. Taking products to new markets,

and I cannot think of a Fintech who is really doing anything different from the core concepts listed above.

If you think this is too simple, then I would really enjoy a conversation about your thoughts.

Yes, fintechs can use new technology to access new markets, make better(?) decisions and create new packages of products, and/or deliver processing efficiencies, but they have also arrived in a perfect environment when

trust in existing institutions is low and possibly damaged beyond repair, interests rates are low, and investors are desperately seeking anything that hints that might provide a decent return, and governments and regulators are demanding greater transparency and reducing the barriers to entry in the hope that competition will benefit the populace.

As well as being new, i.e. not starting from a position of client distrust, fintechs carry no baggage from legacy systems and don’t have the inertia that comes with large societal footprints (real estate, staff, client base, etc.). They can and often do focus on the most willing and tech-savvy clients who buy into their particular story while showing little care for the wider community including a farmer in the Orkneys or the elderly and infirm in deepest Devon.

My last issue is “digital transformation” and the gurus who spout on about why digital transformation is different and not just about “digitising” existing processes when in truth that is exactly what it is about and is in fact just the latest chapter in that story.

There is a long history of better faster record-keeping, from tally sticks, through pen and ink, punch cards, magnetic tape and now something, somewhere in “the Cloud”. Business in general and financial services in specific have a long history of trying to speed up processes, reduce costs, appeal to new markets, make better decisions, broker more deals, etc., etc. In essence that is all the fintechs are doing, just without the constraint (and support!) of a large corporate body.

Of course, braver thinking can bring significant rewards, but this is not the exclusive domain of the fintechs. Just delivering a new ledger book or piece of software was never enough. How it would be used, where it would be used, who would use it, etc., etc. was always necessary. Yes, some initiatives got into tangles and lost their way, but that is a risk of any large endeavour. Most fintechs being small and carrying enormous goodwill from clients and regulators have not experienced this yet, but the successful ones will in due course; scale and complexity carry risk.

I do think that new blood, new thinking and real investment to unlock the potential of new developments in technology should be good as long as we do not dilute the values and principles that underpin the trust and stability required in a financial system. Unfortunately, within the fintech ecosystem, I see more alignment with rapid growth (at almost any cost?) and maximising exit values than I do with the responsibility and integrity I believe is essential. Banking and financial services have never been perfect and there are plenty of examples of abuse, but that is no reason just loosen the strings and rely upon the survival of the fittest. It may keep thousands away from the unemployment statistics and redistribute large sums of pre-seed, seed and other investment monies from wealthy individuals and organisations to would-be entrepreneurs, but is that enough?

I see fantastic, incredible valuations applied to unproven and quite likely unworkable propositions. I see a culture where doubt and legitimate questioning is suppressed, and I see a feeding frenzy or investors, advisors and support services around the whole topic. To me, these are all signs of impending implosion.

Maybe not this year, but soon there will be a feeding frenzy of consolidation both between fintechs and fintechs with legacy organisations. The current gung-ho approach is not sustainable, and the fall out will be a shock to many, even though it is entirely predictable. As usual, early movers will likely come out well, but will likely create new pain for many others.

Let us try and keep the hyperbole to a minimum, harness the entrepreneurial energy and intent alongside the mass of available experience and build with more than the single avowed intent to make a sh*tload of money.

Lastly, I would love to issue a challenge. Can anyone identify a truly innovative and original service or product supplied by a fintech that cannot be traced back to before the financial crash or demonstrated to be a clear evolutionary development of a previously existing product or service?

For example, I discount many of the open banking apps because some banks, wealth managers and accountants would offer consolidated reporting across accounts and even institutions long ago. Yes, it is quicker; Yes, it is available to more people; but essentially it is just a development of existing services.

Another example is Revolut. Preloaded payment cards existed before as did multi-currency cards. Yes, the phone app allows faster and easier loading and movement between currencies with better rates, but again this is a development.

I wonder if anyone can find one from the fintech world of the last ten years?