Seriously, what is it?
So, I’m taking a course on Coursera titled FinTech Foundations and Overview. I’ve heard the term “FinTech” pop up multiple times through random conversations. It seems to be the latest buzzword, so I decided to get into it.
The first thing I learned is that there’s not really one definition of FinTech. You can try and break the word down into “Finance” and “Technology,” which gives you a vague idea of what it’s about. But there has to be a formal definition, right?
Not really. Professor Theodore Clark (who teaches the course) claims that the definition of FinTech depends on who you ask. The first week of the course gets the perspective of FinTech from four different perspectives:
Professor Clark closes the week with an example of FinTech: Capital One
I’m going to try and give a super quick overview of what was taught in Week 1.
Dinosaurs
Guest speaker and professor of finance Veronique Lafon-Vinais is an experienced dinosaur enthusiast, and her argument is that FinTech is nothing new.
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Two points of view: Dinosaurs (large banks, financial corporations etc.) are either unstoppable killing machines that will devour small startups and their fancy new “technologies” for breakfast, or old-fashioned creatures that will go extinct.
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Banks have been using technology for almost their entire existences. ATMs? Best FinTech innovation ever, and banks adopted them rapidly. Banks are always looking for things to make their lives easier (and to make a profit).
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China and its big FinTech companies (Alibaba, Tencent, etc.) are the origin of the recent FinTech boom.
She brings up some thinking points:
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Data is so prevalent that there are issues about who actually owns the data. The creator (us)? The analysts? The banks?
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With the advent of more advanced AI, we lose more control of all the data, and scary things can happen when AI makes AI.
Summary:
- Banks will adapt and won’t be going anywhere.
Entrepreneurs
The guest speaker here is an entrepreneur in a FinTech startup company in Hong Kong. He argues that FinTech is the next new thing. In the past, financial data was privately held by banks, and you couldn’t go up and say “Give me all my financial data” or “Give my data to that other financial institution.” Now there are open banking APIs.
These days in stock trading, anyone can have access to exchanges as long as you comply with the exchanges’ regulations and policies. Before, you had to be a member of the exchange to have access to it. You “no longer need to depend on the traditional banking infrastructure to be able to access to the financial market today, at least in trading.”
More of his points:
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The government role nowadays is “neutral.” In the past, the government regulations were in place to prevent DDOS attacks and hacking. While lots of regulation is outdated, it’s important that the government keeps the playing field level.
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There are many benefits of distributed ledger technology (blockchain) and how BitCoin proved that blockchain tech is not easy to hack.
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Banks are data businesses since they hold all your transaction data.
“Think about it and also all these trading open, high, low, close, all this data and then what time I enter into the market, how I wire money into my account in order to trade how much I could got stocks. All these are on a computer system on the database, so it is really a data business at the end of the day so what they are providing. It’s just like a cloud computing service of all these financial data being sitting in an institute.”
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Since people have so much data available on their mobile phones, they can do things much faster than before (like applying for a loan). Entrepreneurs can build services around this and bypass traditional blocks.
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Banks get headaches managing IT people because the banking culture vs. the culture of Silicon Valley techies is so different.
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There are millions of possibilities and information overload. It’s up to us to figure out which opportunities are worth taking.
Investors
The guest speaker is “a millennial, Joshua, who is a Fintech investor.” Professor Clark brought him in specifically to get the perspective of a young person and investor. The points that were made:
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Stocks are boring, but cryptocurrency and BitCoin is exciting!
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20% stock growth in one year is amazing, 20% growth in crypto is “every other Tuesday.”
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The young generation grew up with the iPad, the computer. They grew up with tech, and crypto is fundamentally a tech, so it almost comes naturally to them.
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“If you’re going to do a crypto investing, a lot of it is identifying short and long-term value… you want to look for companies that are already generating revenue using blockchain technology, in addition to developing technology that can generate other revenues.”
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“You can make money in a bull market, in a bear market, but it’s the pigs that get slotted. It’s the people that are standing, they’re doing nothing, that typically gets slotted here… that’s part of life. No risk, no reward, right?”
Consumers
Here, Professor Clark is the “consumer.” His main argument is convenience is king.
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Security First Network Bank
- “The first Internet-only bank to be approved by the FDIC and insured by the FDIC.”
- Started in the encryption and military systems area, so they had no problems with remaining secure.
- Consumers loved them and their stock price exploded.
- After three years, other banks started to copy them. Consumers liked the other banks more because they wanted online banking and physical branches. It was more convenient to have both.
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A survey showed the millennials would rather go to the dentist and have a cavity filled than go into a bank and sign loan documents.
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“We want easy, fast, convenient, powerful, flexible, adaptable, innovative.”
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The technology may not be so new, but the applications are limitless.
A Case Study: Capital One
To wrap up the first week, Professor Clark tells us the tale of Capital One:
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Five guys want to start banking based on the most profitable customers. “We’re going to focus on a segment that has the highest returns and the lowest risk. We’re going to use big data, and analytics, and data mining, and we’re going to do this in creative ways so that we can understand much more about the customer than they even understand about themselves.”
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Most banks turn them down, but they finally get accepted by a small bank. They lose money for three years, but they made enough adjustments to finally make a profit.
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They became excellent at risk assessment and dominated the credit card market. They got the most profitable customers with the lowest risk and left only high risk customers for other banks.
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They forced other banks to also get into data analytics, AI, expert systems, big data, and risk assessment, or face extinction.
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“Most FinTech firms will not be alone forever. They will be copied, or bought out and the other banks will adapt or die.”
My Thoughts
I’ve always valued getting input from all sides before making a judgment on something, so I appreciate the way this first week’s lesson was formatted. It seems to me that FinTech is a huge field and that there are hundreds of subspecialties. There’s old tech like ATMs and online banking, and there’s new tech like blockchain. There are large, old banks in FinTech, and there are new startups as well.
I do agree with Professor Lafon-Vinais that it’s a myth that large banks can’t adapt to new technology. When there’s customers and money on the line, banks will do anything to keep up. It may as well be a sound financial strategy to plan to be bought out by a large bank once your startup’s technology reaches a fever pitch.
The more financial data that we as consumers and entrepreneurs have access to, the better and more convenient our apps will become. Though questions of data ownership and rampant AI growth must be answered eventually, we might as well make every day life for consumers easier in the meantime.