Looking Beyond the Tech in FinTech
February 14, 2020
By now there are few people that haven’t heard of, and used, FinTech enabled applications or services, sometimes surreptitiously. When it’s being discussed and/or studied, the technology employed is usually the point of focus, and more recently the data that enables the technology. But as in all technology applications, change is constant, and without which obsolescence is almost assured. What seems to often be missing from FinTech discussions, and maybe more substantial than the changing technology, are the changing of business models that are brought about. It seems that a conscious effort should be made to identify these changes, as unlike the technology that enables them, business models changes have quite different impacts.
Business models tend to be much longer lived than the technology that facilitates them, owing in large part to the constant increase in computing power. These business model change examples are proliferating in all types of situations: lending, brokerage, payments, etc. And while these changes surround us, they may be apparent – at least initially – to a limited group. Take for example traditional mortgage lending. This has been the backbone of US banking, yet in the past couple of years, banks have underwritten fewer than half of the mortgages in the US. Think about the scope of this change – about 18% of the US GDP is attributed to this sector. Today, mortgages are now being increasingly facilitated by FinTech firms via phone apps from firms like Rocket Mortgage and Lending Tree, offering mortgage qualifications in time frames that are a small fraction of what banks offer. Banks have been forced to essentially outsource what has traditionally been a business mainstay since the advent of the traditional mortgage product.
For better or worse, the model change brought on by the emergence of non-bank mortgage providers is hardly an anomaly. Another very recent example of dramatic business model change has taken place in a bastion of finance that has been a stalwart of the industry for decades, brokerage commissions. Recently, investors have been made all too aware of what has taken place with brokerage commissions, or more aptly the lack of commissions. On a single day in the very recent past, Charles Schwab, TD Ameritrade, and other major brokerages dropped their commission rates to zero. Describing this as merely a business model change may be the understatement of the year. The motivation behind this move was the exponential growth of the upstart brokerage firm Robinhood and the legacy firms’ attempt to match Robinhood’s extremely successful business model. Besides the shear growth of Robinhood is the population segment it serves – younger, often Millennial, investors who legacy firms covet as the “next generation” of customers.
These are but two examples of technology facilitated business model changes. There are many other examples of the business model changes that FinTech’s are facilitating that may go unnoticed, or at the very least, less noticed. Consider the way you hailed and paid for your last ride from the airport, very likely in an Uber or Lyft type of service, rather than the legacy taxi queue. These are additional examples of a FinTech enabled service that has upended the traditional business model of cabs and the financing of medallions. These changes have been embraced as a result of a new set of customer expectations that establish a baseline of service that has forced change to established business models. These less visible technologies that facilitate “back office” functions like payments, logistics, and even core systems reengineering are proliferating at an extraordinary pace. Like some of the user- facing technologies, these are being facilitated by technologies like cloud computing, machine learning, and even blockchain, with the same result on legacy business models.
As with any change, it doesn’t occur in a vacuum. Recognizing the implications of FinTech changes on the larger business environment is crucial to companies, competitors, regulators, and developers of these technologies. The business model changes go beyond simple balance sheet profit and loss statements, affecting workers, vendors and others, in addition of course, to the end-user. These considerations seem to beg for a much more robust, and I would suggest an academic approach, not only in terms of the technology, but also regarding finance, law, and policy. A more fully developed view of the development and implementation of these technologies facilitates a venue with which to understand that FinTech is about much more than the technology.
Written by: Dr. Jimmie Lenz
Dr. Jimmie Lenz, Chairman of the Neocova Strategic Advisory Board, is an executive, lecturer and scholar in the field of banking and capital markets. Currently, Jimmie serves as The Academic Director for the Master of Engineering in Financial Technology and Master of Engineering in Cybersecurity at Duke University’s Pratt School of Engineering with a secondary appointment with the Duke Financial Economics Center.