“Fintech” (a portmanteau of financial technology that refers to the disruptive application of technology to processes, products and business models in the financial services industry) is coming of age: two of the most prominent Fintechers, OnDeck and Lending Club, have gone public, many more are processing transactions to the order of billions of dollars, and outfits providing market intelligence in fintech are cropping up – there is even a newly minted index to track activity in marketplace lending. Banks are increasingly taking note of the Fintech movement, partnering with startups, investing in them or even acquiring them outright. Venture funding in fintech grew by 300% in one year to $12 billion in 2014. According to the Goldman Sachs’s “Future of Finance” report, the total value of the market that can potentially be disrupted by Fintechers is an estimated $4.3 trillion.
Fintech is a complex market, spanning a broad swath of finance across individual and institutional markets and including market infrastructure providers as well. It is a broadly defined category for upstarts who have a different philosophy around how finance should function and how it should serve individuals and institutions. While some Fintechers seek to reduce transaction fees and improve customer experience, others exist to provide more visibility into the inner working of finance. In spite of this diversity, there are some common threads and recurring themes around why Fintech firms exist and what their market philosophy is. The 5 D’s of Fintech – Democratization, Disaggregation, Disintermediation, Decentralization and De-biasing – represent common themes around the mission, business models, values, and goals of many of these firms. In this series of posts on Fintech, we will look at each of the 5 D’s of Fintech, starting with Democratization — the mission of many a Fintech firm.
The Five D’s of Fintech
Technology has long enabled democratized access to financial services, however Fintech is taking the movement to another level by targeting specific market niches with customized value propositions. A central appeal of many Fintechers is their promise to bring to the masses resources and capabilities which heretofore have been the preserve of the wealthy, elite, or the privileged. This has been made possible by both by market opportunity and internal capability: market opportunity of serving a market whitespace, and the ability to do so economically through the use of data and advanced technologies.
The financial inclusion that Fintechers are now enabling is driven by their ability to clear obstacles, remove barriers, and enable access where none existed before, whether it is serving the unserved or underserved SMBs that have typically been shunned by traditional banks (Funding Circle), providing credit to the underbanked segment lacking the traditional credit scores (Kreditech), enabling investment advice without the need to rely on expensive financial advisors (Nutmeg or Betterment), or facilitating access to the capital markets by offering low-cost brokerage services (Robinhood). Financial services are now “for the people” and “by the people” as well: Quantiacs, a fintech startup with the aim of revolutionizing the hedge fund industry, is essentially a market place for quantitative trading strategies that enables anyone to market their quantitative skills and trading strategies. Or OpenFolio, which is an online community that allows one to link portfolios and measure investment performance against their communities and relevant benchmarks. Wealth management perhaps is a market ripest for democratization as shown by rapid emergence of a raft of outfits such as HedgeCoVest and iBillionaire (platforms that allow investors to mirror the trades of hedge funds and billionaires, respectively), Loyal3 (which offers no fee access to IPOs), Algomi and True Potential (which undo trading obstacles for investors).
As Vikas Raj with Accion Venture Lab notes, the real potential of fintech is in democratizing access to finance for the billions of low-income unbanked population in the emerging markets. The high complexity and low scale nature of this market is exactly the kind Fintechers are good at capitalizing on, and this is evident from the long list of companies that is emerging in this market beyond Silicon Valley and New York. Where traditional finance and government agencies have failed, Fintech has the promise and the potential to excel.
Other industries can learn a lot by observing how Fintech is driving democratization in finance. Whether it is healthcare, education, media or government services, there is potential value in market segments that are currently un/under served which a Fintech like movement can unlock. Adopting the technologies underlying Fintech is part of the story; what is needed first is the recognition of the potential for change, the support from the markets, and an entrepreneurial spirit to lead the movement.