Are You Better or Worse Off? 8 Years of Financial Technology
Are you better or worse off than you were eight years ago? As we near the conclusion of a long election season, this is the question on so many people’s minds. Every candidate for office runs on a promise that, should we elect him or her, we will feel better off in the course of a few years (generally in time for the next election). Many candidates also trade on the premise that right now, you might feel worse off (presumably because that candidate is not yet in office). While this simple question may lose its meaning amid the cynicism of political realities, it does contain a compelling implicit premise. Whereas observations made over short periods of time are subject to noise that may cause us to draw incorrect or perhaps overly narrow conclusions, reflecting on progress over a longer period allows us to focus on the most important trends, developments, and outcomes. This concept is a useful lens through which to evaluate the progress of an industry that has seen accelerating innovation and adoption over the past eight years: the financial technology industry in the United States.
In 2009, millions of Americans watched the inauguration of President Obama after an election that took place right in the middle of the deepest recession in a generation. In fact, during that campaign, which now seems quaint by today’s standards, both candidates took a break from campaigning to attend recovery-package talks in Washington, even issuing a joint statement on the need for both parties to cooperate on a plan. Regardless of which candidate you may have supported, many people watched that inauguration with a sense of hope, that perhaps over the next presidency, we would emerge from the depths of the crisis a stronger and more resilient nation. Whether we are in fact stronger today is clearly an unresolved issue, but one particular area of our economy has seen inarguably significant activity. Over the past eight years, financial technology (or fintech for short) has exploded in popularity, as innovations have become accessible not only to large financial institutions but also to consumers and businesses of all sizes. Let’s examine some of the innovations that have been part of this wave.
Not long ago, most conventional banking operations required the customer to be physically present in a retail branch. In the past eight years, much has changed, primarily due to the near-ubiquitous penetration of smartphones. In 2009, USAA released the first mobile check deposit feature in its iPhone app, with other major banks following suit in subsequent years. Today, consumers conduct a variety of banking transactions on the go, including check deposit, money transfer, bill pay, and even applying for certain types of loans. This shift has changed the customer experience and also altered the physical landscape of banking, coinciding with the net closure of branches across the country.
As mobile connectivity obviates the value of physical proximity, barriers to switching have been reduced, and some traditional depository institutions have struggled to adapt. While mobile banking has had an impact on how people bank over the past eight years, the capabilities in most apps basically just mirror the operations one might conduct in a branch. If large financial institutions want to maintain their centrality in customers’ lives, they will need to introduce innovations that uniquely take advantage of the mobile platform and go beyond those branch-based basics.
In 2009, the entire lending industry had just been turned inside out. After the collapse of the sub/near-prime mortgage market, record high credit card losses, and amid plummeting consumer confidence, Americans deleveraged in a big way and lost trust in traditional lenders. From the ashes of crisis came innovation and the desire to apply a new model to lending. At the time, the nascent industry of “peer to peer” lending had started to gain momentum among a small group of enthusiasts borrowing from and lending to other people on websites such as LendingClub and Prosper. In 2009, those two sites facilitated just $60 million in loans. At the same time, some companies began conducting commercial lending online as well, using the power of web-based tools to simplify the application process and attempt to make better credit decisions. OnDeck Capital, a leader in this market, launched in 2007. Today, LendingClub, Prosper, and OnDeck have made over $32 billion in loans to consumers and businesses online, and the ranks of innovative online lenders have since grown to include literally hundreds of firms, poised to facilitate a meaningful portion of our nation’s economic activity. While online lenders have meaningfully improved the customer experience for millions, they will now be challenged to maintain their advantage against large banks with access to low-cost capital and to continue to grow their businesses while navigating a complex and sometimes uncertain regulatory landscape. The latter point may very well be a focus in the next presidential administration.
Online investing for individuals in 2009 was where online retail banking is today—electronic and convenient—but only just beginning to make use of the opportunities offered by a population carrying over 200 million always-connected pocket supercomputers. The rise of online brokerage took place in the first so-called “dot-com” boom of the late 1990s. While these online brokers, such as E-Trade, TD Ameritrade, Scottrade, and others, offered low-cost and convenient trading of a variety of investment products, this was only the first step in a fundamental transformation of how people plan and manage their investments. Over the past several years, various companies have offered entirely new models of investing. Robo-advisors such as Betterment and Wealthfront use algorithms to manage custom-tailored investment strategies in an automated fashion. Companies such as Quantopian, Motif Investing, and Covestor provide a platform for people to develop sophisticated investment strategies and then make them available on a marketplace for others to follow. Even the aforementioned online lending platforms began as a way for individual investors to access a new and untapped type of fixed-income investment through fractional loan investing in consumer debt. For wealthier “accredited” retail investors, various web-based platforms like Prodigy Network, iCapital Network, FNEX, PeerStreet, and many others offer easy access to more esoteric investments, such as commercial real estate, private equity, managed futures, and hedge funds. While obvious advances have been made in the automation, availability, and cost-efficiency of various investments, we may see in the coming years more successful attempts to merge the best elements of machine-based and human-based investment advice to deliver strategies that are more closely tailored to individuals’ personal circumstances. As with online lending, the next president has an opportunity to affect these developments by advocating for more regulatory certainty and a framework that contemplates adoption of leading-edge technologies such as artificial intelligence.
One of the major trends in technology more broadly has been the consumerization of enterprise technology. What this means is that while once upon a time, advances adopted in big companies trickled down to consumers, that stream now often flows in reverse. People are becoming so accustomed to personalization, mobility, and thoughtful user interfaces in their personal applications that they are now bringing these concepts into professional settings. In 2009, while smaller individual investors could begin to access a wealth of capabilities online, many investors in RIAs, hedge funds, and other investment vehicles had to subsist on phone calls, manually-generated spreadsheets, or client-access websites that were last designed in the late 90s (and looked like it). Over the past several years, companies such as Addepar have worked to bring modern, data-rich, and highly-capable user experiences to larger investment managers and their clients. Simultaneously, several alternative asset classes, such as online lending, have now become large enough to be institutionally viable, providing large investors with greater product diversity. This influx of institutional capital has also helped industries such as online lending mature into significant asset classes. Although the breadth of capabilities to which institutional managers now have access has certainly grown, the next challenge will be in how such firms continue to differentiate themselves and maintain their fees, when so much can be commoditized. Additional challenges in the next presidential term involve how best to adapt decades-old securities laws to a rapidly evolving financial landscape.
One of the greatest areas of financial technology innovation in the past eight years has involved the systems, mechanics, and convenience of payments. Eight years ago, transferring money to a friend online was difficult, expensive, or nearly impossible. Today, individuals can simply send money using apps such as Venmo, which was acquired by PayPal, and payment features offered by banks, such as Chase Quickpay, have also gained widespread adoption. Venmo handled $3.2 billion in payments in Q1 2016 alone. Developers of online and mobile applications have also been positively affected by the transformation of payments. In 2009, integrating credit card acceptance into a product was a major technology project and lengthy undertaking involving paper, faxes, and obtuse compliance procedures. Today, developer-friendly payment platforms such as Stripe have streamlined the process and have facilitated billions of dollars in payment flow. While the payments landscape is dramatically more convenient and streamlined than it was eight years ago, the lion’s share still takes place on ‘rails’ that are decades old and lag the rest of the developed world in settlement time, security, and flexibility. It remains to be seen how and when newer technologies might enhance or replace the ACH network, as well as the impact that decentralized, cryptographic protocols such as blockchain might have on payments.
Over the past eight years, we have witnessed a wave of financial technology innovation in the United States, which has benefitted consumers, businesses, and the economy at large. Nevertheless, many of the promises of technology remain unrealized, and there is ample uncharted territory for innovation. For instance, many financial firms still offer products that put their interests in opposition to those of their clients. And, for all the benefits of mobile technology, most financial service providers are still behind the leaders of other industries in terms of fully tapping the potential of an always-connected world and, crucially, in gaining their customers’ trust to do so. There are also major challenges to be solved in the political realm, and it is often difficult for regulators to keep up with an environment that is changing so quickly, balancing the mandate to protect consumers and the broader economy while also being supportive of innovation. When this election season finally comes to a close, and the next inauguration takes place, our new president will inherit an economy that still bears many of the scars and uncertainty of the great recession, with a population divided as to the benefits of recovery and a path forward. We hope the next president will be supportive of the role of financial technology in promoting access to credit, efficiency, transparency, and ultimately playing its part in fostering the growth of a stable and robust U.S. economy.