Fintech Tries to Replicate Finance


There’s no good definition of what precisely fintech is, but there is a general assumption that it is supposed to be something different than existing financial technology. So different that it will replace existing companies and services. And not just replace them, but be better than them: easier, cheaper, faster, and – gasp – fairer.

About 27% of American households are unbanked or underbanked, and this is the thing that people tend to point to and with varying degrees of specificity hope that fintech will solve. What’s actually happening is that fintech isn’t doing much at all to help bring people currently excluded or underserved by banks into the financial system.

“Communities with higher percentages of poor households—especially at intersections of race and urban and rural geographies—have lower rates of accessing or using fintech,” a report from the New America Foundation concludes. The reasons why are that the basics required to use fintech products are simply less prevalent in poor and minority communities: High-speed internet is rarer and smartphone ownership rates are lower.

And an online payments company, for instance, can’t improve internet access to in a low-income rural community, nor can it help buy smartphones for families that don’t own one. The economic, technological, and social exclusion that creates high rates of unbanked or underbanked households in low-income and communities and those of color aren’t being solved by fintech, and so the people who use fintech are mostly the same people who use traditional financial services.

The good news is that every person who is not using fintech is a potential fintech customer: “Low rates also suggest that fintech has plenty of room to expand.” Which is nice, I guess, for fintech: Its current failings are also a growth opportunity!

Elsewhere in fintech replicating finance, the two big promises of robo-advisors are that their easy-to-use websites steer customers to low-cost, passive investments. Those two things are great and solve pretty much everyone’s problems with investing their savings for retirement, except for the having-enough-money-to-save-for-retirement part.

Now, robo-advisors are changing things up: Felix Salmon lays out how Wealthfront is starting to put a big chunk of customers’ money into a fund that buys total-return swaps and comes with a 0.50% fee, while Betterment will let you talk to a human if you pay an extra 0.15% annually for advice on estate planning and equity-based pay.

Bloomberg’s Julie Verhage reports that robo-advisers are putting more focus on chasing richer customers with new products. And some of those products either come with higher fees or are only available for now to customers with a certain level of assets in their accounts.

A focus on wealthy clients over less wealthy clients, a big range of tiered services, and a host of incremental fees for these services: that sounds a lot like the business model of traditional wealth managers.


Guess who else is interested in fintech? Saudi Arabia’s crown prince and de facto leader, the 32-year-old Mohammed bin Salman, known as MBS, has spent the last week and a half wooing the U.S. diplomatically and financially. He has met with President Trump and Goldman Sachs CEO Lloyd Blankfein and others as he seeks support for his economic reforms, corruption crackdown-slash-coercive power-grab, and the war in Yemen.

A small part of the Saudi’s American tour involves fintech. A delegation representing MBS held a closed-door meeting in New York on Wednesday with fintech start-ups. About 80 attendees came to a WeWork conference room overlooking Bryant Park to listen to the Saudi delegation pitch the start-ups on expanding into the kingdom.

The message was clear: The Saudi financial system has plenty of capital, but its banking technology is outdated and stagnant. About 80% of all transactions are done in cash, and about 70% of all online transactions are paid for with cash on delivery. Part of MBS’ Vision 2030 to reshape the kingdom’s economy is to increase the percentage of payments done electronically. The Saudis want fintech start-ups to help them modernize their financial technology.

And so they talked up things like 24-hour approval for business visas and a “regulatory sandbox” to try to attract fintech start-ups. Of course, the clearest method to attract start-ups is still to dangle a checkbook in front of a company and make any funding contingent on expansion into the kingdom.

Now for some links:

The NSA worked to track down bitcoin users, which makes sense: The promise of bitcoin was that it would be an nonstate currency that would exist outside the traditional banking system and allow users to anonymously buy and sell anything they wanted, up to and including drugs, guns, and internet servers to mine more bitcoin, while the promise of the NSA is that they will never let such a thing happen without surveilling it.

Bitcoin’s blockchain is full of child porn: “Although court rulings do not yet exist, legislative texts from countries such as Germany, the UK, or the USA suggest that illegal content such as [child abuse imagery] can make the blockchain illegal to possess for all users.”

One way to tell the story of blockchain is that it started as a cryptocurrency that would replace fiat money and upend the nation state but instead became a boring back-office tool for banks. Banks, though, are having a hard time figuring out what to do with all the blockchain investments they made, Reuters notes. “Firms bet the new technology would displace much of the sector’s infrastructure, cutting out middlemen, speeding transactions and reducing costs for things like securities and payments processing,” Reuters says.

A cynic might note that there are powerful incentives for big financial firms to decide that cutting out middlemen and lowering costs is not something they are actually interested in pursuing.

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