As a culture, we place great value in the latest and greatest in products and industries. Now that the cloud is turning from trendy to hoary, the new hot topic is “Fin Tech”. But what is Fin Tech exactly and does it have the possibility to be as transformative as the cloud is proving to be? The Fin Tech leader, Lending Club, saw its valuation rise by 56% to $8.5 billion when they listed on the NYSE in December. Is this just the tip of the iceberg for Fin Tech or an isolated incident that is based more on hope than actual results?
Getting a Handle on Fin Tech
What is Fin Tech? Very broadly, Fin Tech is “an economic industry composed of companies that use technology to make financial systems more efficient.” Sectors where Fin Tech has started to emerge include the following:
- Peer-to-peer lending (e.g. the previously mentioned Lending Club)
- Crowdfunding (Kickstarter)
- Algorithmic asset management (Wealthfront)
- Thematic investing (Motif Investing)
- Payments (Xoom)
- Data collection (2iQ Research)
- Credit scoring (Zest Finance)
- Education lending (Common Bond)
Investment in Fin Tech has been growing, with more than $3 billion invested since 2008 and growth projected to reach as high as $8 billion by 2018 according to Accenture.
One word that is often used in conjunction with Fin Tech is “disruption”. Just as the emergence of the internet brought the rise of Amazon and iTunes at the expense of book and record stores, Fin Tech is an expression of the possibility that technological advances can lead to new ways of doing business that either damage or alter traditional business plans.
As an example, peer-to-peer lenders such as Lending Club change the business of lending to individuals and small businesses at the expense of existing banks, credit card companies and personal finance lenders. They offer better terms to borrowers, a chance to participate as a lender to individuals and other capital holders, and a superior customer service experience. In most, if not all of the examples listed above, Fin Tech companies have the opportunity to disrupt existing industries (e.g. student loans). In those industries where they don’t, it’s only because they offer a completely new product or service (e.g. cloud-based analytics).
Another way to put Fin Tech opportunities into better focus is to look at other industries where technology enabled disruptors have already enjoyed success. The two most prominent examples are in the transportation and hospitality industries through ridesharing services (Uber and Lyft) and accommodation agents (Airbnb and VRBO), respectively. In both of these cases, the new entrants have enjoyed success because they have been able to leverage technology in such a way that they provide superior service, lower costs, offer new services, or all of the above.
Next: Ingredients for success