In the years since the crash of 2007-08, policymakers have concentrated on making finance safer. The magical combination of geeks in T-shirts and venture capital that has disrupted other industries has put financial services in its sights. In this way a new generation of startups is taking aim at the heart of the industry—and a pot of revenues that Goldman Sachs estimates is worth $4.7 trillion. Like other disrupters from Silicon Valley, “fintech” firms are growing fast. They attracted $12 billion of investment in 2014, up from $4 billion the year before. However, the fintech firms are not about to kill off traditional banks. The upstarts are still tiny. Nonetheless, the fintech revolution will reshape finance in three fundamental ways.
First, the fintech disrupters will cut costs and improve the quality of financial services. They are unburdened by regulators, legacy IT systems, branch networks—or the need to protect existing businesses.
Second, the insurgents have clever new ways of assessing risk, which can be called data-driven lending. This kind of data-driven lending has clear advantages over decisions based on a single credit score or meetings between banker and client.
Third, the fintech newcomers will create a more diverse, and hence stable, credit landscape. The business of internet-based firms is less geographically concentrated than that of bricks-and-mortar lenders.
If fintech platforms were ever to become the main sources of capital for households and firms, the established industry would be transformed into something akin to “narrow banking”. The bigger effect from the fintech revolution will be to force flabby incumbents to cut costs and improve the quality of their service. That will change finance as profoundly as any regulator has.
References:
http://www.economist.com/news/leaders/21650546-wave-startups-changing-financefor-better-fintech-revolution
http://www.inc.com/magazine/201509/maria-aspan/2015-inc5000-fintech-finally-lifts-off.html