Like every other industry, financial services have not escaped the disruptive forces of technology. Whether in commercial or investment banking, technology-driven changes have challenged old business models—even upending some of them completely. Companies that resist embracing financial technology risk losing market share and customers, or going out of business entirely.
To most consumers of financial services, these changes brought by technology have been a welcome upgrade offering easier, more transparent and cheaper ways to consume the myriad products and services offered by commercial and investment banks, financial advisers, insurance companies, accountants, and credit-card companies, to name a few. By now it has become commonplace to have an app to receive and send money, manage your 401(k), submit an insurance claim or file your taxes.
In the commercial banking sector, technology has propelled significant changes in the way banks operate. From depositing checks with your cell phone to getting approved for a loan on-line in under 10 minutes, fintech has been responsible for creating operational efficiencies for banks that have translated into added value for them and consumers alike.
Much of that operational efficiency has been fueled by automation—making a process cheaper and faster by relying less on humans and more on electronic devices and algorithms. As a lender focused on increasing access to capital to small businesses overlooked and underserved by traditional financial institutions, my organization sees the significant potential fintech has in helping to open up the capital markets to more entrepreneurs.
On-line lenders have made it easier for small businesses to access small-dollar loans (e.g. microloans up to $50,000) that most banks avoid due to lower profit margins and regulatory constraints. Fintech-based lenders such as Kabbage and OnDeck have created on-line lending platforms that offer small-business loans and unsecured cash advances, often making credit decisions within minutes of receiving an on-line application.
The low transaction cost and speed of delivery makes on-line lenders highly attractive to a small business faced with the need to cover payroll or replace a critical piece of equipment. On the equity front, fintech has transformed the investment world, creating new ways for businesses to raise capital from investors. The passage of the JOBS Act in 2012 allowed both accredited and non-accredited investors to invest as little as $100 in private companies.
Equity crowdfunding platforms such as WeFunder have democratized investing, giving everyone the ability to invest in a business, be it a microbrewer in Brookside or a startup biotech company in Boston. The arrival of online marketplaces for debt and even equity financing has made it easier and faster to access capital whether you dream of starting a business or are trying to expand an existing one.
Easier and faster, however, does not always translate to better and more. An over-reliance on technology and automation by commercial banks can exacerbate challenges that many entrepreneurs already face with access to capital. While proprietary algorithms used by on-line lenders significantly reduce the time and cost associated with underwriting prospective borrowers, they can also disqualify thousands of qualified borrowers, especially as more non-traditional data is used to determine creditworthiness.
Equally concerning is the lack of financial education many small business owners have when taking on loans and the risk of falling into a debt trap like so many predatory pay-day lenders have done to unsophisticated borrowers.
Fintech has dramatically altered the way the financial services industry interacts with customers and how business is transacted. And with the benefits of rising technologies such as blockchain, cryptocurrencies and even artificial intelligence yet to be fully realized, the industry is poised to be disrupted and evolve even more.
Despite these advances, the real disruption lies is fintech’s ability to promote and expand financial inclusion and reduce the number of those without access to capital—not just make it easier and more convenient for those with access already. Increasing the flow of capital to under-served entrepreneurs (minorities and women in particular) and low-income communities has the potential to economically empower millions of people through small-business ownership and financial services for wealth management.
Embracing fintech will drive the evolution of financial services for years to come. We can hope that it will lead to embracing more small-business customers, as well.