From the internal workings of the industry, four fintech authorities on Reddit provide their opinions on the biggest things happening in fintech right now:
Amazon Web Services and the other various financial cloud providers. Infrastructure in fintech is very very hard due to security requirements. I’ve been in the industry for over 15 years building various payment protocols and financial services. The new cloud platforms allow companies to keep proprietary racks while deploying at breakneck speeds. What took 18 months to build and deploy now takes 30 days. The reason mobile and online banking is some of the best uxs in the world can be attributed to the cloud.
So, adoption of the cloud (particularly AWS) is leading to better and faster deployment.
The big things have to do with either a payments architecture that avoids existing credit card rails, or a way to provide depository banking services without being regulated like a bank. A possible third thing that could be “big” is the collective effort to make real estate markets more efficient. This could include everything from property valuation, mortgage origination, liquidity provision, and fractional ownership.
Lending is actually focused on “small” things now – the tech part of becoming an alternative fintech lender is fairly well commoditized at this point at competitive advantage comes from identifying a specific vertical or niche that require specialized expertise.
Non-traditional credit scoring models are interesting, but so far there is no evidence that they provide meaningful improvements over more traditional underwriting. Credit cycles are long.
(…r/LastNightOsiris continues to explain his view on the benefits of avoiding bank regulation)
A “bank” in this sense is a specific type of entity that can take deposits from individuals and hold debt assets on its balance sheet in accordance with fractional reserve banking rules. The deposits are insured by the federal government through the FDIC. Having access to retail deposits is very powerful, since it is a very stable, very low cost source of capital which can be quite large. In order to do this, banks must comply with many regulations at the federal and state levels. A fintech – in these sense of a relatively small, new company backed by VC/Private equity, typically lacks the resources to comply with the regulatory burden. Their business model also is likely to require moving faster than the pace of banking bureaucracy, and possibly to engage in certain activities where it is unclear whether they are permitted under current regulations. Therefore, most of them have a bank partner who performs the core bank functions. This “rent a charter” business has been quite lucrative for a number of regional banks. One major difference between renting a bank charter and being a bank is that in the partnering model the fintech can not hold debt assets by leveraging the deposit capital. Only the actual bank can do that. The fintech would need to source capital from somewhere else (somewhere more expensive and more restrictive) in order to make loans or engage in other credit creation activities.
(…r/LastNightOsiris continues to explain “make real estate markets more efficient”)
By increased efficiency I mean smaller transaction costs, shorter time to close/settle, better price transparency, and the ability to participate with smaller minimum investment size. There are different companies with products that address each of those things. The implication would be that real estate becomes accessible to more people as an investment asset class, and that the ability to value and trade it in a market context would increase. My expectation is that would cause prices to rise. Historically, real estate prices have been discounted because investors demand a liquidity premium, as well as because a large part of the real estate market (owner-occupied homes) has not been valued as an investment asset. Changing one or both of these things should erode or eliminate the discount. Cap rates on investment property should come down as valuations go up to remove the liquidity premium. On residential non-investment property, cap rates should actually go up as the investment potential is unlocked, but in that case prices should follow by going up to normalize the cap rates.
In short, fintech companies are trying to find ways to offer ‘bank-like’ services without the burden of regulation. Further, pioneers are setting their sites the largely inefficient real estate transactions.
I would say massive adoption of robotic process automation in companies around the world.
This one’s a layup. Automation is all over the news as some sort of impending crisis. What’s important in this short, but powerful statement is that companies are CURRENTLY adopting automation at breakneck speeds. Massive projects are underway all over the world to clear out transactional and clerical staff within the banking industry.
There is a lot of activity in alternative credit models. Companies are experimenting with other sources of data vs traditional credit scoring methods (psychology assessments, social graph, etc.)
The first class of fintech startups focused a lot on b2c – banking, payments, remittance, investing. Now, most of the interesting activity is companies selling to other companies.
Perhaps most interesting is how massive data availability and faster computing power is enabling better predictive modelling. Are there ways to identify mortgage loan defaults before the happen, based psychographic and behavioural data? Probably. And my guess is it’s already happening.