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Can fintech change the way the money business works?

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Financial technology could revolutionise financial services, says the governor of the Bank of England. What is ‘fintech’ and what difference will it make?

Technology and investing are closely linked. Money is the blood of invention, as it takes copious amounts of it to take an idea to discovery and then on to the mainstream.

The history of stock market booms is the history of technology. Sailing ships, canals, railways, cars, radio, electronics, computing and the internet have all been the spark for investing mania, bubbles then crashes. This cycle is often pooh-poohed, but even though fortunes were lost and economies thrown into chaos by overenthusiastic speculation, what was left behind were vast infrastructures that benefit humanity.

Underneath these cycles of boom, bubble and bust are seductive semantics. When a technology is new, a word or two or a handy acronym act as a magnet for money.

The technology catchphrases gather herd attention. Today, there is ‘the crowd’ and ‘the cloud’, not to mention the ‘Internet of Things’.With these buzzwords, we can visualise the idea more easily. It is even possible to grasp a ‘crowd cloud of the Internet of Things’. These phrases place ideas that work into the heads of investors and remove the need for them to be engineers who truly grasp what is going on.

Another hot sector is ‘fintech’. This is the use of the latest technology to revolutionise financial services. The fintech space is hot and many factors are inflating this concept.

Money men and women (‘bankers’) are seen as pariahs and worthy of technological punishment. This weapon of retribution is ‘disruption’. Apparently, ‘disruption’ is great. Amazon is disrupting the high street with its one-​click patented technology. Uber is disrupting cab-driving monopolies by enabling Prius-driving workaholics to flock wherever people need a lift home. YouTube is disrupting TV. Spotify is disrupting Taylor Swift. Isn’t it time the inter-web crowd cloud stuck a bit of disruption to the bankers? Ironically, the venture capitalists (aka bankers) agree and are pouring billions into fintech ideas.

That is not the whole story, of course. When US bank robber Willy Sutton was asked why he robbed banks, he replied: “that’s where the money is”. Where there are resources there are predators.

Then there is the lure of early successes. PayPal is the biggest example of an internet disruptor that became a financial big boy. It’s worth more than Barclays Bank. By turning an email address into a bank account, PayPal has become worth almost as much as Goldman Sachs.

Then there is Bitcoin. While deeply flawed, this doyen of money-laundering has taken the finance industry’s breath away with its ‘blockchain’ technology. It is indeed a crowd, cloud Internet of Things thing. Minds superior to ours are regarding it with envious eyes and drawing up their plans. If it wasn’t for the crooks, Bitcoin would change everything. But the villains keep absconding with millions of other people’s bitcoins, so it will remain a niche that is populated by ultra-nerds, tinfoil-hatted survivalist preppers, drug dealers, hackers, speculators, money launderers and exit fraudsters.

What about Kickstarter? This has made a slew of money men gasp “...and people will hand over their cash on the back of a silly video and a promise? Give me some of that!” There is a type of financier that can’t help trying to get their claws into the public. The hope, love and optimism engendered by Kickstarter isn’t a sign of the common man’s stupidity, it’s a manifestation of the magic of the internet that can’t be exploited for stock pump and dumps. (Thank goodness.)

Finally there is greed. Kids in hoodies are becoming the richest men on Earth. Make a simple app to send a self-​deleting picture of your anatomy and voilà, you are a billionaire. Make a website that acts like a noticeboard for friends and become richer than Croesus. Enable people to blurt words into the vacuum of the internet and have your company worth more than Rolls-Royce. Just think how much you could make doing something with money.

So a new generation of disrupters, funded by venture capital, are trying to find the magic combination to crack the financial services industry.

The fintech upstarts have the power of the cloud and the crowd, but there is a problem and it all goes back to ‘Slick’ Willie Sutton. The crowd and the cloud aren’t necessarily just an asset for fintech start-ups, they are also a massive liability. Security is the core skill of financial services and that is not easily mastered. Where there are resources there are predators.

People are careful with their money and they are instinctively reluctant to trust fintech start-ups. A perfect example is crowd lending, where fintech is used to put together lenders and borrowers and give both a better deal. What could possibly prevent massive growth? The answer is unexpected. It is not a shortage of lenders, it’s a shortage of borrowers. Banks, it seems, lend money at the right rate, after all. Lending is dangerous and the fintech space just can’t find enough worthy borrowers to disrupt the business.

It is hard to program security and impossible to code trust. Yet that won’t stop the denizens of fintech trying, because in the end, financial services is where the money is.

 

 

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