In March 2018, the Wharton School announced the establishment of the new Stevens Center for Innovation in Finance, a dedicated hub for financial technology - or ‘fintech’ for short. The Stevens Center offers student fellowships, classes, and world-class resources for students and faculty interested in fintech, and is a hint that leadership at Wharton views fintech as a glimpse of the future.
But what is fintech?
Broadly speaking, fintech refers to any technological innovation in financial services, a definition wide enough to encompass ATMs and credit cards as well as bitcoin and blockchain. One might ask, however, if fintech has existed for so long, why the sudden interest now?
My view is that fintech in the past has largely assisted existing institutions, while the future of fintech promises to completely overhaul banking services. What form this takes remains to be seen; it is likely that traditional banks will never entirely cease to exist, though their roles may be significantly diminished if they do not adapt fast enough.
Modern fintech has a few key domains which include (but are certainly not limited to) mobile payments, peer-to-peer lending, crowdfunding, trading, and digital currency. Venmo has made cash transfers easier than ever. Sofi offers some of the lowest interest rates for student loans by using an in-house algorithm that predicts your likelihood of re-paying far better than credit scores. Kickstarter has decentralized funding by allowing individuals to fund entrepreneurial ventures and social projects. Robinhood lets anyone invest in stocks free of commission through its app. Bitcoin has created an alternative monetary system without the need for intermediaries that charge fees for insuring and moving money.
The key theme is the use of data and software to revolutionize financial services. In light of it all, there are two major trends in the industry. One is the gradual phasing out of physical consumer banks, and two is the democratization of finance.
Brick and mortar consumer banks have increasingly been displaced by mobile applications and online sites that remove the need for in-person interactions. In 2018, banks closed a record 1,700 branches in spite of a growing economy. Millenials are less interested in building personal relationships with their bankers, and find it simply more convenient to conduct transactions digitally.
Banking, long dominated by giant institutions, is also moving towards a more grassroots style. It is easier than ever for private individuals to invest, fund a project, obtain an affordable loan, move money around, and engage with the financial system. Technology has allowed people to bypass traditional institutions, eliminating the primary obstacles to participation. This has the potential to make financial services more efficient by removing middle-men, more meritocratic by elevating ideas over relationships, and more useful by lowering costs of use. Now more than ever, it is the age of the individual.
Wharton’s investment in the new Stevens Center makes clear that fintech is no longer a fad, and it is no longer heretical to say that fintech will define finance in this century.