The last time the financial industry swooned so much for a new technology, it was the early 1990s. The Berlin Wall had just fallen, the Latin American financial crisis was almost over, and everyone everywhere (it seemed) was talking about….derivatives. Today’s marketplace feels very similar to those frothy days.
[This article first appeared on our FinTech RegTrends blog. Click HERE to read the entire story.]
But a crucial difference exists. In the early 1990s, no ambiguity existed about what might (or might not be) a financial derivative. In addition to the age-old futures and options (which were mostly exchange-traded), the hot new thing on the market were swaps and over-the-counter (OTC) futures and options.
It is not so easy to identify what kinds of firms fall under the heading “FinTech” and which don’t. Ambiguity is fueled by start-up marketing since savvy start-ups know that the fastest way to find funding right now is to market yourself as a FinTech.
The question has been on my mind lately. When I introduce the company and the FinTech RegTrends Report to people, half the time someone says to me: “Oh! You are a FinTech company.” The conversation proceeds and the person thinks they understand the niche in which we operate. But are we really a FinTech company?
Do all FinTech companies want to grow up to be regulated financial institutions? Can established incumbents become FinTechs just by creating innovation centers and buying a ping-pong table? What about RegTech companies and data providers?
These and other burning questions are the subject of this post.
No single definition has yet emerged regarding this sector. In an attempt to shed some light on the issue, we consulted Wikipedia, Investopedia and Forbes:
- Citing a 2015 Wake Forest Law Review article, Wikipedia indicates that FinTech “is an industry composed of companies that use new technology and innovation with available resources in order to compete in the marketplace of traditional financial institutions and intermediaries in the delivery of financial services.”
- Investopedia disagrees, seeing the industry as being much broader: “Since the end of the first decade of the 21st century, the term has expanded to include any technological innovation in the financial sector, including innovations in financial literacy and education, retail banking, investment, and even crypto-currencies like bitcoin.”
- Forbes offered another perspective in February of this year: FinTech refers to “technologies used and applied in the financial sector, chiefly used by financial institutions themselves on the back end of their businesses…(and increasingly) technologies that are disrupting traditional financial services, including mobile payments, money transfers, loans, fundraising, and asset management.”
Regulatory status does not figure in to the sector’s definition. Nor does age.
All three of the definitions above apply equally both to start-ups and to established incumbents that implement innovative technologies in innovative ways as the recent Citi/NASDAQ deal illustrates.
The crucial question is whether a FinTech company must engage in intermediation (lending, deposit-taking, advising on financial transactions, executing financial transactions, operating a payment system, issuing currency) in order to be considered a “FinTech” company. Investopedia and Forbes suggest instead that non-intermediation activities could qualify as well.
Why It Matters
At the moment, the question of “what counts” as a FinTech seems like it would matter only (if at all) to marketers. Investors want to be part of the hip, happening, highly innovative technology scene that seems likely to generate the magical appearance of unicorns. Companies (ourselves included!) want to spread the excitement about the magic that their algorithms and new data sets can provide to help people make smarter decisions faster.
But the sector’s growth does not occur in a vacuum. Rapid growth attracts regulatory attention.
Policymakers, like technology evangelists, understand that we are only at the front end of a profound data revolution that will transform how people think, how decisions are made, and how business is conducted.
The FinTech sector, operating in one of the most regulated industries on the planet (financial services), is on the forefront of this revolution. So are its regulators……
This article first appeared on our FinTech RegTrends blog. Click HERE to read the rest of this story.