The fintech revolution

A wave of startups is changing finance—for the better

IN THE years since the crash of 2007-08, policymakers have concentrated on making finance safer. Regulators have stuffed the banks with capital and turned compliance from a back-office job into a corner-office one. Away from the regulatory spotlight, another revolution is under way—one that promises not just to make finance more secure for taxpayers, but also better for another neglected constituency: its customers.

The magical combination of geeks in T-shirts and venture capital that has disrupted other industries has put financial services in its sights. From payments to wealth management, from peer-to-peer lending to crowdfunding, a new generation of startups is taking aim at the heart of the industry—and a pot of revenues that Goldman Sachs estimates is worth $4.7 trillion. Like other disrupters from Silicon Valley, “fintech” firms are growing fast. They attracted $12 billion of investment in 2014, up from $4 billion the year before. Many of these businesses are long past the experimental phase, as our special report this week explains. Lending Club and OnDeck, two new lenders, have gone public; users of Venmo, a payments app, transferred $1.3 billion last quarter. In his latest annual letter to shareholders Jamie Dimon, the boss of JPMorgan Chase, warned that “Silicon Valley is coming.”

The fintech firms are not about to kill off traditional banks. The upstarts are still tiny: Lending Club has arranged $9 billion in loans through its marketplace, small change compared with $885 billion of total credit-card debt in America. They have yet to be properly tested in a downturn. No fintech product comes close to matching the convenience and security of a current account at a bank. And banks will gain from many of the innovations. Square, for instance, is a system that makes it easier for small businesses to take card payments; it will boost banks’ transaction volumes. Nonetheless, the fintech revolution will reshape finance—and improve it—in three fundamental ways.

First, the fintech disrupters will cut costs and improve the quality of financial services. They are unburdened by regulators, legacy IT systems, branch networks—or the need to protect existing businesses. Lending Club’s ongoing expenses as a share of its outstanding loan balance is about 2%; the equivalent for conventional lenders is 5-7%. That means it can offer better deals to the borrowers and lenders who congregate on its platform. Half of the loan applications Funding Circle gets from small businesses arrive outside normal business hours. TransferWise takes a machete to the hefty fees that banks levy to send money across borders.

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