"Despite the millions of words written about the disruptive aspects of
fintech, companies
like Square simply provide modern software that sits
atop legacy banking systems."
From Institutional Risk Analyst via HedgEye, January 7:
The guest commentary below is courtesy of our friend Christopher Whalen. It was originally posted on The Institutional Risk Analyst.
In this issue of The Institutional Risk Analyst, we ponder the world of fintech, a term everyone in business and finance knows but few can define with any particular detail. There are many companies that claim to be fintech firms, or at least have some components that have these characteristics, but there are very few that we can point to as being truly revolutionary.
The term “fintech” is a contraction of two words -- “financial technology.” In a recent paper published by the University of New South Wales, Douglas W. Arner, Jànos Barberis and Ross P. Buckley note that the term fintech “refers to technology enabled financial solutions” that have evolved over the past 150 years. They continue:The largest strides in the use to technology in the world of finance came many decades ago, when sending physical mail was supplanted by the telegraph and later the telephone. In the 1970s, when the first computers were introduced to banking, the time required to process financing transactions began to fall dramatically. Then, as today, what computers do best is count.
Just as the invention of electricity changed industrial processes, the advent of computers to enable automated reconciliation tasks forever transformed finance. Fifty years ago, when some of today’s leaders in the consumer finance sector first entered the business of lending on residential homes, getting a mortgage could take months as data was assembled and validated. Payments were made using checks, which were then manually reconciled and presented to the originating bank.
When this writer worked at the Federal Reserve Bank of New York in the 1980s, there were three shifts working 24 hours a day, five days a week, processing cash and checks across the banking system. Airplanes flew bags of paper checks around the country to be processed by the regional Federal Reserve Banks. It is interesting to note that, decades later, the Federal Reserve System still has not extended the hours of the FedWire to evenings or weekends. As we noted in our previous comment ("The Fed Takes a Baby Step Forward in Payments"), the Federal Reserve Board is only slowing bringing the bank-centric payment system in the US up to current technology.
Yet despite such impediments, the evolution of technology is changing the way in which finance operates. Obtaining a mortgage today takes just days instead of months. Perhaps the biggest single task in the process is validating the information obtained from the borrower, including checking for fraud. The actual task of documenting the loan and the collateral has been greatly accelerated to the point where it is normally done in days or even hours.
A great many of the advances in lending today are more incremental than revolutionary. Eliminating mistakes and the attendant legal and regulatory risks that process faults inevitably create is perhaps as important as speeding the volume of loan applications through the system. Mortgage lenders, for example, profit by making more loans, but making a single bad mortgage can wipe out the profit from hundreds of good loans....MORE
