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REMARKS Bloomberg Businessweek October 11, 2021
Fintech companies that passed the
test presented by the pandemic have
seen their valuations soar
Money and data travel at warp speed, compressing space
and time, with less need for human intervention and more
demand for products to manage the ow. In the minds of
techies, this is a revolution in inclusion and democratization
for those left behind by thcentury banks. Fair enough: If
the best tech is like magic, banking hasn’t been magical for
some time. Startups are clearly better at ginning up eciency
through innovation.
But when instant gratication meets people’s pocket-
books, risks start to sneak in. Buy now, pay later programs
get more people to buy more things, but data in Australia
found in users paying late fees after missing repayments—
hardly a boon for equality. Robinhood Markets Inc., the
enabler for Reddit-fueled day traders, was ned million
by the Financial Industry Regulatory Authority over mislead-
ing information and weak trading controls. The war for cus-
tomers means ntech rms lend to people more likely to
default, one study found.
Fintech rms’ use of data and models may also have bene
-
ted from the lack of a long economic downturn. “Risks associ-
ated with lending haven’t been tested,” says former hedge fund
manager Marc Rubinstein. Federal Deposit Insurance Corp.
data show that from to there were U.S. bank
failures, but only since . And in a world where technol-
oy is winner-take-all, the algorithms that drive ntech suc-
cess could start to feel as exclusionary as the banks they seek
to replace. Their power is already being blamed for pushing up
home prices and discriminating against women and minorities.
This all adds up to a regulatory headache as governments
struggle to hold the reins of a sector that’s growing fast and
oers plenty of reward but also plenty of risk. The Covid-
pandemic coincided with headline-grabbing ntech failures—
payments rm Wirecard AG and supply chain nance company
Greensill Capital—where red ags went unnoticed. The job of
having to beef up rules after each crisis isn’t made easier by
politicians calling on the tech sector to keep churning out uni-
corns to boost jobs. “When it comes to regulation, I worry,”
says economist Eswar Prasad, a Cornell professor and author
of The Future of Money. Regulators “seem to get overtaken by
rapid developments.”
Fintech’s disruptive potential was unleashed in mature
markets such as the U.S. only recently, thanks to a conuence
of factors: low interest rates, better technoloy, rising con-
sumer demand, and a more permissive attitude toward non-
bank nance. Eciency gains in software have kept products
coming. The relentless march of e-commerce has boosted
demand for new ways to pay. And venture capital is the fuel:
Global VC funding in ntech reached a record .billion
in the rst half of this year, according to KPMG. Since ,
ntech has raised trillion in equity.
All that money pressures startups to keep growing at
breakneck speed—and explains the shift from plain-vanilla
payments products to more heavily regulated nancial activ-
ities, according to Victor Basta, chief executive ocer of
investment bank DAI Magister. Regular bank accounts don’t
keep people swiping, unlike the stu keeping users awake at
night: crypto trading, investing, shopping, and loans.
The pandemic was a key moment for the sector, as more
people were forced to turn to their smartphones for essen-
tials (government benets and savings) and not-so-essentials
(storming the barricades of GameStop Corp.). The ntechs
that passed the test have seen their valuations soar: Stripe
(billion), Klarna (.billion), Revolut (billion), and
Nubank (billion) rank among the most valuable pri-
vately owned unicorns in the world. On the stock market,
PayPal is worth billion, Square billion, and Adyen
billion (billion).
Traditional banks have been playing defense but also strik-
ing deals. Banks are one of ntech’s big funding sources:
Goldman Sachs Group Inc. and Citigroup Inc. participated in
and ntech deals, respectively, from to . Some
startups have chosen to become licensed banks themselves,
while big tech companies encroach into nancial territory
from the other direction: Amazon.com Inc. oers payments,
credit, and insurance with partner rms.
And the complexity of nancial regulation has opened
doors for tech startups. Some have exploited rules such as the
Durbin Amendment, which allows smaller banks to make more
money from card payments. Others have proted from laws
intended to improve competition, such as European Union
rules giving ntech companies access to bank account data.
The stunning collapse of Wirecard shows how easy it can
be to run rings around regulators. Here was a German bank
with access to deposits, a U.K.-regulated e-money institution,
and a payments rm on Visa Inc.’s and Mastercard Inc.’s net-
works, yet nobody acted on the red ags.
China—which had a head start on the U.S. and Europe in
ntech, thanks to years of cultivating revolutionary platform
companies such as Alibaba and Tencent—is likely the country
to watch. After a string of ntech scandals in the mid-s, the
government is cracking down on the platforms for perceived
monopolizing of sensitive data and hindering fair competition.
Governments have to do more to reduce the risks while
amplifying the benets of ntech innovation. Stronger
consumer protection and improvements to nancial liter-
acy would help. Regulators are also trying a more active
approach to technoloy, oering sandbox-type controlled
environments where ntech rms can experiment and grow.
But it’s hard to escape the feeling that a lot of the risks com-
ing down the pike are unpredictable and many-headed and
that regulators won’t keep up. With central bankers deter-
mined not to be disrupted in their management of the econ-
omy, perhaps another line from Hamlet will prove prescient:
“Neither a borrower nor a lender be.”