Fintech. Thoughts and Observations.
Broadly speaking Fintech (Financial Technology) firms deliver financial services in the area of transaction processing, data gathering, wealth management, and importantly for real estate investors, lending services.
Interestingly Fintechs are both competing with, and in some cases providing back office or administrative services, or product/delivery solutions to more traditional lenders.
A tremendous amount of press has been devoted to Fintechs, due in large measure I suspect to the rapid growth of the industry, and the tremendous valuations of some participants.
So what do we know?
- Fintech is a true “disruptor” in the financial services marketplace. Algorithms, Apps, and iPhones are all being put to use. The experience of lenders and borrowers alike, particularly as relates to the transaction process, can only improve through the use of cutting edge technology.
- Fintech allow commercial mortgage borrowers to be less dependent upon one lender, or indeed one market, for access to funding. More choice and more competition equals more happy borrowers.
- Fintech holds the promise of greater efficiency and transparency. Importantly it also holds the promise of stability. Always a good thing in financial services.
What are the emerging challenges?
- The junk bond debacle and subsequent period of investment bank failures a number of years ago service to highlight what is a continuing phenomenon. Banking is a digitized industry. Assets never seem to stay on the balance sheet very long. They are sliced/diced/packaged/rated/sold (“securitized”), after only a short period of “warehousing”. This is no longer an industry of ledger books and balance sheets. Financial services has become virtual. Much of what we consider banking, takes place off balance sheet. It is difficult to impose capital requirements (i.e. backstop risk) in such an environment.
- True operational and credit risks are difficult to assess and measure as more and more derivative transactions are developed. From asset backed securities to collateralized debt obligations. Risks don’t go away. They get packaged and are given new names.
What should we expect?
- Regulations will have to be improved and modernized. An optimist would say Fintech promises innovation and efficiency. A pessimist would say that Fintech can only lead to excessive risk taking and complexity. The truth, as is often the case, likely lies somewhere in the middle.
- The main regulator in Canada is OSFI (The Office of the Superintendent of Financial Institutions). They monitor the financial soundness of Banks, Insurance Companies, and TrustCo’s. They do not, as yet, regulate Fintechs. Look for that to change.
- The Financial Services industry in Canada is highly profitable, and highly concentrated, (check out this recent article by David Berman in the Report on Business magazine here). Banks will likely push for more stringent regulations on one hand, while actively developing their own proprietary fintech service offerings on the other hand. Its a lucrative pie that Banks are loathe to share with startups, particularly as they are not burdened by regulatory oversight to the same extent as Banks. But if you can’t beat ’em, join ’em.
I have been told that the quote is neither accurate, nor Chinese, as is often suggested, but for what it’s worth “May you be cursed to live in interesting times”.