The Fintech Frontier
By Sona Pai
Illustration by Michael Morgenstern
Remember when you had to go to a bank to make a deposit? Or imprint your credit card number on carbon paper to make a purchase? Or talk to an actual human being to manage your investments?
Today, all of those transactions are a tap, swipe, or click away thanks to the rapid convergence of finance and technology, or fintech.
In every area of finance — payments, venture capital, currency, lending, wealth management, accounting, insurance — technological innovations are making processes faster, extending access to more people, and opening up new possibilities for business growth and value creation. They also have introduced new risks, not to mention a whole new vocabulary to the world, including cryptocurrency, blockchain, peer-to-peer lending, crowdfunding, and robo-advising.
For Georgetown students, it’s a thrilling time to be studying finance, when even the experts are learning as they go, says Reena Aggarwal , Robert E. McDonough Professor of Business Administration, professor of finance, and vice provost for faculty.
Aggarwal directs the school’s Center for Financial Markets and Policy and also served on the World Economic Forum Global Agenda Council on the Future of Financing and Capital. For her and others in the Georgetown community, fintech presents an exciting opportunity to bring students, faculty, and alumni together to shape a transformative moment in the world of finance and address important issues such as inequality and financial inclusion.
“We’re actually contributing to the knowledge base out there about what the implications and possibilities are,” she says, “and we’re doing it in ways that are useful to policymakers and to the marketplace.”
Changing Currency
Technology has long been transforming how people move, manage, and make money. The difference today is the incredible pace and scope of that transformation. As each emerging technology reshapes our relationship with money, new possibilities emerge for even greater change.
Take bitcoin, for example, a decentralized digital currency that relies on advanced encryption techniques rather than a central bank.
The underlying technology that makes bitcoin work is called blockchain, a distributed ledger technology. Blockchain creates an open, shared, secure way to permanently record transactions so everyone with access has the same information in real time.
“An awful lot of effort is spent in the back offices of businesses keeping track of databases and reconciling one database with another,” says James Angel , associate professor of finance and member of the Federal Reserve System’s Faster Payments Task Force.
“With blockchain, you have many copies of a single database. Everybody’s got the same information. Wall Street firms are salivating over this because it promises the ability to take 10 or 15 percent out of their back-office costs,” Angel says.
In PwC’s 2017 Global Fintech Report , 77 percent of financial services executives surveyed said they expect to adopt blockchain as part of a production system or process by 2020. What started as an effort to create a new kind of currency now has the potential to transform multiple traditional industries.
Banking on Access
Fintech also has massive potential in the area of financial inclusion. Blockchain, digital currencies, mobile banking, and peer-to-peer lending already are eliminating financial barriers for the approximately 2 billion people around the world who don’t have access to a bank account.
By making it easier and cheaper to transfer money from person to person and across borders, fintech can bring more people into the global financial system, empowering them to save, borrow, build credit, start businesses, and plan for a more secure future.
“So many people in emerging markets don’t have access to bank accounts or traditional banking systems, but they do have cellphones,” says Hilary Halpern (MBA’17), a fintech policy consultant at The Cypress Group. “Fintech allows you to deposit checks or take out money from your phone while you’re working on a farm in rural India, for example. That’s a pretty big deal.”
As an MBA student at Georgetown, Halpern led a student team in researching the complex regulatory landscape of financial technology and its potential in financing small and medium enterprises. The research, conducted at the request of the World Economic Forum, resulted in a set of recommendations for emerging economies grappling with the opportunities and challenges surrounding fintech.
Halpern presented the paper at the 2016 annual meeting of the Alliance for Financial Inclusion, in Bali, Indonesia. “We wanted to offer central bankers and regulators a toolbox — suggestions for what to consider as they set up their own fintech regulations,” she says.
Halpern also credits her preparation for the fintech industry to the MBA Certificate in Nonmarket Strategy, which takes advantage of Georgetown’s D.C. location to give students an up-close look at how business is shaped by regulatory, political, and social forces.
Another recent Georgetown student-led research paper explores the implications of blockchain for financial inclusion. Although blockchain is currently primarily used to transfer bitcoin, it “has the potential to make the world a more transparent, efficient, and frictionless place,” the paper notes. The technology makes it easier for people to establish and use bank accounts and also makes it more cost-effective for financial institutions to provide those services.
“Part of what’s so interesting about fintech for our students is that it gives them a way to combine their interest in finance, their interest in innovation, and their passion for doing good,” says Aggarwal. “They want to make an impact, and with fintech developing and changing so rapidly, they can.”
Disruption Without Destruction
The promising possibilities of fintech also have spurred a new crop of businesses. Startups that use technology to bypass, streamline, or improve on services offered by traditional banks have become hot — and lucrative — investment opportunities.
According to CB Insights data, venture capital investments in fintech companies grew 38 percent globally in the second quarter of 2017 compared with the same quarter in 2016. Forbes recently reported the top 10 fintech companies in the United States had a combined value of $31.9 billion.
With companies such as Stripe, Prosper, SoFi, and LendingTree becoming household names, established banks are paying attention — much in the same way Uber and Airbnb forced the taxi and hotel industries to take heed. Small, agile teams used technology to create new consumer experiences and steal market share from entrenched businesses.
But fintech disruption is different in an important way: Incumbent institutions aren’t necessarily waging war on their attackers. Instead, they’re looking for ways to join forces. In PwC’s 2017 Global Fintech Report, 82 percent of financial services executives surveyed said they expected to increase fintech partnerships in the next three to five years.
“It’s not as if fintech companies are on one extreme and large institutions are at the other,” says Aggarwal. “There’s a gray area.”
Georgetown McDonough alumni are seeing that gray area firsthand. Travis Skelly (B’04), senior vice president of venture investing at Citi Ventures, says when fintech startups first entered the scene, there was more of the expected “us versus them” mentality among incumbent institutions. Over time, the attitude has shifted.
“I think banks realize they’re not tech companies, and they can’t innovate and build like a startup can,” he says. “They realize and respect what startups are building and the access they have to new customers. At the same time, they know there are a lot of things they can provide to the startup that the startup will never be able to do because scale won’t allow them to.”
At Citi Ventures, the corporate venture arm of Citi, Skelly looks for promising fintech companies to invest in and then accelerates their growth and scale by helping them refine their products and by making introductions within Citi and its broader network. “Citi Ventures helps bring innovative solutions and insights to Citi,” Skelly says. “Startups want Citi Ventures as an investor because of all the value we provide beyond just a financial investment.” For instance, Skelly recently worked with Clarity Money, a next-generation, advocacy-focused personal financial management mobile app.
Sanjay Jain (B’92), managing director of technology investment banking at J.P. Morgan, describes a similar approach.
“We created an in-residence program — kind of like an incubator where we allow very early startup fintech companies to come in-house to J.P. Morgan, present what they’re up to, and then we offer to do one of three things with them.”
Jain says the company might provide expertise and mentoring to the startup team, or it might invest, offering capital and the credibility that comes from having a big name behind a fledgling business. If the tech looks incredibly promising — and better than what the bank could develop in-house — J.P. Morgan will offer to buy the startup.
“That’s the beauty of the technology industry,” Jain says. “It isn’t a winner-take-all world. Companies can coexist. They can mindshare. They can actually help the ecosystem that then helps others. With fintech, it’s not ‘We’re going to destroy you.’ It’s ‘Let’s figure out how we can grow the market together.’”
The Many Sides of Bitcoin
Growing the fintech market depends on more than powerful or cutting-edge technology.
“It’s easy to romanticize technology, but the reality is that out of hundreds and hundreds of fintech companies, only a few are going to succeed,” says Jain. “The ones that do are the ones focused on making the consumer experience incredibly efficient, seamless, and user-friendly.”
And just as new developments reveal an ever-growing crop of new possibilities, they also uncover new obstacles.
“Any new technology will have teething problems,” says Angel. “It’s convenient to pay with your phone, but what if you lose it, or it dies, or someone hacks into it? Or what if crowdfunding turns into ‘crowdfrauding’ because we’ve made it so easy for anyone to raise money? Or take bitcoin. How many people aren’t using it because they aren’t sure who will accept it? Or because it’s become the tool of choice for the underground economy?”
Aggarwal says Georgetown wants to hire faculty with joint appointments in areas such as philosophy, law, ethics, and computer science specifically to explore the broad implications of new technology. The Center for Financial Markets and Policy also regularly briefs senior congressional staffers on emerging issues in global finance, including fintech, to inform legislation and policy.
“That’s a huge advantage we have being based here in Washington,” says Aggarwal. “I see our responsibility as educating students, of course, but also educating the wider community, which includes regulators on the Hill and around the world.”
This fall, Georgetown McDonough began offering a dedicated course on fintech in response to student demand and the booming job market for problem solvers who understand it. It’s a sign of the growing importance of fintech and also a marker of this particular moment in time when the ripple effect of new technology is just beginning to take shape.
“In the future, when we talk about blockchain technologies I think it will be similar to reflecting on the early days of the internet,” says Skelly. “It will be a comparable evolution where we won’t really remember the days when we wondered, ‘How does the internet work and how should we use it?’ Blockchain solutions will run in the background while improving the customer experience and service on the front end.”