The guiding ethos of fintech (and really any industry portmanteau ending in ‘tech’) is move fast and break things. It’s the fundamental advantage that these disruptors have over the incumbents they are trying to disrupt — the ability to move quickly and make mistakes in the pursuit of delivering better customer outcomes.
Generally this ethos is presented as a virtue. Banking is broken and thus any investments in improving it are both notable and noble (even if there are bumps along the way).
Conversely, anything that stands in the way of this ‘march of progress’ is generally cast as a villain.
The most prominent villain for fintech companies is regulation. From their perspective, it’s a competitive moat (based on rules written for a different century) that protects banks’ ability to make money without delivering world-class products and experiences.
And so it’s easy to see why a fintech company — believing fully in the virtue of its mission and faced with a litany of illogical and intractable regulations — might just say "F*ck it, we're doing it anyways." (which is what Robinhood co-founder Baiju Bhatt reportedly did when his company tried to roll out a checking & savings product that it claimed was insured without confirming that with regulators first).
The problem is that while we may mythologize the ‘move fast and break things’ ethos in the abstract, in the real world consumers don’t love it when their stuff breaks. This is especially true when that ‘stuff’ is their money, as illustrated by the recent furor over service interruptions at challenger banks Chime and Varo Money.
And when fintechs and challenger banks aren’t constrained by regulation (as they mostly are in the U.S. and Europe) the harm caused by this ‘move fast and break things’ approach can be much more severe than a couple of service outages or a false claim of deposit insurance.
- In China, online P2P lending exploded in popularity, with the number of P2P lenders growing from 50 in 2011 to 6,000 in 2015. Then the whole industry imploded when it was revealed that 40% of P2P lending platforms were Ponzi schemes.
- In India, online lending companies raised a record $909 million in venture capital last year (the third-biggest market behind the U.S. and China). And those lenders are now using “data from borrowers’ cellphones to collect on debts in ways that are illegal in both India and the U.S.”.
- In the Philippines (another emerging market where VC dollars for online lending are pouring in), the National Privacy Commission is investigating hundreds of complaints from consumers about lending apps leveraging their personal data to shame them into making their payments.
A Prediction for the 2020s
So in the spirit of end-of-year predictions, I’ll offer one — over the next decade, fintech companies will come to love (or at least quietly appreciate) regulation.
There are two primary reasons I believe this will happen.
- Brand protection. Fintechs and challenger banks understand that brand recognition and affinity is key to their long-term success. Building their brands will be a challenge (a recent survey of European and U.S. consumers found that only 19% of consumers completely trust the challengers they use, while 47% completely trust traditional banks) and it will take time and effort to overcome. As Zach Bruhnke, co-founder and CEO of U.S. challenger bank HMBradley recently said, “We’re going to have to grow by word-of-mouth and doing the right things for our customers”. Fintechs and challenger banks focused on the long-term task of building brand affinity and trust will, over the next decade, come to despise bad actors that skirt the rules and dress up get-rich-quick schemes in the same language they use to describe their own firms. Regulations that constrain and/or shut down these bad actors will be increasingly appreciated by legitimate market participants.
- Disruption-friendly regulations. In the 2010s, we saw the beginning of a trend that will strengthen in the 2020s — regulations designed to foster competition between incumbents and new market entrants. To date, such regulatory action has run the gamut, from vague (innovation sandboxes and special-use charters) to hyper specific (U.S. regulators’ cautiously approving the use of alternative data or the Bank of England considering giving non-banks access to its 500 billion pound balance sheet). Perhaps most promising has been the work done by the U.K.’s Competition and Markets Authority (CMA), which has been proactively driving the adoption of rules and standards around Open Banking for last couple of years. Over the next decade — through careful management of public perception and increased investment in lobbying — fintechs and challenger banks will further reshape the regulatory environment from a competitive moat to a more level playing field.
“As a licensed broker-dealer, we’re highly regulated and take clear communication very seriously. We plan to work closely with regulators as we prepare to launch our cash management program”.
This was the statement issued by the chastened co-founders of Robinhood shortly after they backed away from their initial (ill-conceived) plan to launch a checking & savings product without government insurance. And here’s the crazy part — that’s exactly what happened! Less than a year later the company announced a new deposit product, this time insured by the FDIC.
As fintech companies mature in the 2020s and the focus of their strategic objectives shifts from growth to profitability, regulation will play a vital role in transforming the ethos of those companies into something a bit more sustainable. Call it ‘move fast and don’t break things’.