Technology, Cost Driving Fintech

Fintech holds the promise of reducing costs and improving efficiency in the financial sector. Achieving that promise, however, will require careful regulation, New York University finance Professor Thomas Philippon said during a March 8 presentation at the Federal Reserve Bank of Atlanta's Public Affairs Forum.

According to Philippon, fintech involves putting "new technologies together with the idea that you are going to disrupt the existing financial system," bringing innovation to legacy financial services and effectively reshaping the financial industry. Philippon cited industries including asset management and insurance as being especially ripe candidates for fintech's brand of disruption. Fintech also includes digital payment systems such as PayPal and Apple Pay that make it easier for consumers to purchase goods, whether in a store or online. It also includes software platforms such as Kickstarter and GoFundMe, crowdsourcing sites that directly link people seeking funds to willing investors.

Fintech regulation will likely encourage new entrants into the arena, Philippon said. But startups should not be regulated the same as established financial services companies, he added. "If you give [fintech companies] the same regulations as the big players, then they will suffocate," he said.

Powerful forces behind fintech's advance
Continued technological advancement coupled with a desire to lower costs are two of the main forces driving fintech. Philippon said that although information technology investments have lowered prices for consumers in retailing and other industries, consumers of financial services have not seen similar reductions. In fact, Philippon said, what users pay for financial services has not changed much in 100 years.

Part of the reason costs for financial services have not changed is because the efficiencies, and thus the savings, that flowed from investments in new technologies and improved processes did not trickle down to the end users. Rather, these savings helped bolster financial companies' bottom lines, Philippon said.

Can banks and fintech peacefully coexist?
Despite the perceived rivalry between fintech firms and banks—many of which fear losing market share to the newer firms—Philippon noted that the companies have nevertheless found areas of cooperation, demonstrating an awareness that fintech can enhance banks' traditional tasks, such as automated bill payment and back-office operations. Philippon also said fintech can improve access to credit for lower-income households and expand services to the unbanked.