Public Affairs Forum
March 8, 2017
Thomas Philippon: My name is Thomas Philippon, and I'm a professor of finance at the NYU Stern School of Business.
What is fintech?
Philippon: I think, broadly speaking, you want to think of fintech as the use of technology to disrupt financial services. So fintech, for instance, is a way to make it much easier to pay when you go into a store—that's going to be PayPal and Venmo and Apple Pay, and all these digital payment systems that make your life easier as a consumer.
Another one is when we talk about peer-to-peer lending. This is a platform where we put together directly the borrower and the lender. So that's where you can see the disruption, because, essentially, we are cutting out the middleman—that's Lending Club, and Prosper, and various kinds of platforms where you can raise money. There [are] also some very broad technologies, such as the blockchain idea, which is not specific to a particular industry—it could be applied in many different places.
Blockchain is like a decentralized accounting system. Instead of having one set of books—one ledger, which is stored in one closet—when you have a blockchain, it's: you have a bunch of copies of the same ledger in many different places that everybody can read at the same time. That's the key. Then you can use this to settle transactions and create new financial products. One example of this, of course, is Bitcoin, which is a cryptocurrency—a virtual currency—which runs on a blockchain ledger.
In the future, we're going to see a lot of fintech in asset management. So, next time you call your broker for some advice about what to do with your portfolio, chances are you're going to be talking to a robot.
Is the financial community embracing fintech?
Philippon: So fintech is meant to disrupt financial intermediation and existing players, and the extent to which that's happening is a bit changing over time. What's kind of interesting to notice is, if you were to ask that question to the CEOs or CFOs of large financial firms, maybe like a year-and-a-half ago, you would have noticed that many of them were a little bit worried—or outright scared—by the idea that perhaps these new fintech firms would just come in and replace them entirely.
I think today the mood is a bit different, in the sense that we get the feeling that fintech is not going to replace, necessarily, all the actors—at least not in the short term—and right now it's all about finding out the synergies: what new ideas you can apply to existing models, as well as new models.
So, the banks are partnering with the fintech [firms] and using some of their ideas to improve their services. One obvious example is just making the user interface nicer for your clients. Everybody has an interest in doing that, so this part of fintech—improving the client, the user experience—is something that's become very important.
Has fintech lowered costs for consumers?
Philippon: Finance, at least up to now, has not delivered the goods. It has not delivered the kind of improvements one would expect from this industry. If you look at what finance is doing today—providing payment systems, loans, asset management services, insurance—and you ask yourself, "How much does it cost to the end user? How much does it cost for them to have access to financial services?"
Then what I find striking is that, to the best of the measures that we have, the cost of financial services has not declined in recent years. It's pretty much the same today as it was a hundred years ago. If you think about it, that's a little bit shocking because a hundred years ago people didn't have computers; they had pencil and paper.
Now, you might ask, "What a minute. How is that possible?" We have long chains of intermediaries today, so the system looks very complicated. It has many, many links, many paths. Now, each part could be cheaper, and could become cheaper over time. But if you multiply the parts, then the overall cost could still be large—and to some extent, that's what we had.
Another thing that happens is, some of the innovations that we've seen in finance did not produce a decrease in prices for the end users, unlike some of what we saw in other sectors, like retail trade. In the 1990s, the U.S. retail industry made vast investments in IT, inventory management, their global supply chain—absolutely massive improvement. What did we see? Well, we saw the prices go down, so now when you go to the store, you pay less.
To some extent, finance also invested a lot in IT and new technologies and computers, but if you look at where the improvement went, to a large extent it went into higher profits in financial firms, not really lower prices for consumers. Finance has remained a little bit protected, and has not really delivered high-quality services for low prices for the broad population.
Should fintech be regulated?
Philippon: The rise of fintech, if you think about it, it also creates a very significant challenge for financial regulations. Over time, financial regulators grew comfortable with regulating banks and insurance companies, and they know the business models and they know the actors, and [they are] to some extent easier to regulate than a bunch of new start-ups that are run from a garage by a 25-year-old kid. So naturally, the regulators might be more suspicious, and the system as a whole might not welcome these new firms.
I think it's very important that you create a framework where we welcome entry. You should not put the same burden of regulation on new start-ups as you put on the existing firms. I think we should give them a break, and that would be good for everybody in the long run.
Does fintech offer better access to banking?
Philippon: Fintech could help in banking the unbanked, in lending to people who—because they are too small or too risky—usually are priced out of the usual lending system. I think we see a lot of that in emerging markets already, where, because the loans are so small, it's almost impossible to break even unless you charge a crazy interest rate. Well, fintech reduces these costs and makes it profitable—or at least you can break even—by making small loans to a lot of people.
So we see definitely a lot of that happening in emerging markets—in Kenya, for instance. And I think you can make a plausible argument that fintech is also going to help improve access to credit for low-income households, and for new firms in the U.S.