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Is FinTech a Threat to Financial Orthodoxy?

Chris Montaño & Ross Pettit, ThoughtWorks | Oct. 14, 2016
Despite all the excitement about FinTech and disruption, could it be that FinTech firms are at the mercy of the very same market forces affecting established FIs?

This article was brought to you by ThoughtWorks

Is FinTech challenging financial Orthodoxy

The perfect storm: incumbents in publishing, media, entertainment, and retail have been displaced by unencumbered upstarts, who have reshaped the competitive landscape in their own image. In the wake of the 2008 crisis, financial institutions (FIs) were weakened by new regulations and a loss of public confidence.

Financial services looked like it would be next for technological reinvention. Armed with optimism and nearly $50b, venture capital firms went on a multi-year campaign to disrupt, transform, and otherwise fix financial services with apps, service model designs, and tail strategies no large financial institution could hope to replicate.

The landscape filled up fast with new means of lending, cheaper forms of wealth management, and even entirely new currencies. Regulators fanned the flames by making it easier for innovators to go to market and endorsing the promises of fledgling tech. With so much hype, it was no longer a question of merely challenging the incumbents. Fintech was going to rewrite financial orthodoxy itself, fundamentally reshaping capital markets and even the economic principles on which they've functioned since the dawn of time.


Orthodoxy Strikes Back

What the narrative didn't take into account is that financial services are messier than the "efficient" models they're based on. For many institutions, the unspoken truth is that they only survive at the razor's edge. They must be able navigate complex market inefficiencies and business cycles.

Society and policy are the prime movers of all markets, not technology. Attempts to effect change that do not start there will have incremental impact at best-they cannot fundamentally reshape markets.

Would-be Disruptors Stumble Over Capital Markets, Not Incumbents

old school 1
Click on chart to enlarge

What's become obvious is that fintech firms are at the mercy of the very same market forces affecting established FIs. No FI can get by for very long if it competes primarily on regulatory arbitrage, loses competitiveness when the business cycle changes, operates marketplaces without a buyer of last resort, or relies on constant capital injections to stay afloat pursuing scale in race-to-the-bottom pricing.

No wonder fintech firms are starting to look more "fin" than "tech": they're running into the same macroeconomic forces as their institutionalized forebears did. And they're reaching the same conclusions on how to navigate those forces, only without the deep balance sheets or financial expertise of their incumbent competitors.

This isn't "challenging orthodoxy". This is caving in to orthodoxy.


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