Alright, let's talk fintech. Anna Paulson, the Philadelphia Fed president, recently gave a speech about "
Harnessing the Benefits, Minding the Risks of Fintech Innovations." The usual song and dance – opportunity, risk, innovation, disruption. But let's cut through the jargon, shall we?
Fintech's "Creative Destruction": Mostly Deck Chair Rearranging?
The Schumpeterian Hype
Paulson invokes Schumpeter and his concept of "creative destruction," framing fintech as the latest iteration of capitalism's relentless churn. New ideas replace old ones, winners and losers emerge, and society gets richer (supposedly). She even quotes an essay saying societies that allow creative destruction to operate grow more productive.
But here's where the data gets interesting, or rather, contradicts the narrative. Paulson cites research showing that only about 25% of innovation comes from "creative destruction." The vast majority? Improvements that existing firms make to their own products and services. Even in the fast-growing IT sector, established players are the primary drivers of innovation.
So, is fintech really this disruptive force tearing down the old order? Or is it mostly the big banks adding a few new features to their apps? It feels more like the latter. They are rearranging the deck chairs, not building a new ship. The real question is, how much of this "innovation" is actually benefiting consumers, and how much is just benefiting the banks' bottom line?
Fintech's "Inclusion": A Veneer or Real Access?
The Inclusion Mirage
The speech also touches on financial inclusion, with Paulson stating that success will mean financial inclusion is broadened. Fintech is supposed to reach the unbanked, reduce transaction costs, and improve transparency. And it does, to some extent. She cites a Philly Fed study showing that banks partnering with fintechs were able to offer larger credit lines to customers with low or missing credit scores.
However, let’s be real. The unbanked often remain so for very valid reasons: lack of trust, unstable income, and a general distrust of the financial system (which, let’s be honest, is often justified). A shiny new app isn't going to solve those fundamental problems. It may offer a veneer of access, but does it truly address the underlying issues?
And I've looked at hundreds of these reports, and there is always a footnote saying that credit growth has not come at the cost of higher default rates. But what happens when the inevitable recession hits? What happens when those "subprime borrowers" with "thin credit histories" suddenly find themselves unable to repay their debts? The data from India might be promising, but the U.S. is a vastly different landscape.
Fintech: Disruption or Regulatory Capture?
Regulatory Realities
Paulson emphasizes the need for regulatory structures that recognize the coexistence of traditional finance and fintech. She suggests building on existing frameworks, learning from past mistakes, and avoiding a "start from scratch" approach.
This sounds reasonable, but it also hints at a potential problem: regulatory capture. Existing regulations are often shaped by the interests of established players. If fintech is simply shoehorned into these existing frameworks, will it truly be able to disrupt the status quo? Or will it just become another tool for the big banks to consolidate their power?
The problem is that the definition of "fintech" is so broad. It could be anything from a revolutionary blockchain-based lending platform to a slightly better mobile banking app. And regulators tend to treat them all the same, which stifles true innovation.
The elephant in the room is crypto. Paulson mentions cryptocurrencies and digital assets moving "from the fringe to the center." But the Fed's stance on crypto remains cautious, to put it mildly. They pay lip service to innovation while simultaneously exploring central bank digital currencies (CBDCs), which would essentially give the government even more control over our finances.
A Fresh Coat of Paint on a Broken System
Fintech isn't the revolutionary force it's often made out to be. It's mostly incremental improvements and clever marketing. The underlying problems of financial exclusion, systemic risk, and regulatory capture remain. Until we address those fundamental issues, all the fintech innovation in the world won't make a damn bit of difference.
