In 2015 Dan Davies wrote an excellent guide to Fintech business models (the “Fin”) that provided a very effective tool for looking beyond the hype. The other side of Fintech that the non-technologist (and even many experienced IT professionals) have trouble with is the actual “Tech”. A great many people in finance have now reached the point where they would like a way to identify Fintech technologies which are unlikely to solve real problems, work any better than existing technologies, are generally impractical or simply need a lot more explanation. The following are seven ways to identify Fintech technologies that do not deserve the hype.
- The technology claims to solve a problem that did not exist before and was actually created by the nature of the new technology.
Perhaps the best example of claiming credit for a problem that did not exist before is Bitcoin. Bitcoin enthusiasts claim it solved the “double spend” problem. A music MP3 can be copied multiple times so how do you stop digital money being spent multiple times? Very simple, you do not create a form of money that lacks a central authority. The electronic money spent in the modern financial system cannot be spent twice because in the modern world money mostly exists as a liability on the balance sheet of commercial banks (and they will not let you spend it twice) or as central bank reserves. Central banks have a similar attitude to people who attempt to use the same funds twice.
- A small part of the functionality of an existing system is implemented using the new technology and is claimed as a great success.
It is genuinely hard to create a technology based on computers that cannot be used to re-implement existing business logic. Even the most amateurish Blockchain solution supports some form of programming logic, data storage and data distribution. With those core components, you can re-implement pretty much anything in the financial system. The big question is whether you have re-implemented in a way that is cheaper, quicker or more secure.
- No thought has been given to the costs and complexities of integrating the new technology with existing infrastructure.
Some minimum degree of interoperability with the rest of the financial world is required to make any new Fintech technology work unless you really are proposing it will grow up in parallel and replace everything. In which case the technology (and related business models) require even closer scrutiny.
- The technology is new and original but the creators are incapable of explaining how it would be any better at solving real world problems than existing technology
Computers and software can be used by smart hard working people to create amazing things. However the general purpose nature of computers and programming languages mean that incompetent people can always produce awful systems. Creating a new technology does not easily get away from this general truth. Technologies become more obviously pointless when their proponents cannot even explain why their technology is better. Bearing in mind an explanation of “better” should ideally be in terms of mechanisms for improvement as opposed to mere assertions of virtue.
- The technology would fail to meet legal and regulatory requirements if treated on the same basis as existing technologies
In spite of the recurrent problems in the infrastructure of some individual banks and occasionally market infrastructure there are a great many very strict rules (both legal and internal to organisations). Regarding security, resilience, privacy, transparency to regulators. Those rules are generally there for very good reasons that do not simply become irrelevant because the technology changes.
- The advocates of the technology claim you “do not need to understand how it works, you just have to believe that it will change the world”.
Every day many human beings make use of a myriad of technologies without understanding how they work, aircraft, computers, microwave ovens to name a few. However there is big difference between those technologies and some fintech technologies (particularly those related to distributed ledger technology). Each day airliners successfully take people across the Atlantic, microwave ovens heat food and computers are used to post videos of cats to YouTube. While all this genuine use of technology goes on many Fintech related technologies seem to just generate hype. Where a Fintech technology cannot be demonstrably shown to work in the real world (maybe is it simply too new) people really need to understand how it works in order to make judgements about its worth. Otherwise you end up relying on faith or magical thinking.
- Criticism or even just questions are dismissed by referring to adoption/hype cycles that show you are going through a period of negativity before ultimate success
There are multiple variations of these curves including the famous Gartner Hype Curve. The way these types of curves are used to attempt to silence critics is by proclaiming that criticism (or even just questions) are due to being in the “Trough of Disillusionment” and that eventually you will reach the “Plateau of Enlightenment”. It just takes persistence, give it five or ten years (and a few hundred million dollars) and the preferred technology will be mature enough to do something useful. In many cases this will be true. It can take a long time for a technology to mature enough for widespread adoption. However, many technological ideas are just plain stupid and will never work. Human beings unsuccessfully worked for centuries trying to turn lead into gold, until they invented the IPO. For technologies that genuinely add value, asking questions, even being critical, are key to helping turn an immature idea into a mature, useful product.
Also by Martin Walker:
‘Ledger Nirvana’ in trade processing either doesn’t exist or is aeons away
- The post gives the views of its author, not the position of LSE Business Review or the London School of Economics.
- Featured image credit: Bitcoin, by typographyimages, under a CC0 licence
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Martin Walker is Banking and Finance Director at the Center for Evidence-Based Management (CEBMa) and produces research for financial consultancy Finadium. He has extensive experience in investment banking IT and operations. His roles included Global Head of Securities Finance IT at Dresdner Kleinwort and Global Head of Prime Brokerage Technology at RBS Markets. He also held roles at Merrill Lynch and HSBC Global Markets, where he was the Blockchain lead in Markets Operation. Additionally, Martin worked for the R3 CEV Blockchain collaborative on product development and has published two papers on the topic: Blockchain And The Nature of Money, and Bridging the Gap Between Investment Banking Architecture and Distributed Ledgers (R3 CEV Research – Mar 2017)
You could at least link to the document you are talking about:
Thanks for the suggestion, Ben. The link is now included.
Using that logic you could argue that computer solves “heating of the processor problem” It didn’t exist before computer. Or that Internet solves network load balancing problem that didn’t exist before internet. Bitcoin solves central authority problem, double spending is just the side effect you need to deal in order for the entire solution to work
Why exactly do you think the existence of a central authority is a problem? and who do you think it is a problem for?
Considering why a central authority can be harmful: Despite making it slower and less more expensive to conduct transactions (superficial reason everybody states) there are deeper problems it solves within communities. Just imagine one scenario: You are living in an autocratic environment and decided to piss off the ruling individual because you unveiled one of his corrupt actions. With multiple hours he freezes all your assets, so you can’t even flee the country anymore. Having a decentralized currency on your side will at least help you to stay liquid. Yes, coinbase accounts have been frozen, but that why the safest way to own cryptocurrencies is not through a third party but through a bitcoin core wallet. So if I would be that guy, I would be hella happy that I still have liquidity. I know people will argue “that is an extreme case” but it is also just one of hundreds, in which this technology strengthens indiviudals.
Don’t you think the first thought of this unnamed autocrat is simply to arrest you and throw you in prison?
Technically you would be liquid in Bitcoins but I am not sure how much help that would be.
Or think of the other way. You living in a democracy and reveal the corrupt politician. He not only flews the country but gets away with ill gotten gains because there is no central authority controlling Bitcoin.
Without discounting the possibility that certain technologies do not solve a problem, Bitcoin is not a good example. Here are just a few problems Bitcoin solves:
My wife needed to transfer some money from Mexico to the UK. Normally, she does this through a wire transfer that passes through banks in Mexico and the UK, incurring fees from both banks and a marked-up exchange rate. The transfer normally takes a few days to clear. Now, she uses Bitcoin to make these transfers, which clear within minutes and save her about 10%.
Mind you, she is fortunate enough to have a bank account. There are billions of people worldwide who do not. They would have had to go through Western Union at an even more extortionate rate. Now, unbanked people can hold and transfer funds using only a smartphone. Bitcoin not only solves the double-spending problem; it allows users to transfer funds in the absence of any financial infrastructure whatsoever, all with complete transparency.
Of course, as with any fiat currency, you are also depending on the government to implement sound monetary policy. Just ask the people of Venezuela or Zimbabwe. Bitcoin is not without volatility, but if I were from one of these places I would sure want some.
I could go on and on about the different problems Bitcoin solves, not to mention even more promising blockchain technologies such as Ethereum smart contracts.
I would be interested to hear your thoughts.
Thie following is not meant to be a defence of conventional banking or banking technology (both of which have considerable scope for improvement).
We are asli drifting away from the orginal topic a little but since you have aent me auch thoughtful comments, i have attempted to answer them.
I am glad your wife she has found a good way to transfer to funds to Mexico, It would be interesting to a see a like-for-like comparison between a conventional transfer and one that has bitcoin in the middle ie one that starts with pounds in a UK bank account and ends up with Pesos in an account in Mexico.
There are significant (and generally growing) mining costs, and even they do not reflect the full economic cost of mining + I imagine there are costs for the exchange from pounds to bitcoin and bitcoin to pesos.
You may have also noticed some of the problems with Bitcoin processing in recent months, with transactions not paying sufficient fees taking at least a week to be processed, if not longer.
Doing a very quick web search I see you can do same day conventional transfers at relatively low cost. I can send you some rough calculations but the true economic cost of just mining works out at about $15 per transaction.
Bitcoin is not an easy option for tbe unbanked because very few. people use bitcoin for day-to-day, let alone get paid in bitcoin.
If you are interested in my thoughts on the relative merits of blockchain/DLT/smart contracts have a look at my paper on the topic of applying the technology in capital markets.
On the question of countries with high inflation you may be interested in something i wrote on the topic.
Btw – you don’t seem to have explained how the double spend problem arises in conventional banking and how bitcoin solves the problem.
Fintech I think wrongly over the recent years has been associated with companies who effectively are using the existing rails through API with a more customer centric interface. The reality is very little has been done at the B2B or inner bank solutions to solve some of the major challenges banks and financial sectors face on daily basis. To a great extend, this has been the version 1.0 and in the near future focus and investment will move away to income generating and value adding proposition that won’t require substantial investment as part of their acquisition in order to deliver a promise of revenue in the future.