Time for Fintech to Stop Thinking Small

By Loren Picard for American Banker

A Potemkin Village is something with a showy facade intended to divert attention from an underlying embarrassing condition. The phrase was originally coined to describe an allegedly fake portable village built in Russia by Grigory Potemkin to impress the Empress Catherine the Great as she traveled through Crimea.

Now, we’re seeing Potemkin villages flourish in fintech: Technology is impressive on the surface; underneath, it offers little competitive value.

At a recent fintech conference, for instance, I found myself becoming increasingly skeptical about online lending pitches after listening to speeches, watching demos and holding meetings.

While platform after platform boasted of innovative proprietary technology, the majority of the technology on display appeared to fall squarely in the nonproprietary data processing category. If there are proprietary solutions hidden within the platforms, the industry participants are not showing their hands. Furthermore, if all these platform solutions really were proprietary, we would not be hearing about new me-too lending startups every week.

Some of that has to do with a maturing market. Automating income verification, tax filings and bank account cash flows was once impressive. But now, there are many firms that specialize in such activities and any financial intermediary can integrate this off-the-shelf technology.

As an industry, we need to develop solutions to hard fintech problems rather than touting technology that is already commonplace. This is what successful technology companies like Google, Facebook and Amazon do repeatedly. Using proprietary technology, they create solutions for customer needs.

To pull off the feat, fintech can learn lessons from the development of artificial intelligence.

AI has been able to conquer really important, hard-to-solve problems in technology, resulting in truly impressive functions. Think facial recognition or opening doors with robotic hands. AI researchers refer to these big problems as “AI Complete.” We need a financial industry effort to identify “Fintech Complete” problems — the stuff that solves hard problems and creates massive value for customers.

Take Amazon, which allows you to buy an audio book and an e-book of the same title, for instance. One feature that customers love is the ability to switch from the audiobook to the e-book and pick up right where you left off. Or look at the pharmaceutical industry. It creates value almost entirely through proprietary creations: vaccines, maintenance drugs, even cures for erectile dysfunction.

What would be equivalent Fintech Complete problems? One idea is how to optimize a borrower’s credit card exposures — or any kind of debt — based on his or her spending habits and the awards and/or miles the cards accumulate. Can a platform crunch data to both move points around and switch the credit card used to pay for something in order to limit interest cost and maximize rewards? Something like this should be possible.

Another FinTech Complete problem could be determining how a person should invest if he or she has a specific type of illness like cancer or diabetes, or if the disease runs in the family. Could life insurance be tied into an investment program based on longevity predictions and the need for medical support derived from private genome sequencing? Think of how powerful this kind of predictive algorithm could be in helping consumers decide how to save and spend.

To identify more FinTech Complete problems, we should set up an industry think tank that includes behavioral economists, policymakers, marketing researchers and others. The think tank doesn’t have to identify the how, only the what. The how — actually creating a solution — is open to all competitors.

If the fintech industry truly wants to stay relevant, it needs to win at identifying hard problems, solving them and then scaling them. Fintech loses if it creates a simple widget or app that is scooped up by the megabanks.

Rather than turning out to be just the R&D lab for traditional financial institutions, fintech needs to create its own Googles and Facebooks. Let’s make sure we build real villages rather than Potemkin ones.

Loren Picard is managing executive of G5, a development and consulting firm in the marketplace lending industry focused on creating products and platforms for financial intermediaries and investors.

First appeared at American Banker