Despite the noise that has surrounded the US financial services industry over the past decade -- the great recession, the advent of cryptocurrencies, the explosion of fintech products -- our financial systems look remarkably similar to the mid-2000s. It is still expensive to be poor, securitization of high-risk assets are an everyday occurrence, and cryptocurrency is becoming more regulated and less decentralized. Even new technologies have primarily generated marginal improvements in efficiency rather than systems change.
This holds true particularly when looking at some of the most well documented shifts in the industry: mobile banking, robo-advising, and trading & investing accessibility. These improvements represent some phenomenal products from Robinhood to Stash to Wealthfront. However, even in these instances the finance industry is playing catch-up to broader trends of mobile-first and disintermediation that have disrupted industries since the dot-com era.
In fact, catching up seems to be a recurring theme in the US financial services industry. Today mobile-money might as well be universal throughout Africa, as the result of platforms like M-Pesa, Paga, and Zoona. Yet in the US, the consumer market is still massively underdeveloped with Venmo / PayPal and SquareCash as the only players of note. While these platforms are successful in progressive urban centers, they are still very far from universal adoption with respective estimates of 10M and 3M MAUs each.
Similarly, in Europe fintech startups Monzo and N26 are challenging the world's largest banks with their mobile-only infrastructure. Both companies have well over 500,000 active users and are in hyper growth. It’s the same story with Revolut and TransferWise, which have fundamentally altered the foreign exchange and remittances industries with their products. Once again, in the US market there are no at-scale players in these spaces. The more likely outcomes are that US consumers will adapt European fintech products or that US incumbents will buy European fintech companies.
The final blow comes when looking at the top awards for innovation in finance where the United States is seldom to be found. For instance, in 2017 there was not a single US startup or institution in the BAI Awards or The Financial Brand top innovations.
The big question mark in all of this is ‘why’. Why is the US, not only the world's largest entrepreneurial & VC ecosystem, but the world's largest financial services player playing catch up when it comes to financial innovation? This boils down to three primary causes:
By nature, regulation favors incumbents and punishes newcomers. Since regulation is crafted around existing infrastructure and often requires significant financial and HR resources to navigate, startups often find themselves boxed in at all sides. However, if you were to ask any regulator if their goal is to stifle innovation and progress, their response would be a vehement no. Instead, this is simply an unintended consequence of protecting consumers from big industry players.
Protecting consumers is entirely understandable. However, where the US approach falls flat is in implementing context into the regulatory framework to provide the necessary scrutiny of ‘at-scale’ institutions while giving startups the space they need to experiment, make mistakes, and grow. Yet the leading nations in financial technology: UK, Singapore, and Hong Kong, have all found a way to implement this through ‘regulatory sandboxes’. Regulatory sandboxes allow fintech companies to test their products in the marketplace with controlled conditions and minimal regulation. This enables companies to build a product based on real user feedback and take greater risks in innovation. The UK’s Financial Conduct Authority began implementing a regulatory sandbox a few years back and has recently launched a global application of its regulatory sandbox. In the United States, Arizona made headlines in March by becoming the first state to explore a similar structure, but this program will not be live for some time and other state & federal actors have been slow to follow suit.
Systems like these need to be implemented at scale in order for the US to become a leading fintech innovator. While this is not giving startups carte blanche, it gives them enough to get their legs and build more disruptive products.
Efficiency vs. Systems Change
If you look at the litany of financial technologies that have been released in the states over the past decade, the majority of them focus on efficiency. These products have increased the speed of banking, opened access to financial information, and reduced the number of layers to acquire assets. I look at these as marginal improvements. They optimize the customer experience but they do not fundamentally alter the system itself. They do not attack and re-evaluate the core tenets of how banking, investing, and saving work together today. They do not create entirely new models as some of the products developed in other regions of the world do.
Part of this is tied to the ‘too big to fail mindset’. Our incumbent institutions are so strongly entrenched it’s hard to even imagine different structures. This mentality limits the products created and the flow of capital from VC’s toward true moonshot ideas. This can also be attributed to the nature of venture capital funding in fintech. Despite being a high cost-to-entry industry, the expectation in fintech remains to deliver outsized returns in a very short amount of time. Often this attitude results in focusing on marginal improvements and quickly pouring capital into marketing and user acquisition. By comparison, industries like biotech are given far more runway to create, test, and garner regulatory approval, which many find a necessity. Taking a similar approach to financial technology investments would go a long way in spurring more innovation in the space.
When entrepreneurs and investors shift their mindset from efficiency gains to systems change, it will catalyze a greater rate of change in the financial sector.
Don’t focus on the 10%
The vast majority of financial platforms developed in the states focus on the same demographic: 'the 10%’. This essentially comprises the wealthy and upper middle class by household. There is also an implicit assumption in this about the rest of the population’s ability to be a valuable paying customer. This is a mistake. Today we live in a society where basic financial literacy is in question, where over 45% of American adults have less than $400 in retirement savings, and where underserved consumers spent over $173.2 billion on fees and interest in 2016 according to the Center for Financial Services Innovation (CFSi). This isn’t an indictment on the average consumer but rather suggests that our system has deep flaws that must be addressed.
As a result, this is the customer and the market that will drive the next wave of innovation. The most financially viable products in the world are the ones that add real value, dating all the way back to the printing press. This focus is a big reason why financial products in Africa, the Middle East, and South East Asia have out-innovated the United States. These regions have focused on products that level the financial playing field and in doing so have developed their own marketplaces. M-Pesa is likely the most well documented of these, but comparable ideas and companies are sprouting up and scaling in their respective markets across emerging economies. In order to reignite innovation, companies in the US need to shift their focus to serving and empowering this customer.
In many ways, it makes sense the US is behind when it comes to financial innovation. However, with this realization also comes massive opportunity. The next decade is poised to be one of the most disruptive in history when it comes to financial services, and the US is far from out of the race. With the right changes the US can transition into a leading economy in the sector.
Some of these changes are already happening. For instance, large financial institutions have started treating startups as partners or vendors rather than competition to be eliminated. Similarly, more funders and investors are beginning the see the value in building products for traditionally ignored population segments: from focusing on Middle America to products for immigrants and minorities. These investments are already beginning to unlock value and build new marketplaces. However, in order to not only catch up, but excel in the financial services sector, the rate of change needs to grow. This requires a shift in our regulatory framework, more moonshot companies looking to fundamentally alter our systems, and a deeper focus on serving the ‘90%’ consumer.
The current trend of rising wealth inequality is untenable for society in the long run. In the next 50 years, our systems will have to shift from increasing the wealth divide, to bridging it. With the right infrastructure and strategy, American financial services can lead this transformation.
Samir is a social entrepreneur, writer, and connector committed to bridging the public and private sectors by bringing together diverse communities to eliminate the access gap. Samir co-founded and is now dedicated full-time to Esusu - a platform designed to empower users to better save, access capital, and build credit through community savings.
Prior to Esusu, Samir co-founded Transfernation, a nationally recognized 501(c)3 non-profit which uses technology to ensure excess food from events goes toward underserved communities across New York City. For his entrepreneurial endeavors, Samir has been recognized as a WEF Global Shaper, Global Good Fund Fellow, Dalai Lama Fellow, Resolution Fellow and was the recipient of the Jefferson Awards Foundation National Public Service Award. In addition to his work as a social entrepreneur, Samir has worked for LinkedIn, The United Nations, Venture for America, and various non-profits in the New York City area.
Outside of work, Samir enjoys baking & cooking, staying active, travel, writing, and spending time with his family and 4 younger siblings. Samir received his Bachelor's of Science from New York University's Stern School of Business.