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Feb. 1, 2018

Opportunities, challenges in fintech market

Mobile financial technologies help improve financial health because the enable instant access to finances and real-time movement of money.

By Brian Peters

Financial Innovation Now (FIN) is an alliance of leading innovators promoting policies that empower technology to make financial services more accessible, safe and affordable for everyone. Members include Amazon, Apple, Google, Intuit, and PayPal. These companies are at the forefront of America's economic growth. They collectively employ over 700,000 people and spend more than $40 billion annually on R&D. Their technologies enable the creation of whole new businesses and industries, and they empower individual consumers with tools to live more productive, healthier lives.

Mobile financial technologies, such as digital wallets and peer-to-peer payments, help improve financial health because they enable instant access to finances and real-time movement of money. These technologies enhance financial capability directly, and they also enable traditional financial entities to make depository accounts more manageable, and help users to avoid high-cost alternatives.

The Federal Deposit Insurance Corporation (FDIC) found that in 2015 nearly 25 percent of American households remain unbanked or underbanked, but also found that "use of smartphones to engage in banking activities continues to grow at a rapid pace..." and "this growth presents promising opportunities to use the mobile platform to increase economic inclusion." The FDIC has also found that consumers agree that mobile banking services help "to address weaknesses in traditional banking," particularly by helping consumers "reduce fees, better track their finances, and improve on-the-spot decision making."

For those consumers who still rely on cash, companies like PayPal and Amazon are enabling users to add cash to their accounts using an app, digitizing that money for online transactions. PayPal recently partnered with Acorns to allow PayPal users to take better control over their financial lives by saving and investing.

While the mobile internet is improving access to money, the speed of money can also matter, particularly for the half of Americans who live paycheck to paycheck. It does not make sense that, in our modern era of instant communications, it can still take up to five days for a payment to clear. This unnecessary delay causes many Americans to turn to high-cost alternatives. People should not have to choose to pay twenty dollars to access their money quickly rather than run the risk of late charges or overdraft fees. Real-time payments clearing would help to alleviate these problems. Many other countries already have real time payment systems, including Mexico, the United Kingdom, India, and Singapore.

Financial innovation has also begun to solve similar access problems for small businesses. The costs of payment systems, reputation building, and loans have often excluded small businesses from full participation in the financing market. But now, new technologies are allowing small businesses (and micro-businesses) and workers to more easily take instant digital payments from customers online and on Main Street. Amazon, for example, supports millions of third party sellers, many of which are small businesses. Moreover, services such as "AmazonPay" and "Pay with PayPal" are tools that help small businesses earn credibility, expand their customer base, and accept card payments safely and securely online. Small businesses are also using innovations in payroll technology, inventory management, sales and data analytics, shipping logistics, and rewards programs, all of which make basic elements of running a business faster and less expensive.

The integration of the above technologies into a small business operation can facilitate fast and convenient access to capital. For example, Intuit's QuickBooks Capital platform enables small businesses to share financial information from their QuickBooks accounting software with financing partners so the small businesses can easily and quickly apply for the financing they need to grow their businesses. PayPal utilizes merchant card payment information, in partnership with a commercial bank, to facilitate working capital loans for small businesses. The use of these alternative data sources is valuable when assessing the whole picture of the small businesses that may not have access through traditional sources.

Traditional small business lending processes are paper intensive, manual, and time consuming. Technology integrations, by contrast, enable small businesses to utilize their data in the application and underwriting process, enabling streamlined processing and typically more favorable outcomes for the small business (eg. lower rates, higher rate of approvals). Financing is made available to small businesses when it is most needed, and funds are made available immediately or within one business day. Intuit's QuickBooks Capital platform has helped over 10,000 small businesses gain access to over $700 million in capital, and its own loan product, in a limited rollout over the past 6 months, has already funded over $42 million for small businesses; and, as of 2017, PayPal has loaned $3 billion to 115,000 small businesses.

This access to capital has benefited small businesses that typically are not able to obtain financing from traditional lenders. QuickBooks Capital is able to successfully fund small businesses that have less annual revenue, slightly lower FICO scores and are younger in business than that of traditional lenders. Similarly, an analysis of PayPal's working capital loan program found that between October 2014 and March 2015 a significant percentage of PayPal's loans went to businesses in counties that had lost banks since the financial crisis, and nearly 35% of these loans went to low-and-moderate-income businesses, versus 21% of loans from traditional retail banks.

Consumers are benefiting from a wide variety financial management software applications. For example, Intuit's Mint application, and its recently announced Turbo platform, gives consumers direct access to their financial information in one place, for free. These kinds of tools have helped millions of consumers and businesses create personal budgets, set savings goals, avoid unnecessary fees, find better offers and otherwise participate in the kind of simplified financial management that was previously available only to those who could afford a personal accountant.

There are additional benefits. Open data can enable efficient and more reliable tools that provide verification of account ownership or loan application information. Broader permissioned data access permits more and varying data points to be used to verify identity, speed account onboarding, and reduce fraud. Account verification tools enable consumers to access other financial products and services, including peer-to-peer payment services, in real time rather than by delayed verification options, such as micro-transfers.

Consumers are accessing many of these digital tools in app marketplaces, such as Google Play and the Apple App Store, and the vibrancy of these markets have dramatically lowered barriers to entry for thousands of entrepreneurs to innovate at scale and create new services and new jobs.

This benefit ultimately accrues to consumers, but businesses also benefit as consumers make better-informed decisions and obtain lower costs for products and services.

We believe financial services are in a period of significant transformation and these changes give policymakers in Washington an excellent opportunity to try new approaches that enhance economic participation and improve access. The benefits outlined above could be enhanced through a modernized financial regulatory structure that keeps pace with innovation and meets the needs of today's consumers and commerce.

Brian Peters is executive director of Financial Innovation NOW (FIN). His remarks are excepted from testimony this week to the U.S. House subcommittee on Financial Institutions and Consumer Credit.


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