Will growth of fintech be a positive thing

There has been much discussion in the business press lately about “Fintech,” or the rapidly emerging financial technology sector. Fintech describes a broad, loosely defined spectrum of financial services, all of which are offered over the Internet.

Basic banking services like loans, credit, and debit card accounts and peer-to-peer point-of-sale payment processing are offered along with traditional ancillaries like insurance products, brokerage accounts, and advisors. Less traditional products range from credit monitoring and repair to money itself in the form of cryptocurrencies Several of the dot-coms are startups, while others are owned or backed by industry giants.

Most commentary covers fintech as an investment opportunity; a new group of growth stocks to own as well as a growing sector of the economy. Other stories focus on Fintech as a potential disruptor to brick-and-mortar financial institutions, noting that those who aren’t expanding their electronic offerings internally are acquiring fintech companies outright.

Investment opportunities and growth are always welcomed, but I find fintech more interesting as a tool for economic development. Just as inner cities are known to be “food deserts,” where larger, conventional grocery stores tend not to locate, leaving residents to rely on convenience stores and the odd bodega, inner cities also tend not to have banks. Payday lenders charging confiscatory interest rates and liquor stores offering check cashing privileges tend to fill the void.

In the rural midwest, we are fortunate to have banks and insurance vendors in each county seat, and more often than not in most smaller towns. Third-world rural areas are often not so fortunate, requiring travels of considerable distance over non-existent infrastructure to conduct banking services. The combination of fintech and phone apps are already helping facilitate commerce in those markets.

To be fair, the financial sector, and banks in particular, have been leaders in the transition to online services. Between direct deposits and an online portal, I typically go for weeks, if not months, without seeing the inside of my bank. I was also banking online in the 1990s with Prodigy over my 1200 baud Hayes modem, but those accounts first had to be established at a brick-and-mortar bank, in person, with a handwritten signature. The recognition of digital signatures, combined with increasingly sophisticated, multiple-verification security measures have now enabled the establishment of online-only accounts without any physical presence.

Some insurance companies were also early adopters, having chosen online business models over local agencies. While the brick-and-mortar agencies distinguish themselves as having local agents and full-service offices, even those are now scrambling to expand their range of online services and mobile applications.

Another portion of the fintech sector is in investments. We are, by now, familiar with our Governor’s family business. TD Ameritrade, which recently merged with Charles Schwab is a leader among several online brokerages that offer an alternative to brick-and-mortar dealers and telephone bull-pens. Those also grew up alongside the internet, but the legacy brokers are offering an increasingly smart array of analytical tools that perform as “Robo-advisors,” utilizing algorithms and artificial intelligence to analyze, advise and execute trades.

There is yet a new generation of online brokerage tools that take me back to our economic development discussion. I have always been supportive of lotteries and gambling initiatives. I like the idea of a “voluntary tax,” but arguments that the best gaming customers are those who can least afford it have not fallen on deaf ears. For most of the past 40 years, it has bothered me that a person of modest means can purchase a lottery ticket with pocket change at any gas station or liquor store. That ticket is almost certain to lose, but the same person, wishing to purchase a mutual fund or a share of General Motors with an underlying value, must run a regulatory gauntlet. A licensed broker must first confirm his suitability and risk tolerance.

What’s more ironic is that before this discussion goes any further, I’m obligated to point out that securities are not suitable for all individuals. I do not sell investments or advice and past results do not guarantee future performance. I find it awkward that I need to say that, because you aren’t required to hear a similar shpiel from the cashier at Casey’s before you say goodbye to that twenty bucks you’re dropping on Powerball.

OK. Where were we? Enter the fractional brokerages. Companies like Acorns, SoFi, Robinhood, and Stash are answering the call by offering low-cost, convenient access to securities. The investments are sometimes limited to exchange-traded funds, but companies are increasingly offering fractional securities, providing opportunities to purchase expensive stocks on a budget with the convenience of a phone app. With Stash, for instance, you can own a stake in Berkshire Hathaway (Class B) for as little as five dollars, but don’t expect an invitation to the annual shareholder’s conference at that price.

Joseph P. Kennedy, the patriarch of the Kennedy political clan, once said that when he heard his shoe-shine boy giving stock tips, he knew it was time to get out of the market. That prediction worked out well for Joe. He avoided the crash of ‘29, but with all the current loose rhetoric about income inequality and complaints that the rising stock market doesn’t benefit all of us, I think the democratization of the market by the new crop of fintechs is potentially very positive. Let’s hope they can leverage a bit of deregulation to share market growth with our less developed communities and help rebuild the American middle class.