Will Low Interest Rates Spur FinTech Growth?

In art, form follows function, while in technology, progress follows policy.

News that a group of leaders hailing from the finance industry weighed in on regulation in FinTech, stating that collaboration should be a major theme among all manner of players – from startups to the most entrenched big banks – may hint at the shape of FinTech to come.

The clarion call came last week from a group of stakeholders that had convened at the World Economic Forum last at Davos in January.  The result? According to the Financial Times, a position paper that emerged from the Forum states that there is nothing less than an “urgent need” for assurance that innovation will not threaten “systemic stability.”  The warnings come from a team of executives, and industry regulators, that come from larger financial firms across the U.S. and Europe, from Deutsche Bank, Western Union, the Bank of England, and elsewhere.

That concern has far greater implications beyond discount rates applied to invoices.  The worry is that unchecked technologies may have unintended consequences.  Beyond the FinTech players themselves, there’s worry that the banks will be in such a scramble to play catch up with the newer upstarts that they will themselves be unwitting harbingers of systemic destruction. 

Baby steps are in the offing.  The list of suggestions from the paper (OK, actually, the paper’s contributors) include a forum to be created for both the public and private sectors – interested parties in FinTech, to be sure – to pinpoint where there is the most promise in the industry, and discussions on the use of financial data.  And, as has been the case for a while, one aspect of regulation would be a move toward a uniform set of codes that would be international in scope.

One tailwind might push the discussion to be deeper and even more urgent: low interest rates.  That’s right.  Low interest rates, which have been the mainstay of global lending and borrowing for several years.  The spread that traditional finance firms make on the traditional business may not be enough to keep things at the status quo.  The alternative is to innovate into better margins. The idea is that new business lines that could bring in new revenues (and, at some point, net income) should stir executives to look to technology for greasing some wheels.  The build or buy part of the equation is an unknown, but the impetus remains that some sort of collaboration is needed. 

The low interest rate environment also has a boon in store for the FinTech players too, as money will likely chase returns (valuations be darned, at least for the moment).  Perhaps online lending stands to benefit, as a conduit to banks refreshing their approach to extending credit to smaller firms.  Elsewhere, compliance issues will dominate, and so will insurance.  Necessity is the mother of invention, and in finance, the necessity is shaping up to be this: Innovate to stronger returns on capital, or languish as others do.