What Fintech Means for You
How financial technology may alter your relationship with banks and brokers over the next 10 years
Editor’s note: This is the second of two articles marking the10th anniversary of financial technology, or fintech, and discussing innovations that may change how we interact with money. This article is about the growth of decentralized finance (known as “DeFi” for short) and the mainstreaming of alternative investments.
A decade has passed since a burst of innovation began to push fintech into the mainstream. Banking on a smartphone, sending cash via peer-to-peer payment services and using automated portfolio managers were once exotic, relatively niche services then, but are commonplace today.
What changes are coming in the next 10 years? Fasten your seatbelt as we take you on a tour of tomorrow.
Wider Access to Alternative Investments
"Alternative" investments — a broad category that includes collectibles like wines, cars, art, stamps, coins and even baseball cards as well as real estate, natural resources and infrastructure projects — have grown more popular over the last decade, although minimum-investment rules have kept many small investors on the sidelines.
New fintech firms, by offering the ability to invest in fractional shares of alternatives, can help that investment class go truly mainstream and usher in three changes in how many people invest.
First, direct access to alternative investments will likely become more common at large financial service firms. Today, investors seeking access to alternatives usually have to open an account at a specialized service such as an art investing platform or a real estate crowdfunding firm. Fintech may enable investors to buy and sell alternatives under the same login as their main brokerage account.
Stock Tips from a Robot
Second, robo advisors — online-only financial advice services that manage clients' investment portfolios with little to no human interaction — may start to incorporate alternatives into their robo portfolios.
"Alternatives will be a part of the standard investor portfolio."
The wall currently separating alternative and traditional managed portfolios seems to be poised to collapse, and automated advisors will include the full investment universe. A sign of this trend is the robo advisor Betterment's recent acquisition of a crypto portfolio manager.
At the same time, an increasing number of jurisdictions are likely to lift at least some of the rules that determine who qualifies as an "accredited investor" authorized to access certain kinds of alternative investment products.
While these rules vary by country, they typically require individuals to have a high annual income (in the U.S., $200,000 for an individual or $300,000 for a couple), a significant net worth ($1 million, not including primary residence) or a professional certification (such as a Series 7 or Series 65 license).
According to the most recent SEC data, about 13% of U.S. households in 2016 had someone who qualified as an accredited investor. Critics contend that such rules inappropriately restrict access to certain types of products.
Alternative-investment boosters expect that, over the coming decade, some jurisdictions will lift many of the restrictions (by, for example, replacing the net worth requirement with an online financial literacy test) or to phase them out entirely.
"This coming decade will see alternatives go mainstream."
"This coming decade will see alternatives go mainstream and (cause) a shift away from the classic sixty/forty investment philosophy," said Milind Mehere, founder and CEO of YieldStreet, an online market for alternative investments. He was referring to a common strategy of investing 60% of one's portfolio in equities and 40% in bonds.
"In 2032," Mehere added, "I see my personal portfolio as a blend of stocks, alts, crypto, commodities, cash, taxes and trusts all delivered in a seamless experience via a super app. Alternatives will be a part of the standard investor portfolio."
DeFi Is Small, but Poised to Grow
Outside of the traditional financial industry, advances in crypto technology are fostering decentralized versions of financial products (known as "DeFi" for short). DeFi protocols such as Aave, Compound, and Uniswap use software to offer different financial services — such as lending, trading and insurance — for cryptocurrency users.
DeFi protocols are not like traditional large banks or fintech companies. Instead of leadership drive by a board of directors and the CEO, major changes to DeFi protocols generally can only be made if the majority of the community votes for a change.
DeFi currently is used mostly for transactions performed entirely on a blockchain, such as trading cryptocurrencies. Most other financial products need a real-world verification. Mortgages require credit checks and income verification, for example, while insurance needs a process to handle fraud allegations that end up in protracted, multi-year legal battles.
Over the next decade, look for DeFi to become more competitive with traditional financial services. It can go mainstream by improving the overall user experience and the ability of blockchains to work with real-world assets.
Centrifuge, Etherisc, and MakerDAO are three DeFi protocols working on projects to bridge the gap between blockchain and the real world, but the total value of assets on DeFi protocols that involve real-world interaction remains relatively small.
Innovation Beyond Imagination
Over the next decade, however, DeFi's advocates expect it to become more competitive with traditional financial services and real-world products — and allow wholly new ones.
"The real innovation that benefits consumers over the next decade comes not from dragging legacy business models onto a blockchain, but from the growth of new crypto-native DeFi solutions that can meet your real-life financial needs," said Lex Sokolin, the global fintech co-head at ConsenSys, a blockchain software technology company.
"Decentralized finance provides a novel, and likely superior, architecture to manufacture financial products."
"Just like all past transitions to new technology, there will undoubtedly be challenges as we explore the frontier," he added. "But decentralized finance provides a novel, and likely superior, architecture to manufacture financial products."
Key to Success: Simplify
To broaden its mainstream adoption, DeFi will need to be easier for consumers to use. Interacting with it today often involves navigating dense financial jargon and a platform that offers few instructions and limited help and lacks features such as a detailed trade-confirmation screen. Learning how to safely use DeFi products and how to navigate the industry's jargon can be very intimidating to crypto newcomers.
As DeFi overcomes these two challenges over the next decade, how would consumers benefit? In the developing world, DeFi can give billions of people an independent alternative to institutions run by authoritarian governments (which can seize citizens' assets without due process), shaky local banks and volatile currencies.
DeFi's value to people in emerging economies is evident in Chainalysis' global ranking of consumer adoption of cryptocurrency, which is dominated by developing countries.
A Change Is Gonna Come
Developed economies generally do not face the same instability challenges. There is a wide range of opinions regarding how (and how fast) DeFi will change the developed world over the next decade, but most of the tech pioneers and executives interviewed for this article concur that it is likely to create innovative financial products and experiences.
"Throughout my career in financial services, I have seen first-hand the limitations imposed on the industry by legacy rails," said Jarrett Lilien, president and COO of WisdomTree Investments, a fund-management company. "Not unlike the disruptive impact of ETFs on mutual funds, DeFi and blockchain technology are poised to redefine the foundational infrastructure of financial services — and the industry needs this kind of innovation."
As an example, Lilien said blockchain could enable people use gold or U.S. Treasury securities the way they now use cash — without having to carry the assets themselves.
The growth of user-friendly DeFi services over the next decade could create a new kind of competition for traditional finance.
What Is the Future of Fintech?
"A decade from now, if your company isn't interacting with the DeFi ecosystem — or crypto and blockchain more broadly — then your firm won't be considered a fintech company," said David Klein, founder and CEO of Commondbond, which finances solar energy projects for consumers and solar installers.
The four trends we have discussed — an advanced AI-based assistant, automation of day-to-day financial needs, alternative investments going mainstream and competition from DeFi services — represent only the biggest changes facing financial services. Many more are on the way.
The next decade may also see more embedded finance, in which retailers and other non-bank companies offer bank-like services such as extended payment plans; the issuance of digital currencies by central banks; and greater integration of government benefits into your financial accounts.
Your relationship with money will evolve with each such change.
"If you consider the first decade of fintech to be fintech 1.0," said Adam Nash, cofounder and CEO of Daffy, a service that automates charitable giving, "then fintech 2.0 over the coming decade will move beyond creating online versions of traditional financial services and toward fundamentally new ways to interact with your money and your finances."