Like many in the fintech space, my ears perked up a few weeks ago when Dan Schulman, the CEO of PayPal, declared to Jim Cramer on CNBC that the financial services (and the increasing amount of technology driving it) will change more in the next five years than it has in the last 30.
“You have to, to serve these markets, re-imagine how money can be managed and moved because there’s going to be more change in the next five years in financial services than happened in the past 30,” Schulman told “Mad Money” host Jim Cramer.
Change is the Only Constant
At first glance, this is a bold statement when you consider how much change we have seen in payments and applications and data management. Indeed, the mere existence of PayPal—and eOriginal, for that matter—is an indication of how much change has already happened.
Marketplace lending is a perfect example of some of the change we have already seen. Beginning with Zopa in 2005, Prosper in 2006 and then Lending Club and OnDeck in 2007, these tech-savvy disruptors have rapidly risen in prominence, shaking the foundations of traditional financial services institutions. Indeed, tech companies are slowly evolving into financial service companies as they see the opportunity to take the technology beyond just a preferred online customers experience.
There is no better example of this than Upstart. As we mentioned previously, earlier this year the marketplace lender received a no-action letter from the CFPB. This is significant as it recognizes Upstart’s value and validity of the use of alternative data to make lending decisions and provide borrowers with improved rates. Additionally, the marketplace lender also completed its first loan securitization, which is a key indicator of the company’s credit performance as well as a maturing industry.
Even in Mortgage…
Even in mortgage, the most traditional and regulated line of financial services, we have seen an extraordinary level of tech evolution in recent years with Quicken using Rocket Mortgage to shoot up as the largest non-bank originator in mortgage, with plans to grow even more rapidly through technology beyond borrower applications.
This has resulted in growing pressure on traditional banking institutions to evolve their mortgage technology. Earlier this year, business school professors at the University of Chicago, Stanford and Columbia reported U.S. banks are paying a sizable price for failing to modernize and losing market share in residential mortgage.
As noted in National Mortgage News: “By sorting the nonbank lenders into two categories, the researchers were able to isolate the effects of technological differences from regulatory factors, which they concluded were the biggest reason that banks lost substantial market share between 2007 and 2015.”
However, the message seems to be getting through. In 2017, we heard time and time again that digital processes are enabling originators and their partners in the secondary market to realize scale, access capital faster and reap the benefits of a digital closing process and electronic promissory notes. If you would like to read more about these benefits and the key components of the second phase of the digital mortgage progression, please click here.
Embracing the New Digital Reality
While these markers represent significant change, they are also clear indicators of how much growth and evolution is still possible. Moreover, it is evidence that Schulman’s statement is not as assertive as it may seem on the surface. Indeed, he was focused on payments, which is just a sliver of financial technology. Specifically, in his comments he noted the opportunity to, “re-imagine how money can be managed and moved.”
For all that we have seen evolve and change in fintech over the last 30 years, the fact is that we have barely scratched the surface of most financial services processes, and most of the change we have seen has been superficial and customer facing.
If you expand money to include the assets and data behind the financial services ecosystem and the movement of capital, there continues to be enormous areas for not just technology adoption, but also innovation. The good news is that the message is getting through in mortgage and across the asset classes that the must adopt technology. Additionally, there are also a growing understanding by technologist the innovation must me the highest standards and gain the trust by all parties of a financial transaction.
From originators to warehouse lenders, custodians and players in the secondary markets, an auditable chain of custody of the “digital original” creates trust in transactions by providing certainty in how assets are created, transferred, and maintained. In this digital ecosystem, lenders and buyers need the confidence, compliance and visibility provided by technology and digital processes.