Robocop vs. Terminator in Fintech; Comparing DeFi originations to Digital Lenders in the early years

Future of Finance | Lex Sokolin | Aug 27, 2019

I'terminoator vs robocop - Robocop vs. Terminator in Fintech; Comparing DeFi originations to Digital Lenders in the early yearsve got a gentle, data-backed story this week inspired by a great distinction made in this Techonomy article by the Chief Digital Officer at Schneider Electric. The thesis tracks three key lessons from attempting to bring large companies into the 21st century: (1) transform the core of your business instead of fumbling around at the edges, (2) digitize your processes and separately figure out a distinct digital model, and (3) catalyze a digital ecosystem from the new model. You can think about the distinction as either taking the existing business and slowly swapping out parts from human to machine (e.g., like RoboCop), or building the robot from scratch utilizing the latest platforms, markets, and artificial intelligence (e.g., like Terminator).

This distinction is helpful in assessing how financial incumbents are performing, and why the Tech firm approach to Finance keeps is different from the traditional model. Goldman's credit card distributed through Apple looks a lot like RoboCop to me -- same old, but in a tech wrapping. But Goldman's approach into the market with Marcus, with digital lending and neobanking at the core, feels a lot more like Terminator. This is partly why Lloyds' announcement about launching a roboadvisor in 2020 is boring -- too little, too late, while Softbank plows hundreds of billions into neobanks, neoinsurers, digital lenders, and artificial intelligence.

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Anyway, here's the data backed part. If you are focused on Fintech and building out digital, in whatever form, you are on the right track. A recent report from EY looking at the investment preferences of mass affluent and wealthy clients paints the picture clearly.

Just three years ago, only 18% of investors were using mobile apps to manage their money -- that number is now 40%. Face to face interactions have decreased rapidly, from 30% to 16%. But so is Web-app use! Phones have become the home for most of our attention, and financial activity is no exception.

They are our preferred method for dopamine delivery, and transactional activities like angry comments on Trump videos and free stock trading on Robinhood are a natural fit. More considered advice delivery -- things like setting up a trust, dealing with the financial implications of divorce, tax structuring across jurisdictions -- still benefits from at least 30% human interaction.time spent TV vs mobile - Robocop vs. Terminator in Fintech; Comparing DeFi originations to Digital Lenders in the early years

But mobile isn't the only growth platform for interaction. Check out the expected rise in chatbot and voice-first interactions below. People have now gotten enough smart assistants that there is an expectation of improvement in the quality of their applications and services. Today, less than 2% of respondents prefer machine assistants as a primary communication channel, but that preference rises to an expected 9% in the future. People want to talk to their machines, Star Trek style, about financial services.

The final bit I want to showcase is just how good of a "Terminator" decentralized finance is becoming. Numbers differ of course depending on how you measure things, but charts below should be directionally correct. I took the annual growth of digital lending globally in the early years, and normalized against the growth in decentralized lending. The products are different -- all of DeFi today is collateralized, while digital lending involved actual underwriting risk (i.e., credit risk, not asset volatility). Yet still, it is helpful to see the two as comparisons, with the conclusion that DeFi is growing faster despite the alien nature of its underlying technology. The sources are Autonomous NEXT and Loanscan.

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Similar things could be said of the Initial Coin Offering boom/bubble, comparing it to much slower but more sustainable growth in Fintech venture capital. Moderating growth against a correct regulatory approach is the right answer -- but innovation does often outpace the existing ruleset. It seems inevitable to me that DeFi lending will need to back into regulated banking and lending entities, or at least partner with them, to avoid being chased around or shut down by the authorities. Enabling tax arbitrage is not a long-term sustainable business model.

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