Getting Out of the (Fin)Tech Bubble

I have been traveling to Washington, D.C., to discuss innovation and financial services for more than two decades. On the last few trips, I have joined with the team at Restive Venture and toured the nation’s capital with a group of very eager, very smart entrepreneurs from their portfolio. Read more about the day here

As I have observed in the past, because the companies that join this particular tour are so early in their journeys, regulators tend to be a bit less guarded than they are with even slightly later stage businesses. Two things jumped out on this year’s tour: (1) FinTech, at least for purposes of generating excitement among policy makers in D.C., is over; and (2) there is keen interest in businesses applying new technologies to make service businesses more efficient.

FinTech is Over! 

Having made this trip so many times over so many years, the nature of the reception itself is revealing. In year’s past, for example, FinTech CEOs were greeted by the President. They were featured by the Secretary of the Treasury in roundtable discussions focussed on how technology can improve financial access and inclusion. Measured against the highs of the past, the degree of engagement and the tenor of the conversations has changed.

In the past, there was a sense that policy makers and regulators in D.C. viewed technology as a tool for achieving long held goals for reducing the cost of access to financial services, increasing the fairness of the financial system, and even policing the misuse of the system by criminals and hostile state actors. Although there was some variation across agencies—e.g., more suspicion among bank regulators to technology housed outside of the banking system—policy makers were open to the use of new tools to solve old problems. The tone today is far more grounded. Policy makers want evidence that technology can solve actual problems while meeting regulatory demands. 

In retrospect, the shift in attitude should have been obvious from the preparation for the trip. In year’s past, Restive’s day in DC included the nation’s federal bank regulators. Last year, twenty staffers from one of the agencies joined. This year, no one from that agency or any of the other bank regulators joined the sessions.

Given the issues that surfaced within the industry earlier this spring, that decision could be justified purely on resource allocation grounds. But the unwillingness to meet with innovators reflects something more than just that. I didn’t quite put my finger on it until I framed a question to the illustrious former regulators who agreed to meet with us in lieu of the current occupants of those offices: on the spectrum from Hunter S. Thompson to Taylor Swift, D.C. is full on HST, why? One of our panelists gave a thoughtful and provocative response—Sam Bankman Fried.

Living in the “tech” bubble of Northern California, I was taken aback. I don’t think of SBF as a FinTech entrepreneur, and the crypto community occupied a very different space from what I think of as FinTech. But those swim lanes, our former regulator friend explained, are not as clear in DC as they might be in San Francisco. In promoting crypto in DC, SBF made many of the same claims that FinTech entrepreneurs have made for decades—i.e., that technology can reduce the cost of providing financial services, bring more people into the system, and address systemic racism. Progressives had long felt that these claims were overstated for more traditional FinTech, and the exposure of SBF as a fraud has enraged them to the point that they have stopped listening. 

Upon reflection, it is also clear that the label FinTech carries other baggage as well because of the association with “tech.” This, too, should have been obvious even from 2851 miles. Northern California is the canonical “tech” bubble, and it can be hard to see how others perceive it from inside that bubble. Where most within that bubble see progress and tend to overlook the flaws and self-contradictions, policy makers in D.C. have a more critical take. 

Policy makers in D.C. see a churlish and hypocritical community that claims a moral superiority over the capital and much of the country but that is as quick as any to look to D.C. for help when problems get too big, too fast for “tech” to control. Just this spring, a panic among the venture community and the companies it has nurtured led to the stunning demise of industry’s bank, and when it became clear how disastrous the demise of SVB was, the venture community demanded that bank regulators reopen it even at a cost to the rest of the country. At this point, many in D.C. view “tech” and “technologists” as modern day snake oil salesman who promised one thing (i.e., flying cars) but delivered another (i.e., fake news and dance videos). 

All Hail… Next Gen Fin Serv and MES?

Some might argue that the FinTech label is worth rehabilitating. I’m not among them. Rather than attempt to revive it, I am prepared to let it go. The criticisms framed above, if slightly overstated, aren’t wrong. I have managed to avoid investing in the worst of the worst. But companies in which I invested have collapsed, and others have been accused of mistreating their customers. Although some amount of failure is inevitable in venture investing, I can appreciate the fatigue. 

Moreover, I think defending the label distracts from the real task—demonstrating how technology has brought real and quantifiable benefits to consumers and businesses across the United States. We know from the empirical work done by Melissa Koide and the team at FinRegLab (as well as others), that innovations in underwriting have expanded access to credit, helped to eliminate overdrafts, reduced the cost of remittances, and expanded access to electronic payments for millions and millions of people. Rather than try to resurrect the corpse, I’ll put my torch to the pyre. 

Doing so, however, raises the question of what follows in its wake. I see two types of businesses rising from the ashes. The first is boring but important—Next Gen Fin Serv. The second is a bit messier and doesn’t sit entirely within the category of Financial Services but embraces some of it—Machine Enhanced Services.  

Next Gen Fin Serv businesses solve the problems that generations of companies have been solving—payments, advice, credit, insurance. They do so with modern technology that is better, more compliant, and cheaper than the companies that have come before it. To take one example, Unit is doing the same things that FIS and FiServ and Jack Henry have done for decades. It helps banks open accounts and process transactions for their customers. It may be possible to distinguish precisely how Unit’s tech stack compares to any of the above, but the distinctions get very fine, very fast. 

The second category is a bit more nebulous. These businesses have the hallmarks of the businesses highlighted recently by Paul Krugman. The two key ingredients are the use of AI, either in the form of machine learning or large language models, to eliminate rote but necessary tasks in the delivery of services. These businesses fall inside and outside the traditional confines of Fintech. Four business in the Restive Portfolio fit this description: SPRX, a business using generative AI to help companies apply for R&D credits; Brico, a businesses that use generative AI to apply for and maintain various licenses; Noodle.Shop, the GenAI powered assistant for solepreneuers that is now supporting people running everything from single lawyer immigration law firms to single therapist counseling practices; and FairPlay.ai, which uses AI to manage auto-decision making and is increasingly serving as as the copilot for underwriters. And, my wife Cait, and I have invested in one doing the same for litigators—FileRead, which takes a first pass at a discovery record to identify hot documents and key witnesses and build case chronologies.

I admit that “Next Gen Fin Serv” and “MES” don’t have the same ring as fintech but neither does “Generative Pre-trained Transformers”. Don’t underestimate the power of acronyms and repetition!

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This was a harder trip than some that I have taken to D.C. It is nice to be feted, and there was precious little of that this year. But I am as optimistic as ever about what technology can do to improve the delivery of financial services and, frankly, services generally. There is a ton of room to build, and it is good to get out of the bubble once in a while.