Let’s admit it: Fintech is a colossal disappointment.
When the word “fintech” was coined in the early 1990s, bringing together “finance” and “technology,” venture capitalists peddled lofty tales of the future. Money would zip around the world at the speed of light, with consumers surfing a wave of friendly apps, falling fees, and financial inclusion.
Instead, we got … Zelle.
While technology has transformed almost every industry in America, finance has been left largely untouched. Sure, we have ATMs and credit cards, but stocks still settle in two days, bill pay takes five days, and mortgages nearly two months.
This shocking lack of progress hit home for me recently while reading a new book on decentralized finance, or “DeFi.” DeFi is an emerging industry that uses blockchain technology and cryptoassets like bitcoin to build an alternative financial system.
The book features a copy of an old “money telegram” sent through Western Union in 1873. (You can view it here.) The telegram shows “CC Antoine” sending $300 to “Jason Ingraham” on August 25th of that year. The all-in fee at the time was $9.73, or a little over 3%.
Western Union is still with us today, so I went to its web site to find out what this same service would cost now. The company has a fun tool on its homepage that lets you “send money 24/7 around the world” with the push of a button. I used their tool to test the cost of sending $300 to someone else in the U.S., the way CC Antoine did in 1873. The all-in fee today? $39.
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Despite almost 150 years of technological progress — highways and airplanes, computers and the internet — the cost to send $300 across the country via Western Union has quadrupled!
Once you start to look, these signs of technological stagnation are everywhere. Why does it cost 2.5% every time I use my Visa card? Why do international wire transfers take two (or more!) business days? And where is the Amazon/Tesla/Google of finance?
It’s as if we were still paying $1/minute for long-distance calls, or getting 56k dial-up access to the internet.
What Caused The Great Stagnation?
There are many reasons for this “great stagnation”: Regulation, tradition, etc. (Consider that the average age of the ten largest financial companies in the U.S. is 126 years.) But the primary one is simple: Money never entered the digital age.
Sure, we have online bank accounts and mobile apps, but the back end of our financial system is stuck in the paper era.
You can understand why if you think about how checks work. If I send you a check for $10,000 and you deposit it at your bank, your bank won’t let you withdraw that money until the check “clears.”
This makes sense. If your bank let you walk away with $10,000 immediately and I didn’t have $10,000 in my account, it would be stuck with the bill. The process of checking with my bank to make sure I have $10,000, that I haven’t written multiple checks on the same account, and so on, takes time.
This sclerotic process has doomed most fintech attempts. Despite our best efforts, fiat money moves at the pace of first-class mail.
Crypto solves this.
The Bitcoin blockchain — and all subsequent blockchains, like Ethereum — are built on a fundamental advance in computer science that allows money to move and settle at the speed of the internet and for a fraction of the cost of legacy systems. You can now move any amount of money, anywhere in the world, and have it settle almost instantly, for low fees.
(Here’s an example: This $1.1 billion bitcoin transaction took place outside of banking hours, settled in 10 minutes, and the fee was 0.00001%.)
Recently, developers have been building on this new breakthrough to create an entirely new financial ecosystem called DeFi, or decentralized finance. DeFi uses blockchain technology and networks like Ethereum to allow financial innovators to program money like software. The programs operate autonomously, without traditional overhead.
It’s early, but the things people are doing are mind-boggling. Today, there are DeFi protocols that allow you to:
Take out collateralized loans worth hundreds of millions of dollars in seconds, whereas traditional lending programs take weeks.
Trade tokenized stocks 24/7/365 and have those stocks settle instantaneously, while traditional stocks trade from 9:30am-4pm, five days a week, and settle in two business days.
Send money to anyone in the world instantaneously (even through Twitter!), and have it arrive immediately for virtually no fee.
Invest in a yield-seeking account that searches for income without any human involvement required.
These capabilities are raw, but some are already operating at scale. The largest DeFi protocol, Uniswap — a decentralized competitor to Coinbase — handled $52 billion in trading volume last month, all without a single employee (Source: The Block).
There are, of course, massive risks, with technological and regulatory concerns being chief among them. But DeFi is already proving that it can do many of the things the legacy financial system does but faster, cheaper, and better, and it’s attracting a huge wave of venture capital investment and human talent. (Venture capitalists poured a record $17 billion into the space in the first half of this year.)
It fills me with great hope. After years of waiting, fintech is finally arriving. It’s just going by a different name: DeFi.