There are a lot of issues in the tech industry (as with any industry). The one that’s received the most attention recently has had to do with the lack of diversity among works at the major tech firms. Apple, Google and most recently amazon have recently started sharing numbers around the diversity of their employee base and the underrepresentation of women and certain minorities is quite staggering. So that is a very interesting issue. But, hopefully that’s something you’ve already heard something about and there are a lot of good articles out there discussing the issues. So if you want to learn more, go do some googling.
The issues that I’m going to address briefly today pertain just to finance and financial technology firms. If we want to reimagine how our financial system is structured and design it around the end user there are two problems we need to solve. First, identity verification, and, second, value transfer.
At its most basic level, finance is about transmitting value from one party to another. If I want to transact with someone, I have to (1) know who they are and (2) have a means of transferring value to them.
Let’s look at #1 first. Identity verification or “Know Your Customer” (KYC) as it’s called is a huge problem for banks. The federal government tells banks to do a lot of things including how to appropriately verify their customers are in fact who they say they are. Every bank has it’s own process for KYC, meaning a lot of work is being duplicated by a lot of different institutions. If I’m a startup that wants to provide a financial service to customers (savings, checking, cross border transfers, lending), I have to have an easy way to verify the identity of my customer in a way that makes the regulator happy and doesn’t overly burden my business.
In the US, verifying identity involved a lot of duplicated work. Just think about how many times you’ve been asked to verify your identity online or over the phone. Unfortunately, that burden can make it really hard to service low value customers a low rates. According to a 2013 FDIC survey, nearly 10 million households in the US are unbanked and 25 million are underbanked. In emerging markets, the problem can be even thornier to tackle meaning hundreds of millions don’t have access to basic financial services.
The other reason so many of these people lack access to financial services has to do with how expensive it currently is transfer value, problem #2. To oversimplify things, today, the underlying technology for transferring value hasn’t really changed in a few hundred years. It still depends on banks running their own closed ledger systems, sure it’s not on paper anymore, it’s digitized, but in many ways its the same process. If you want to transfer money inside a bank, that’s relatively quick and easy, but if you want to transfer from one bank to another, things get harder. One of the primary reasons is that now banks have to reconcile their books and the government makes sure their doing it appropriately so they don’t create money out of thin air. Anyways, if you do a regular ACH transfer, it takes around 3 days. You can do expedited versions that take about 1 day. Or you can do a wire, which happens same day, but costs around $20.
Three days or even same day, but for $20 is too much and too slow. Certainly not the type of capabilities that allow the creation of lean efficient platforms that can transmit even a few dollars around the world for next to no cost almost instantly.
Once these two problems startups will be able to build incredible financial services that we can’t even imagine right now. Getting into emerging solutions would take too long to look at in this post. But if you want to learn more, take a look at the innovation underlying bitcoin’s blockchain, which enables a decentralized open ledger. Bitcoin as a currency may not be that important in the future, but the concept of the open decentralized ledger will be. As for identify verification, there are a lot of discussions happening right now, but we’re still early in the game.