Over the past several years, traditional financial services firms have thrown shade at alternative finance platforms by labeling them “Shadow Finance.” This oblique reference to Fintech firms seeking to disrupt and dethrone old school banks is standard banter on the various financial news networks. Even august groups like the Financial Stability Board has fallen into the trap of following along with the herd by publishing a dedicated report on ominous sounding Shadow Finance.
Yet it is transparency that sets alternative finance apart.
The ability to clearly understand counter party risk and make decisions based on data, not smoke and mirrors – is the best that Fintech can and should offer. Bill Ullman, Chief Marketing Officer of Orchard, wrote on these pages some time ago that Fintech, and specifically online lending, is really the advent of Sunlight Banking. Fintech is incorporating Transparency, Technology, and Trust.
Today, we have received additional information from Wells Fargo indicating there are 67.5% more potentially unauthorized accounts. These “Fake Accounts” may now total around 3.5 million. As Berkshire Hathaway CEO Warren Buffett aptly stated on CNBC, “there is never just one Cockroach in the kitchen.” Wells Fargo is suffering an infestation.
But how does a highly regulated, prominent financial institution that was founded in 1852 allow the creation of 3.5 million bogus accounts? Only the shadow knows…
[clickToTweet tweet=”How does Wells Fargo, founded in 1852, allow the creation of 3.5 million bogus accounts? Only the shadow knows…” quote=”How does Wells Fargo, founded in 1852, allow the creation of 3.5 million bogus accounts? Only the shadow knows…”]
Regulators will inevitably love Fintech because of the ease of regulation and transparency. It is just a matter of time.
“The cost of regulation is so high because of the paper involved. Fintechs have an advantage because they are all digital. The regulators are going to start to understand this. The cost of regulation is coming down… traditional finance needs these new capabilities, otherwise they will be massively challenged … this stuff is going to happen…”
“This news is just another unfortunate example of how misaligned incentives are in the pressure-cooker world of big banks,” commented Walsh on the Wells Fargo debacle. “In the past 20 years, the market share of the top 25 U.S. banks jumped from just 17% in 1996 to 72% in 2016. On average, these banks dedicate $.60 of every dollar of revenue to maintaining overhead: employees, branches, old systems. Their scale and complexity has made their operations prohibitively expensive, and puts pressure on retail employees to push products. Sales goals and production-based incentives sadly result in bad behavior among banking employees, as the Wells Fargo situation illustrates. At Varo, we believe the banking industry must focus on innovation and technology to re-align incentives and use bank products to solve everyday problems, not meet sales targets. This will restore trust, and ultimately make banking easier and more affordable for everyone.”
Walsh, by the way, spent many long years in the traditional financial services sector. So he has first hand experience.
So is Fintech part of the Shadow Banking never-world? Not a chance. As the saying goes, sunlight is the best disinfectant. And old finance needs a good dose of Fintech sunshine. Wells Fargo proves it.