Financial technology, known as fintech, is everywhere. If you send money by phone or invest with the help of robo-advisors, you’re using it. Its proponents say by lowering costs, it can expand the range of financial services providers can offer and the pool of people who can afford them.

But fintech presents risks, including to privacy. Fintech companies aren’t subject to the same regulations as traditional financial institutions when it comes to handling personal data. And some worry regulatory safeguards aren’t keeping up with fintech advances.

Amid the uncertainty, fintech’s role in financial services keeps expanding. How will fintech change the landscape for consumers? Can banks adjust? And will it make a real difference for those long shut out of traditional financial services?

Download the paper Harvard Business School professor Emily Williams presented at the Economic Conference, “Fintech, Financial Inclusion, and the Future of Finance.” Watch the session she spoke at, titled “Innovative Financial Technologies and Financial inclusion.”

Jay Lindsay:

Technology’s big promise is simple: a better future.

We’ll live longer, we’ll be more prosperous and safer, our cars will drive themselves until they finally start flying. All thanks to technology.

Technology has a flip side, of course, and we are also aware of that. How many movies have explored what happens when humans don’t quite understand the technology they’ve unleashed? Still, that can never quite kill the romance.

Science fiction writer Arthur C Clarke saw both sides. His homicidal artificial intelligence character, HAL, ran amok in the classic film and novel “2001: A Space Odyssey.” But Clarke also famously said, "Any sufficiently advanced technology is indistinguishable from magic."

In the world of financial services, technology is performing all sorts of magic these days. And the Federal Reserve Bank of Boston’s most recent Economic Conference – it’s 68th – explored the impact of these advances.

Now, financial services are important to everyone, whether you spend a lot of time thinking about them or not. We use financial services to receive and save money, to borrow and spend, to invest and pay bills. Financial services are your bank account, your credit card, your direct deposit. They’re how you obtain a mortgage and invest for retirement.

It’s just a fact: We need access to financial services to function and thrive. And that means changes in the provision of financial services have a major impact on households and the health and stability of the broader economy. That’s why the Fed needs to know what’s happening with them.

Here’s Boston Fed Research Director Egon Zakrajšek:

Egon Zakrajšek:

The Federal Reserve Act, the law that governs our activities, also gives Fed a significant role in ensuring financial stability. Not only that, we know from experience, say for something like what happened during the global financial crisis of 2007, ‘08, and even into 2009, that periods of financial instability, severe instability, directly impaired the ability of the Fed to achieve the goal of price stability and maximum employment.

So, we obviously have a very, very strong interest in learning how the financial system is evolving, how all of these new entrants into the financial landscapes are interacting with the traditional members of the financial system, banks, other kind of financial institutions.

Jay Lindsay:

This is Six Hundred Atlantic, a podcast produced by the Boston Fed. I’m your host, Jay Lindsay. On this season – our seventh – we’re looking at the future of finance. And we’re focusing on three perspectives covered at the Fed conference.

First, we’ll look at the disruptive role of financial technology, otherwise known as “fintech.” How is fintech changing financial services, what risks does it pose, and do we need to start thinking about it differently?

Then we’ll look at DeFi – that’s short for “decentralized finance.” DeFi is fintech that’s built on blockchain technology and conducted in cryptocurrency. We’ll explain how it works, and we’ll also explore the notion that DeFi can be a democratizing and liberating financial force. Is that realistic?

The last episode features a topic that both excites and terrifies: artificial intelligence. AI is already impacting financial services with its promise of greater convenience and better-tailored products. But there are red flags that can’t be ignored.

Zakrajšek says our eyes need to be wide open on all of it. And events like the conference help the Fed and experts from various industry, academic, and media sectors hash out what’s happening and what’s ahead.

Egon Zakrajšek:

Financial system is really key to the economic vitality. I think there's going to be a little bit of attention as the technology leaps and advances and wants to move. We want to make sure that it delivers the benefits without imposing, say, potential harm on the society.

Jay Lindsay:

We start by looking at the emergence of fintech. A logical question to start with is, “What exactly is fintech?”

Boston Fed principal economist and policy advisor Christina Wang, who helped organize the conference, says there’s no formal definition. But there’s a broad understanding of what fintech is.

Christina Wang:

Generally, people, when they talk about fintech, they're referring to the application of advanced technology, typically like digital technology, to deliver financial services. And so that encompasses a whole range of things.

Jay Lindsay:

For example, PayPal or Venmo, which allow people to directly send money to each other digitally, are fintech.

If you pay for your groceries with Apple Pay, you are using fintech.

Digital banking service platforms that allow people to open checking and savings accounts online are fintech.

Various peer-to-peer lending platforms used by individuals or businesses to bypass banks are fintech.

Fintech is also the automated “robo-advisors” that numerous investment companies use to help individuals manage their portfolios.

So, fintech is very common, it’s used by traditional and non-traditional financial institutions, and its offerings are expanding each day.

Wang says fintech expands the range of financial services providers can offer, and the pool of people who can afford them. That’s because the use of digital technology lowers what economists call “marginal costs.”

That’s the cost per transaction of providing services to an individual user.

Christina Wang:

A good example would be if you were to open an account, through digital means versus having to maintain like a brick-and mortar branch. It would be a lot cheaper if you do it digitally, right? So that makes it more affordable to provide services to consumers, especially those who don't have a lot of wealth.

Jay Lindsay:

Emily Williams, a professor at Harvard Business School, told conference attendees that fintech could make financial services more widely available to populations that have limited access to them – but have paid relatively more for them.

Emily Williams:

It’s clear that more financially vulnerable households, the lower-income households, and also minority households, are spending a disproportionate, a larger amount, of funds on just accessing basic financial services.

Jay Lindsay:

Williams also said fintech companies could help the 47 million people in the U.S. whom she called “the credit invisible.”

That means they have a thin or nonexistent credit file because they haven’t accumulated the needed financial data – things like a record of loan or credit card payments.

Fintech companies have proven very willing to do business with this group. They just use alternative data in the absence of a credit score.

For instance, Williams pointed to a practice some fintechs have adopted called “cash flow underwriting.” That’s when lenders assess a person’s creditworthiness based on his or her income and expenses, not on a possibly nonexistent credit history.

Emily Williams:

So, Fintechs understand that there are huge swaths of the population that don’t have the right type of proprietary data. But these people may still have a large sort of digital financial imprint through their bank account transactions, for example.

They are working to support credit bureaus, not just provide an alternative, but to enhance the way that we monitor and measure risk for certain segments of the population.

Jay Lindsay:

This amounts to competition for traditional financial institutions like banks. This can be very good for consumers, but not so great for banks – especially smaller ones.

Seth Pitts is the 37-year-old CEO of Bay State Savings Bank in his hometown of Worcester, Massachusetts.

He knows fintech companies can present unwelcome competition to the banking industry.

But he also says financial technology itself can help banks expand their capabilities. And he sees fintech companies as potential partners.

So, he’s not worried.

Seth Pitts:

I think the rise of FinTech is great, even though, for some of us, it can be scary, given the fact that it may be harder to keep up with the pace of technology or the efficiency by which technology allows companies to deliver products and solutions. I don't see it as this existential crisis for community banks. I find it an opportunity to help bolster the industry through the right partnerships that can help us all do what we're here to do.

The rise of FinTech, I believe, will continue to rise. And it'll be exciting to find ways that smaller banks like ours can punch up, if you will, due to the partnerships that we can establish with FinTech companies that fit our mold.

Jay Lindsay:

Still, concerns come with the increase in credit availability and financial services that fintechs provide. Wang notes privacy is one of them.

People will likely exchange data with the fintech companies providing them with digital services. But some of these companies are not subject to the same regulations as traditional financial institutions.

Do they have adequate data safeguards in place? Should they be more tightly regulated?

And then there’s the speed at which fintech companies can move. That’s an asset, for sure. It helps these companies quickly adapt to customer needs and respond to business opportunities. But Wang says it can also present problems.

Christina Wang:

If the providers, in terms of their products or their technology, is changing very fast, then the regulatory sort of safeguard would probably be lagging behind. And so, there's definitely that concern.

Jay Lindsay:

There’s also a lack of awareness of just how much fintech companies and nonbanks have changed the financial services landscape. And that can be a concern.

In a recent paper, Wang and her Federal Reserve colleague Mattia Landoni highlight an example of that.

They note that fintech lenders and independent finance companies have gained market share with small and medium-sized businesses nationwide in recent years.

But despite their increasing influence, their borrowers were at a disadvantage when the critical Paycheck Protection Program loans were issued during the pandemic.

You may remember that these PPP loans were a lifeline for employers trying to meet payrolls when business ceased during the pandemic-inspired lockdowns.

In their research, Wang and Landoni found that borrowers who didn’t have prior relationship with banks – the kind who used fintech lenders – received their PPP loans up to three days later.

Wang explains those few days could have been the difference between getting the desperately needed funds or not:

Christina Wang:

The bulk of the money was dispersed within basically two weeks and, max like 20 days. And so that, you know, a few days, two, three days later could make a big difference.

Jay Lindsay:

Wang says the study doesn’t indicate any sort of “blind spot” about fintechs among policymakers. But she added they might not be fully caught up on the extent of their growth and influence.

Christina Wang:

The landscape in terms of small business credit has changed quite a bit after the financial crisis, the Great Recession. And I think partly it's because data was just kind of scarce. We really don't have a lot of visibility into small businesses and small business credit.

We need to catch up and then, to continue follow further developments. Because with the advent of AI there will likely be further developments.

Jay Lindsay:

Pitts says he knows the changes fintech is going to spark are going to come quickly, and they are unavoidable. His advice to fellow bankers? Lean into it, but remember who you are.

Seth Pitts:

I think we could look back at history and, and look at companies that didn't lean in. You know, whether it was when email came out, and people chose to continue licking stamps, or you take BlackBerry, and they really love that keyboard, and they didn't want to change until it was too late.

Use this as a tool to do what you do better, not to do something brand spanking new that you have no experience with at the risk of losing your core business and your core base. Try to find ways to do what you do better, leveraging these tools, and don't think of them as an end-all, be-all savior to do everything differently.

Jay Lindsay:

The emergence of fintech has come with the development of an intriguing and fast-moving subcategory: decentralized finance, known as DeFi.

DeFi is on the leading edge of fintech. The financial services in this category are hosted on blockchains, which we’ve all heard of, but few of us really understand. They’re executed by programs called smart contracts. They’re conducted in cryptocurrencies.

DeFi is speedy, futuristic, and unburdened by middlemen.

It’s democratic and flexible.

It will make financial services more inclusive and affordable.

That’s the story anyway. Is it true?

Or is the better question: “How much of it can be true, if we’re realistic about what we should try and what we shouldn’t?”

Egon Zakrajšek:

Like with anything, innovation will have fits and starts, there is no smooth path that can ensure that we'll get to a good outcome without any costs.

Jay Lindsay:

We’ll take a close look at DeFi on the next episode of Season 7 of Six Hundred Atlantic.

Thanks for listening to Season 7 of Six Hundred Atlantic. You can find interviews and our first six seasons and subscribe to our mailing list at bostonfed.org/six-hundred-atlantic. And please: rate, review, share, and subscribe to Six Hundred Atlantic on your favorite podcast app.

The producers would like to thank our contributors for their insights and time. They are Seth Pitts, Christina Wang, and Egon Zakrajšek.

This has been “The Future of Finance,” the seventh season of the Boston Fed’s Six Hundred Atlantic podcast.