The below article is a translation of an article in FinansWatch authored by CLO Tobias Holger Hansen.
In September, it was 10 years since the investment bank Lehman Brothers went bankrupt. The bankruptcy sent shockwaves through the international financial world and started a chain reaction on the financial market. The negative consequences included bank failures, falling house prices, increasing unemployment and a general economic recession.
In connection with the 10-year anniversary of the financial crisis, a lot has been said and written about the consequences of the crisis. One of the less spoken about but positive consequences is the current fintech boom. It developed in the wake of the financial crisis and as a direct effect of the Lehman Brothers crash. However, it is important to note that fintech is not a new phenomenon and has always played a key role in the financial sector. The introduction of payment cards in the 1950s and ATMs in the 1960s are examples of the early use of technology in the financial sector. But the new technologies were not seen as a threat to the existing banks. On the contrary, the products helped the banks position themselves further. In the time after the financial crisis, the characteristics for new fintech companies is that they want to rethink and rebuild the financial sector and create actual alternatives to the traditional providers.
The financial crisis created the ground for encouraging new actors and there is even a direct link between Lehman Brothers and some of the fintech companies we know today. Several former employees are behind some of the most successful fintech companies today. Revolut, which has a DKK 10 billion valuation today, was started by Nikolay Storonsky, who in 2008 was employed at Lehman Brothers. Revolut is far from the only example and the list of former Lehman Brothers employees that have started fintech companies is long. Other examples are MarketInvoice and Vestpod.
The financial crisis also prompted another range of successful entrepreneurs with experience from other industries to suddenly start having an interest in the fintech sector. Traditionally, entrepreneurs have seen disruption as Mark Zuckerberg’s old mantra “move fast and break things”. But this mantra is almost impossible to apply to the financial sector and this is why successful entrepreneurs have avoided the financial sector earlier. The financial crisis, however, gave new possibilities to disrupt the financial sector and gave the entrepreneurs a taste for it. All of a sudden fintech became attractive. This meant that a lot of entrepreneurs started looking at the financial sector as an obvious possibility for disruption. Therefore, from the ashes of Lehman Brothers, a series of entrepreneurs rose, who wished to improve the existing system.
In addition, the trust to the existing financial system was at a low after the financial crisis. The general skepticism towards the banks meant that consumers started looking for new providers of financial services and this created a good foundation for fintech companies. This lack of confidence in banks was a strong contributing factor to the subsequent fintech revolution.
At the same time, the financial crisis entailed that a tsunami of new rules hit the financial sector. The new legislation imposed regulatory brakes on existing banks. But simultaneously created new opportunities for the new fintech companies, who in some cases could operate without being covered by the new legislation. In the US, Dodd-Frank was introduced as a direct consequence of the financial crisis. Dodd-Frank involved a completely new form of detailed regulation of the financial sector. In Europe, the banks are by virtue of CRR/CRD IV subject to new capital buffer and liquidity requirements to better equip them to withstand future loss. At the same time, the rules for governance in the financial sector were sharpened in continuation of the first effects of the economic crisis. In the years after the financial crisis, the main focus for the banks was to ensure compliance with the new rules. Conversely, this meant that the possibilities of developing new and better technologies at the banks had a lower priority. On the opposite hand, fintech companies started developing their own products with a focus on technological development and mobile solutions. The fintech companies were not in the same way as the banks inhibited by the new regulations. This meant that the fintech companies were able to offer competitive products and get a technological head start.
But the financial crisis can’t claim all the credit for the fintechboom. At least as important for the fintech boom is that the technological development has accelerated with record speed since the financial crisis. For example, the iPhone was launched in 2007, which is just one year before the financial crisis. The technological development has obviously also had an enormous significance for the growth of the fintech sector because it made a digital disruption of the existing financial sector possible. Since the financial crisis, a string of digital banks and neo banks have emerged that operate withonly an app and no branches. In England, for example, there are “challenger” banks Monzo, Atom and Starling while Germany has Fidor and N26. A Danish example is neobank LunarWay. The phenomenon is not limited to Europe. In the US, there is Chime and in Brazil, there is NuBank which is an example of a 100% digital bank that uses new advanced technology and has started after the financial crisis. The technological development has in this way created a more digital consumer behavior that the new fintech companies have been good at supporting.
Seen in retrospect, it is the combination of the financial crisis and technological development that have been decisive for the formation of the fintech sector that we know today. The fintech sector has meanwhile also gone through a development themselves since the financial crisis and today focus is mostly on cooperation and partnership with the existing actors in the financial sector instead of disruption.
Tobias Holger Hansen is Chief Legal Officer and responsible for managing legal risks within the Cardlay group. Tobias has previously worked as a banking and finance lawyer at a tier one law firm in Copenhagen and as Vice President for Legal & Compliance in a Danish payment institution.