After the credit crisis of 2008-09, former Federal Reserve Chairman Paul Volcker quipped that the only important innovation the financial industry had come up with in the prior 20 years was the automated-teller machine. Now almost everyone is walking around with a smartphone loaded with apps to manage personal finances, cryptocurrencies have become funding vehicles for everyone from cloud technology entrepreneurs to rappers, while big banks are pondering how to put their records and conduct transactions on decentralized blockchains.
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Bloomberg View columnist and economics professor Tyler Cowen recently spoke with fellow Bloomberg View columnist Matt Levine, who spends a lot of time thinking and writing about the future of finance and its intersection with technology. Here is a lightly edited version of their online chat.
Tyler Cowen: Twenty years from now, when we look back, what do you think will be the biggest and most surprising way that fintech will have changed our lives?
Matt Levine: I am going to have a boring answer here, which is that I don’t expect anyone to experience financial technology as surprising or life-changing. The point of most innovations in consumer finance has been precisely to reduce its presence in our lives: Instead of talking to a bank teller to get money, you use an ATM. Instead of physically walking into a broker’s office to talk about which stocks to buy, you buy index funds through a web page. Or, now, you click to enroll in an app and it does all of your asset-allocating and stock-picking and tax-harvesting and so forth for you. I think that a lot of financial technology is heading in the direction of perfecting that vanishing act, so that in 20 years you’ll just think about financial things less than you do now.
Of course there are people with the opposite vision. There are, like, virtual-reality programs that let you visualize your stocks as buildings and walk through them like a city. If anything in financial technology looks like that in 20 years, then things will have gone horribly wrong. Or there are the cryptocurrency enthusiasts who think that everyone and everything will have their own currencies in the future, and that everyone will spend all day engaged in thinking about crypto-exchange rates. Again that doesn’t seem like an attractive or realistic vision.
That said, I think the possible surprise here lies in the connection between finance and identity. People are sort of inchoately aware of it now; we use the term “identity theft” to mean “someone using your name and Social Security number to get a credit card.” But most people don’t really think of their credit report as being central to their identity. Really ambitious proponents of blockchain technology, though, envision a world in which a lot of identity information — your citizenship and marital status and college degrees and employment and certifications and whatnot, maybe your fingerprints and retinas and DNA, as well as of course your credit information — are encoded on a blockchain and used in every aspect of your life. (India has a governmental system a little bit like this, and China is building one, though the blockchain vision usually involves decentralized non-governmental systems.)
I think that the idea that financial intermediaries should be the keepers of identity is pretty uncomfortable, but then, the idea that Facebook would be the keeper of identity seems like it would be uncomfortable, and in fact Facebook has quickly taken over a lot of the work of verifying identity, at least online. One thing that we might see in the next 20 years is a fight between financial institutions and social networks and decentralized blockchain builders over who gets to be the keeper and verifier of everyone’s identity.
TC: Perhaps I expect bigger changes than you do, so let me follow up on a few possible future scenarios. Here’s one to start with: Big data and algorithms will become so good that only the good credit risks will be able to borrow. Of course this will help many creditworthy people, but the social-insurance function of credit might disappear with large numbers of risky borrowers locked out of the loan market and perhaps some insurance markets too. In economic lingo, separating equilibria may replace pooling equilibria and it may become harder to protect against risk.
ML: This is not impossible, but the story of technological changes to credit so far seems to me to be pretty exclusively one of expanding access to credit. You have subprime mortgage lending, which is of course a mixed bag, but which certainly allowed people who were bad credit risks to borrow — not because algorithms were so good (or bad) at analyzing their credit risk, but because the borrowing was secured (and the algorithms were bad at predicting house prices).
But also the whole peer-to-peer and online lending space really expanded unsecured personal lending from being an afterthought at banks to being a real business. If your starting point is that average credits get loans at average rates, then better credit analysis driven by big data might hurt below-average credits.