Alex Floate, a member of our Emerging Fellows program checks the possibility of changing the world of finance by means of fintech in his seventh blog post. The views expressed are those of the author and not necessarily those of the APF or its other members.

Fintech was coined as a phrase in the early 21^st Century that described the internet enabled finance technology that began to appear. Later it came to describe the whole of the financial technology sector, and a buzzword analogous to ‘invest in us – we’re on the cutting edge’. Others then began to see fintech as a gateway to a post-capitalist system in which fintech will democratize finance and save the world in the process. These enthusiasts were literally banking on fintech igniting the forces of creative destruction that would bring down the old order of labor, land and capital and replace it a distributed tech model based on individuals, information and abundance.

Creative destruction is a concept dating back to Marx that capitalism will continually destroy the existing order to create new value and wealth. Creative destruction is caused by innovation which undermines the status quo, and de-values anyone or anything that continues following the old order, including skills, desires, function and capital. During Marx’s time this was the new industrial barons destroying the value and wealth of the landed gentry through commoditization. More recently technology entrepreneurs have unseated the established industrial conglomerates by expansive use of information.

Obsolescence and replacement are not confined to direct replacement of the new technology but can endanger whole systems. For example, the inefficient neighborhood grocery store within walking distance of its customers fell prey to the technology of the auto; it was now easy to drive to efficient and cheaper supermarkets. Now we see even those supermarkets and stores falling prey to the technology of the internet. Creative destruction in action. Is fintech a technological revolution causing the next evolution of capitalism?

That is the hope of those who see fintech as the democratizing influence on finance and capitalism. The use of fintech allows individuals around the globe access to information, platforms, cheaper capital, and stores of value without needing expensive intermediaries or even beholden to any one currency. By breaking the back of the old finance system, the new decentralized one will be distributed across the population. Fans of Austrian economics will rejoice as fintech skirts around regulations and allows individuals to choose where they access and store capital, at what interest rate they want, and in whatever electronic currency that best suits their needs.

But, fintech fans appear to underestimate the reaction that vested interests of governments, financial institutions and current technology leaders have in either blocking, slowing or hijacking this new round of creative destruction. Governments especially will see this new order as a threat that previous iterations of change lacked, as it will challenge their ability to regulate and exercise financial authority over their own economies. We are already hearing the mumblings about regulation of Bitcoin or attempts to thwart Facebook’s plan to create a digital currency. The fintech wars will truly be unleashed once a digital currency appears at enough scale to challenge the largest currencies. That most likely will be the Rubicon that needs to be crossed before governments fully assume a war footing.

Before that occurs though, the most likely scenario is an alliance of current financial powerhouses, tech companies and both groups pocketed lawmakers stepping in to create conditions that allow much of fintech’s promise to be purchased and assimilated. Until then fintech will be a race, not a war, to see how fast it can advance. The race will be to provide people the power of its promise before a behemoth financial Borg assimilates it and leaves the people as powerless as they were before.