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FinTech

Robert Dittmar delineates between cryptocurrency and FinTech and categorizes Fintech into 4 buckets: credit tech, invest tech, insurtech, and pay tech
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<v ->Hi, my name’s Bob Dittmar.</v> I’m a finance professor at the Ross School of Business and I’m faculty co-director of our FinTech initiative here. What I wanna talk about today is a little bit about how crypto fits in as a FinTech. Frequently, people use the two terms almost interchangeably. People think FinTech and they think Bitcoin or they think blockchain. But I just wanna clear up the fact that Bitcoin is not the only FinTech that’s out there and perhaps not even the most important. So, what is FinTech? Well, as the name implies, it’s really financial technology. And so, that means that it’s any technology that impacts the way that we conduct finance. You may ask yourself, well, what exactly is finance?
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I happened to look this up on Wikipedia and what Wikipedia says is that finance is, quote, “matters regarding the management, creation, and study of money and investments.” Given this definition, what is FinTech and how does crypto fit in? FinTech is simply technology that affects how we raise money, invest money, protect money, or pay money. We generally refer to raising money as credit-tech. Examples of this are SoFi, LendingClub, and GoFundMe. They’re new ways in which we can get money for a project, finance a business, buy a car, or do other financial transactions where we would normally have to raise money.
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The second, investing money, which we refer to as invest-tech, and think of examples, such as Robinhood, or robo-advisors, such as Wealthfront, change the way that we invest money. And so, if we want to save for retirement or simply invest in stocks, these technologies have changed our ability to do so. The third example, insure-tech, represents ways in which we’ve changed the way that we protect money. We think of insurance as protection of an asset. Most of us have insurance on our cars and our homes, and variable rate insurance and things like that are examples of technological innovations in insurance. The final, and perhaps biggest category, is what we call pay-tech, changes in the way that we pay people or pay businesses.
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This is perhaps the most pervasive in our life. Many of us have used Venmo or PayPal or other payment services. And crypto, very broadly, fits mostly within this pay-tech subcategory. One of the points that we emphasize in our FinTech course is that FinTech isn’t really new. Any innovation that has happened in terms of how we do finance is a FinTech. There was a time when coins were FinTech. People used to carry bars of metal or rings or other things to use and shave off pieces of metal for transactions. Coins became a way of transacting with strangers where one was able to verify the value of the metal that was being exchanged. Checks are an example of FinTech.
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Although you may be annoyed these days when you get a check, especially if you’re young because you’re used to making peer-to-peer payments, at one point in time, that was a revolutionary technology as was paper money. So, FinTech has been with us since we’ve been creating financial transactions. Bitcoin’s decentralization is one of the fundamental innovations that makes it a new financial technology. Traditionally, currency has been issued by governments. If you look at a dollar bill or some other piece of currency, you’ll see that it says that it is backed by the full faith and credit of the US Government.
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So, typical currency has been driven more by a central issuing authority rather than a decentralized peer-to-peer network of people who want to transact in a currency. So, the reason that crypto is so revolutionary is that it’s kind of a libertarian ideal in some ways. Because of that, and also in a libertarian ideal, the market fully determines the value of cryptocurrency. There is no government that is issuing more money or less money and, therefore, affecting its value. At the end of the day, crypto functions like other currencies though in terms of being an article of faith.
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If you think about the value of a dollar bill, it is worth a dollar only because we believe that it is worth a dollar and because people are willing to accept it in exchange for some good or service. What we really value is that good or service itself and money is simply serving a role as a medium of exchange in order to get that good or service. Crypto is often criticized because of the fact that there is nothing behind it. If you think about it, it’s simply a bunch of computer code. But when you really think about it, there’s not much behind a dollar either besides faith.
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And, in fact, even commodity currencies like gold have very little to back them. Gold is really not that valuable when you think about it except as a desirable metal for things like jewelry or decoration. You can’t eat it, you can’t turn it into weaponry, or some other useful tool. It’s only worth what it is because we believe that gold is worth what it is. So, in that regard, crypto is just like any other currency. It may not have the backing of any kind of specific commodity but as long as people are willing to believe that it has value and that it can be exchanged for goods and services, it represents an innovation in financial technology.

In this video, Robert Dittmar, Professor Finance at the University of Michigan delineates between cryptocurrency and FinTech.

The term FinTech refers to all technology and innovation related to financial services and does not necessarily imply newness; checks and paper money are two examples of FinTech that we are very familiar with. Robert lays out four categories: credit tech, invest tech, insurtech, and pay tech – the last of which includes many blockchain technologies.

Discussion: What are some ways that technology could improve your ability to take care of your finances? Do you consider yourself an early adopter or do you take time to get used to changes in technology?

Optional: An innovation of some types of FinTech is less reliance on banking institutions and credit systems, which could empower unbanked and underbanked populations across the globe. Read more about how decentralized finance may improve financial inclusion.

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Cryptocurrency: Beyond Bitcoin Teach-Out

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