Lessons for Fintech Founders from the 2008 Financial Crisis.
Are we staring at another World Financial Crisis?
The financial crisis of 2008 brought to light many of the risks and uncertainties inherent in the world of finance. As the fintech industry continues to grow and innovate, founders must keep these lessons in mind and be vigilant and cautious in developing new products and services.
One of the key takeaways from the crisis is the importance of transparency and accountability. Fintech founders need to be transparent about the risks and limitations of their products and services and be prepared to be held accountable for any negative outcomes resulting from their use.?
Several recent examples demonstrate the consequences of fintech founders not being transparent about the risks and limitations of their products and services. German fintech company Wirecard collapsed in 2020 amid a massive accounting scandal. Its founders were accused of inflating the company's revenue and hiding losses, leading to billions of euros in financial losses for investors. LendingClub, a US-based peer-to-peer lending platform, was fined $2 million by the US Federal Trade Commission in 2016 for misleading investors about the quality of its loans, and WeWork's IPO was canceled in 2019 due to concerns about the company's financial viability, with its founders accused of not being transparent about the company's financial losses and its dependence on its founder.
These examples highlight the importance of transparency and accountability in the fintech industry and the need for rigorous oversight and regulation to protect consumers and investors. Fintech founders need to be vigilant and cautious about the potential for unintended consequences and systemic risks as they develop and launch new products and services. They should carefully consider the impact of their offerings on customers, markets, and society as a whole.
Another important lesson is the need for proper risk management and regulation. Fintech companies should work closely with regulators and other stakeholders to ensure their products and services are safe, reliable, and compliant with relevant laws and regulations. I commend the Central Bank Of Kenya for their forward-looking approach on regulating the fintech industry in Kenya.
In addition, fintech founders need to be mindful of the potential for unintended consequences and systemic risks. As the financial system becomes more interconnected, the actions of one company or product can have far-reaching effects on the broader economy. Fintech companies need to be aware of these risks and take steps to mitigate them. For example, Payment processors like PayPal and Square have experienced occasional glitches that have resulted in unintended consequences for customers. For example, a glitch in PayPal's system in 2014 resulted in some users being charged twice for the same transaction. Such glitches can cause inconvenience and financial harm to customers, erode trust in the fintech company, and result in regulatory scrutiny. Locally in Kenya, we have had numerous instances where Mpesa systems failed without prior warnings leaving users stranded.
Finally, fintech founders should be cautious about over-reliance on technology and data. While technology and data can be powerful tools for innovation and growth, they are not a panacea. Fintech companies need to be mindful of the limitations and biases inherent in these tools, and they should be prepared to use human judgment and expertise to supplement and validate their findings.
The financial crisis of 2008 serves as a stark reminder of the risks and uncertainties inherent in the world of finance. Fintech founders can learn from these lessons by being transparent, accountable, and cautious in developing new products and services. By working closely with regulators, managing risk, and being mindful of unintended consequences, fintech companies can help ensure a safe and stable financial system for all.