Yeah. That’s right, that’s right. That’s exactly what they’re doing. I think it’s scary. I can tell you that a lot of the opportunity those fintech companies are finding is derived from that kind of discrimination, because if you are a large enough lender, you are going to be very highly vetted, and if you’re a very small lender you’re not.13
Take SoFi, for example. They refinance the loans of people who went to good colleges. They probably did not set up their business to be super racist, but I guarantee you they are super racist in the way they’re making loans, in the way they’re making lending decisions.
Is that okay? Should a company like that exist?
I don’t know. I can see it both ways. You could say, “They’re a company, they’re providing a service for people, people want it, that’s good.” But at the same time, we have such a shitty legacy of racist lending in this country. It’s very hard not to view this as yet another racist lending policy, but now it’s got an app.When we talk about fintech in general, does that refer to something broader than advising investors when to buy and sell stocks, and this new sort of loaning behavior? Or is that the main substance of it?
Fintech may most accurately be described as regulatory arbitrage: startups are picking up pieces that a big bank can’t do, won’t do, or that are just too small for it to pick up. And I think fintech is going to suffer over the next five years. If there’s a single sector that people are going to be less enamored with in five years than they are now, fintech is definitely the one.
The other side of it is that they’re exploiting a hack in the way venture capitalists think. Venture capital as an industry is actually incredibly small relative to the financial system. So if you were starting, I don’t know, a company that used big data to make intelligent decisions on home loans—which is probably illegal, but whatever, you’re small enough that it’s no big deal—and you say, “Hey, we’re doing ten million dollars a year in business,” a venture capitalist will look at you like, “Holy shit, I’ve never seen a company get up to ten million dollars in business that fast.” The venture capitalist has no idea that the mortgage market is worth trillions of dollars and the startup essentially has none of it. The founder gives a market projection like, “Oh, this is a trillion-dollar industry,” and the venture capitalist is like, “Oh, that market is enormous. I’ve never seen numbers like that before.”
It’s much more of a clever hack than an actual, sustainable, lasting, value-creating enterprise. One of the biggest flagship fintech companies, LendingClub, is in a ton of trouble.14 SoFi is probably illegal. And those are the flag bearers for the sector.
The other thing that happened was the San Bernardino shootings—apparently the guns that were used were financed by a loan from Prosper, which is another peer-to-peer lender.15 And you just think about where this is going to go. Are we eventually going to get to the point where we have the credit models to assess and not give that guy a loan because of the risk that he could be a Muslim terrorist? Is that the society that we will be living in?
Maybe. But we’re going to get there with the data.
The FutureIf you had to give a nontechnical layperson one piece of advice for thinking about these questions, what would it be? Is it to be more skeptical? Is it to be less credulous when confronted with hype? Because it seems like there’s a fairly small number of people who understand these technologies well, and yet they appear to have the potential to make a pretty big impact on a lot of people’s lives.
I think the most realistic way of looking at it is that it’s not all hype. The technical advances are real—and even if they’re not real today, the relentless drumbeat of progress on hardware and algorithms will make them real eventually. It will take longer than you think—potentially a lot longer than you think—but it will happen. So everything you’re hearing is an early warning sign of what the future is going to look like. Maybe not even in our lifetimes, but yeah, it’ll get there. And the questions that we’re going over, they’re going to be real. It’s just not there yet.
So yeah, I would recommend some skepticism, but not complete skepticism. Because the advances underlying this are real. And the rate of progress has kept up, and I don’t see a reason why it’s going to stop.
It’s funny, because I think the biggest concern that I have for the future is that a bunch of people like me are going to make a bunch of money. And a bunch of people are going to lose their jobs. And a bunch of people are going to get new jobs that are crazy and cool. But I don’t know on net how great it’s going to be for society moving forward, though I want to be optimistic about it.I often have this kind of discussion with people who are algorithmically minded, and they view capitalism as an optimizing function. And all questions about technological change go through this filter of, well, we’re glad we have cars instead of horses and buggies. And everything else will sort itself out. But everything else doesn’t just “sort itself out.”
I mean, I try to not fall into the Y Combinator/Stanford guy thing, but I actually do think that universal basic income is going to be the endgame.16 I think that is what society will look like long-term,