Read the fawning media and fintech bloggers and you’d think that the fintech fairies can do no wrong — that all these startups and technologies making their way into incumbent financial institutions were sprinkled with special fintech dust that makes the problems and conflicts of that curmudgeon ol’ financial industry just, well, go away.
Now, with the fintech blessing bestowed upon us, we’re just angel-pure ethereal unicorns making everyone, including financial clients, richer. Mo’ money! Of course, that’s not actually the case and just as finance has always had a predatory, ugly side, so, too, does fintech.
In spite of the lofty intentions of some of its participants, fintech doesn’t automatically clean up the financial industry. Proof is in the pudding. Here are 6 shady fintech industries that could use some cleaning up.
Forex / Binary options
These financial companies masquerading as financial firms are bad news. Headquartered in countries like Cyprus and managed out of Israel, these companies are the pox on the home of fintech. These companies play the role of house to their legions of unsuspecting gambling clients. The thing is, they’re dressed up as investment platforms, but they’re playing a totally rigged game.
Forex firms’ clients bet on moves in currency pairs and they do it with a lot of leverage (used to be 200x, now, it’s more like 50x) . Sure, that leverage is great if it works out for you. If it doesn’t, poof (that’s the sound of money disappearing). Many of the forex brokerage firms that power these platforms came out of the online poker industry. Binary options are a new twist on the dopamine hit — gamblers bet that a certain stock or index hits a certain price. If it does, they make money. Good luck trying to cash out though — these companies are notoriously quick to take your money but extremely hard to get your money out of. Like a roach motel for cash.
“It’s gambling and we’re a bookie,” an ex-binary options salesman told the Times of Israel, which did a great expose on the industry.
The legal cannabis industry is an interesting one, at least from a fintech perspective. Legal sales of marijuana are expected to top $7 billion in 2016 and to surpass $22 billion by 2020. While many states have OK’d the sale of the herb, it’s still a controlled substance at the federal level. That means proprietors can’t really access the traditional banking industry, relying, instead, on fancy armored cars and bodyguards.
They’re lots of examples of companies trying to break this impasse, but most of them lack any traction and look like someone was high when they were designed. Mostly, it’s a child’s game. But that doesn’t mean fintech firms aren’t trying. There’s even an example of a credit union that sued the Federal Reserve when it wasn’t granted a banking license. There’s currently a bill afloat that would prevent the feds from prosecuting companies that provide financial services to legal cannabis companies, but experts don’t think it will pass.
There’s another sketchy form of fintech, one that makes an estimated $500 million dollars each year for the prison system off the backs of inmates and their families. Correctional facilities don’t have a lot of money to throw around for technology for their indentured guests. Instead, companies like Jpay, which controls payments for an estimated 70% of inmates, build out kiosks and tablets where inmates can video chat, use email and send faxes, and receive digital payments from their friends and families. Prisons don’t have to pay anything — these technology and services firms front the money and build out everything on their dime. Prisons then split fees on services.
Thing is, companies like this charge egregious rates: users pay for everything. This becomes a profit center for the jails. Inmates can pay as much as a 30% fee off a wire. Emails, faxes, minutes for phones — everything is nickled and dimed. Certain states have stepped in to cap these outrageous fees and now the FCC is moving in. However, with the system’s hand in the payments cookie jar, it’s going to be hard to change.
Payday loans are kind of like the ugly duckling of finance: they’re definitely part of the family, but no one really wants to take responsibility for them. That’s not exactly true — the Consumer Finance Protection Bureau (CFPB) has upped its game to protect people who, due to dire circumstances or lack of education, get hammered by financial firms who lend off their pay slips. For a type of loan that results 20% of the time in re-borrowing and default, that’s a welcome move.
A few years ago, there was a lot of discussion around online short-term loans that resulted in APRs of 5000 percent. One sorry sap paid 16 million percent. Wonga, a UK lender, received the brunt of the attention from regulators and authorities and has pulled things back. Its payday-like loans still reach levels of 1500+% representative APR. Because many online consumer loans are short-term, they don’t appear to be as expensive as they really are because the gross dollar amounts aren’t eye-catching.
Thankfully, other newer fintech products are almost the anti-payday loan, though, providing borrowers the tools to build credit and eventually, get themselves out of debt. That’s what Lenny does. Even Financial is a marketplace for personal loans that, while not cheap, are probably going to work out cheaper than credit card debt — and certainly a better deal than paydays. LendUp, which bills itself as a payday alternative, helps its clients build credit through education and appropriate financial products.
Bitcoin and other cryptocurrencies
Sure, read the breathless headlines from mainstream media and you may think that bitcoin was going to “revolutionize” payments. Well, sure, it might (actually, its underlying technology, the blockchain, might actually have a chance). But truth is, for now, for bitcoin and most other cryptocurrencies, the only people really using them are drug dealers and other purveyors of the nefarious.
With a certain level of anonymity, Bitcoin is well-suited for the drug trade. Silk Road, an international online marketplace of all things illegal that was eventually shuttered, preferred to transact in bitcoins. Read the news every week and you’ll learn about international authorities auctioning off millions of dollars of bitcoin confiscated from felons. Just recently, a college student went online to buy LSD and began trafficking it to his school buddies. His currency of choice? Yep, bitcoin.
Sure, with crowdfunding, you can back the next cool watch, music artist, and manufacturer of niche clothes for your pet iguana. But as the fundraising medium made popular by Kickstarter and Indiegogo becomes more commonplace, so is fraud becoming de rigueur.
There are some cases where a crowdfunding project was just an outright sham, a project owner bilking unsuspecting backers and absconding with large sums of money. But then there’s this gray area of crowdfunding fraud. It’s not outright theft, but backers, those people who advanced money to a project or cause they deemed worthy of their hard-earned funds, are left holding the bag. Or more accurately, they’re left with no bag and no product. These cases of fundraising are typically the result of mismanagement or poor planning to bring a new product to market.
Regardless, it’s against outright theft that AIG just launched its new crowdfunding insurance product, protecting crowdfunding platforms, and the people who transact on them, against snake oil salesmen.
A little 3rd party insurance and a little more transparency can help make the dirty underbelly of fintech a little less dirty.