• Seb Paisley

Explaining the American fintech paradox


A brief introduction to American fintech

America is home to both Wall Street and Silicon Valley but seemingly lags behind other developed nations in the introduction of fintech. A parallel to be drawn with this is the slow European Union vaccine rollout showing that size and resources are no guarantee of efficiency and innovation. The most prominent example of widespread fintech for consumers is contactless payment systems which have been accelerating rapidly in Europe and are steadily taking off in other regions. The compound annual growth rate used in forecasting analysis for contactless payment market growth over 10 years is often cited between 10-20% and yet America of all economies is still struggling to introduce the technology. Silicon Valley is the world-renowned centre of technological advancement and so combined with intellectual property laws should theoretically have led to America having cutting edge consumer fintech, but there are instead corporate powers forcing this down.


Monopoly issues

American card payment systems are governed by a strong duopoly of Visa and Mastercard who have the power to limit innovation due to immense lobbying funds and engage in tacit collusion, holding the costs of transactions above other economies. The financial sector plays a dangerous balancing act whereby countries with large barriers have slow tech development but are more stable which is the American model. Online payment systems such as Square are still constrained by this duopoly since they are unable to be a standalone financial network route and rely upon the credit card companies to connect those involved in a transaction. The main implication of this is that transaction fees are held high in America because whilst they have the technology to innovate, the lack of competition enables incumbent firms to block change. However, despite these restraints, America has been presented with an opportunity in the form of cryptocurrencies that are increasingly able to break away from regular currency. The most recent breakthrough to bypass the credit card companies is Tesla’s move to accept Bitcoin as a form of payment and so it seems rather than reform the old, the American path away from barriers comes in the form of creative destruction. Therefore, America must continue to focus on creating solutions rather than breaking down the existing barriers.


The Covid factor

The ongoing pandemic has acted as a catalyst for new digital solutions but most notably, the shift to contactless systems has developed at an even faster rate in advanced economies that have used technology as a means to limit human contact. Covid in America has been a highly divisive issue with each state taking its own approach as well as a new administration coming to power. States that chose a relaxed approach to Covid have missed this chance to evolve meaning that the companies controlling markets can continue to do so. Covid has crippled old systems but caused fintech to flourish as the drive for the next generation of payment systems is accelerated.


Solving the American problem

On the face of it, the solution is simple, implement more aggressive antitrust policies to create more competition so that the Chinese model becomes viable, and the consumer benefits. Whilst this is wishful thinking due to America having some of the greatest powers of private lobbying in the world, under the new presidency there is a possibility of reform centred around monopoly busting in many of America’s industries. Covid may have presented the best opportunity for fintech to grow in America, but the state must not let it be constrained by Visa and Mastercard. Cryptocurrency has taken off in the last year but is often seen more as an investment opportunity by consumers rather than a store of value meaning that for the time being, improving transaction methods and fees should be the central focus in America. The paradox of Wall Street coexisting with Silicon Valley but providing few fintech advancements is due to red tape, which until lifted will continue to allow America to fall behind other economic superpowers. The Biden administration has an opportunity during the pandemic to provide this change for both public health and economic reasons as long as they are willing to lobby and stand up to abuses of monopoly power.