This article argues that Silicon Valley is more likely to be the source of the next financial crisis than Wall Street. The author believes all those new financial technology startups have been great for many individuals and small businesses, but they aren’t being careful enough. He thinks they’ll be the source of the next crisis. I think there are likely to be problems in many of those firms and for their clients when the next liquidity squeeze comes, but for now they appear to be too small in aggregate to trigger widespread problems.
These financial technology (or “fintech”) markets are populated by small startup companies, the exact opposite of the large, concentrated Wall Street banks that have for so long dominated finance. And they have brought great benefits for investors and consumers. By automating decision-making and reducing the costs of transactions, fintech has greased the wheels of finance, making it faster and more efficient. It has also broadened access to capital to new and underserved groups, making finance more democratic than it has ever been.
But revolutions often end in destruction. And the fintech revolution has created an environment ripe for instability and disruption. It does so in three ways.