It’s time for “fin” to be the most important part of “fintech”

I just finished reading “Bad Blood: Secrets and Lies in a Silicon Valley Startup” (John Carreyrou), the page-turner of a non-fiction about the rise and collapse of Silicon Valley blood diagnostic company, Theranos, and the now infamous founder, Elizabeth Holmes.  The shocking details are physically breathtaking.  One of the most striking take-aways is that the “fake it ‘til you make it” mentality that has long been acceptable for tech companies, is not so benign when translated to other industries.  Theranos (allegedly) went from (classically) overly optimistic startup to fraudulent public danger when it began using its unproven technology on real patients.  While the idea for a great new blood-testing technology was there, the medicine behind it was not.

Tech companies have been making similar leaps into the highly-regulated world of finance, without deep financial expertise. Technology-driven financial companies dive in head first, raise vast sums of money, and provide an exciting vision of new technology-enabled financial services.  The problem is that they often don’t seem to have a clue about the complex rules and regulations that accompany offering financial products.

Robinhood, the democratizing fintech darling, had one such “epic failure” when they announced with much fanfare that they would offer consumers checking and saving accounts with rates well above what is offered elsewhere in the industry.  ONE DAY, prior to launch, they had to put the entire thing on hold, because oops, they had failed to contact regulators. They had been planning to insure the accounts via the Securities Investor Protection Corporation (SIPC), which is used for brokerage accounts, not the FDIC, which insures checking and savings accounts.  The fact that the cash in the Robinhood accounts wasn’t going to be used for investing, meant that the accounts would likely not be protected by the SIPC, creating a huge risk to consumers if Robinhood were to fail. It also turns out the product, as designed, was much more like a money market fund than savings account, which meant the 3% interest rate was not as industry-altering as marketing materials made it seem.  At least once the alarm was sounded, the launch was quickly shelved for the time being.

Just a few days ago, Bitwise Asset Management reported that as much as 95% of spot bitcoin trading volume has been faked – i.e., instantaneous net-zero two-way transactions to make it look like there is active trading volume. The Bitwise report states that the motive for the fake volume is most likely listing fees, which can reach millions of dollars. While savings accounts and bitcoin may not be as life-and-death as an incorrect disease diagnosis, we are talking about consumer investments, life-savings, and financial well-being.  And we’re not talking pennies – it’s deeply saddening that suicide hotline information is regularly posted to cryptocurrency social media feeds.

Even in our niche industry of stock option, equity compensation and cap table management, shiny tech companies are popping up on a regular basis.  Increasingly, we are bringing on new clients who’ve left these providers when they realize that when auditors or investors are standing over your shoulder for an answer on corporate dilution, stock-based compensation or roll forward activity, a chat box is not an acceptable form of support.  Some of these providers are touting the revolution of technology-enabled “electronic shares”, despite the fact that electronic (or “book”) positions have been around for decades – yet investors seem to be buying the hype. We employ a team of Certified Equity Professionals who back the product and help our clients through the nest of IRS, SEC, FASB, and IFRS regulations that effect equity compensation.  I frankly don’t know how a company can possibly claim to offer services in this space with little experience and without such experts.

I lead a fintech company, and am confident that the advances brought on by new technology in the space have largely been fantastic for consumers of financial services.  Now is the time, however, to realize that an iPod that doesn’t work as marketed is not the same thing as a financial product that doesn’t work as marketed.  Tech entrepreneurs and investors must take responsibility for having the level of industry expertise necessary to make their technologies disruptive, not destructive.


Elena Thomas, COO

Plan Management Corp. | OptionTrax