Fintech companies excel at cutting costs and streamlining processes, but they can't eliminate risk. Instead, they shift it into forms they can manage better. The article compares this process to thermodynamics, where energy can't be destroyed, only transformed. Every financial transaction carries risk, whether it's the chance of a loan defaulting or a fraudulent payment. Traditional financial systems manage this risk through friction—like lengthy application processes or manual vetting—but fintechs reduce that friction, which means the underlying risk doesn't vanish; it simply takes on a new shape. Examples highlight this transformation. Square, for instance, minimizes underwriting friction by allowing instant payment acceptance. However, this shift introduces new risks like fraud and chargebacks, which they tackle with advanced detection systems. Similarly, Toast streamlines lending for restaurants by using real-time transaction data, but this concentration on a single industry exposes them to correlated risks, especially during events like COVID-19. In the BNPL space, companies like Affirm and Klarna absorb credit risk previously managed through high APRs by offering interest-free financing. Their success hinges on effective underwriting that keeps losses below the fees they charge merchants. The key takeaway for fintech founders is to understand the risks they inherit when reducing friction. They need to assess if they have the right data, technology, or expertise to manage these new risks effectively. If they don’t, they might be gambling on outcomes rather than strategically managing their risk exposure. In the end, risk isn’t eliminated; it’s reshaped and requires a deliberate approach to manage effectively.