Within the space of six years, finance technology – fintech – has gone from a technology that skirted the edges of the investment sphere to receiving billing at this year’s G20 summit where the world’s industrial leaders described its impact as something akin to a new industrial revolution.
Many terms are circulated when describing fintech’s remarkable emergence. Its rapid march into what in some cases are centuriesold financial practices has resulted in heavy disruption, some casualties and a swift change in pace and outlook for financial institutions.
Fintech is the innovative use of technology in the design and delivery of financial services and products.
2016: A subdued year
For Faye Chua, Head of Business Insights at ACCA, 2016 represented a year when fintech started “becoming more normal,” explaining that it has “slowly established itself in its own right.” Chua doesn’t yet regard fintech as a matured area and she is acutely aware of the risks and challenges that it poses, but she recognises its momentum, as well as how much more progress is required in the sector. Technology is often a catalyst for growth and fintech’s impact across the financial services sector is explored in FinTech – transforming finance.
“Fintech has slowly established itself in its own right.”
Meanwhile, Dr Alex Money, Project Director at the Smith School of Enterprise, University of Oxford, describes 2016 as a quiet year for fintech “relative to its own exuberant standards” with broader macroeconomic effects instead taking precedence. From the perspective of fintech as a sector, Money views it as conforming to the expectations of most asset classes: early disruption, rapid innovation, capital coming into it, some outside successes, and a lot of early attempts that ultimately don’t work out, before finally maturing.
There are three areas that have been attracting the attention of Lenora Suki, Head of Product Strategy, Sustainable Finance, at Bloomberg. The first is the huge growth in passive management, particularly in the generation and development of information technology that can drive passive investing low-cost tools. These developments, she argues, have impacted on active managers, placing them under increasing pressure. As a result, part of the fintech innovation for them hinges on making insights regarding ESG performance issues more widely available and integrating these insights into their daily workflow. A third area, and an important driver for Suki’s work, is the increasing commodification of financial data. Reflecting this, she is looking to fintech to develop data that helps generate actionable insights.
North America and Europe continue to dominate the sector, although political uncertainties surrounding the UK’s decision to leave the EU and the US presidential election subdued overall growth in these regions. Continuing political uncertainty is expected to increase pressure on the UK to maintain its leading position in the European financial services sector.
Although there is no swift end in sight to the dominance of the more established fintech hubs, developments in Asia are of particular interest to Chua. Like other experts, she keeps a close eye on the rapid growth of the Chinese market, but alongside this points to developments in fintech hub, Singapore, as well as Hong Kong and Pakistan. In the coming months, Chua will be watching to see how Singapore works with the Financial Conduct Authority to expand plans to make the city state a global Smart Financial Centre. Alongside this, she highlights Hong Kong’s move to launch its own innovation lab, which she views as a positive step away from its very regulated approach to something more open. In Pakistan, she is keen to see how fintech impacts on the market as the country switches from 3G to 4G mobile technology in 2017.
China is a key focus for Daniel Street, Asia-Pacific Strategist at the IFC, who is monitoring fintech’s “increasingly crucial role in boosting financial access to traditionally underserved micro small and medium enterprise (MSME) groups in China, improving the quality and affordability of financial services”.
China’s rise in the fintech sphere looks unstoppable, boosted by a massive market, supportive government policy, and a large-scale need for the type of private sectorled financial intermediaries offering innovative business solutions.
As a result, fintech companies are, according to Street, “increasing their influence and reach in payments, microfinance, consumer finance, wealth management, and individual credit reporting”.
The so-called Alibaba model of e-commerce, which sees the provider support microcredit companies, allowing them to originate and service loans at a far lower cost than traditional financial institutions is likely to have systemic effects in encouraging other financial institutions in China to enter or expand their financing of MSMEs. This will bring more unserved or underserved borrowers into the financial system. The resulting competition could lead to more affordable and accessible financial products and services for MSMEs.
However, Street goes on to warn of the need for sophisticated securitycontrol mechanisms, arguing that: “Remote accounts are inherently riskier than traditional bank accounts, where a customer is physically present at a specific location.”
Getting greater value from data
At the University of Oxford, the focus of one of the research areas is the use of datasets and specifically understanding the value around these. Money’s team is currently working on scenario-based forecasting, essentially trying to figure out how they can get the data to help understand key strategic questions.
He argues that during 2016 there was definite progress in understanding the questions that need to be asked, figuring out how to apply technology as a potential intermediary of information, and realising that information is required in a more structural way.
The team’s fundamental focus is “whether digital data can tell us more about things that matter as an ESG investor than they do at the moment.” Money explains that normative statements exist suggesting a range of conclusions, prompting researchers to focus on whether data can actually provide possible answers. He hopes that his research team will be able to form the tools that allow anybody to pose questions, set out scenarios and see what the data suggests will happen in these scenarios.
Alluding to the work that Money’s team is carrying out, Suki argues that the current challenge with ESG information is the quantity of non-standardised, variable quality information that is available. She explains that it’s difficult for quantitative analysts to do much with the information that is out there because it’s often backwardlooking, subject to normative views, and lacking in transparency. For her, this poses a key hurdle for fintech, which needs to provide meaningful differentiated information while also adding value to the conventional financial analysis that is being done.
Looking ahead, Suki argues that the situation is likely to get “messy”, but ultimately she sees five places where fintech has the potential to work well within the space in which Bloomberg operates, namely:
- creating datasets;
- lower-cost quantitative analysis and management;
- machine intelligence driven engines that extract value from unstructured information;
- data visualisation tools;
- open analytics, allowing anyone to query data across lots of different datasets like a quantitative analyst would do.
Of these, the first particularly interests her, though Suki warns that people have only so much capacity to try to use new information.
An end to disruption?
The term ‘disruption’ is commonly used to describe the industry and its impact.
Within this, companies are typically collaborative – working with the established entities to create something new – or competitive – aiming to go into direct competition with the existing order and its players. Chua is seeing a shift away from the directly competitive towards collaboration and innovation, and cites the fintech plans that Deutsche Bank has made over the course of 2016, which include investing €750m in digital products and advisory services by 2020.
Looking ahead, Chua’s interest is focused on blockchain and specifically how it’s going to be used, not just for banking, but within businesses themselves. Meanwhile, Money views 2017 as a year when we’ll see the forms of disruption changing. He cites MiFID II, arguing that this will be a factor that will encourage greater corporate access to technology. “If it continues along the path we’ve seen to date, fintech will help fund managers become more transparent about how they are spending their money to their underlying investors, which is an area that hasn’t yet properly evolved.”
The potential for fintech remains ripe and in some areas it is beginning to be realised. Much of the earlier fanfare, as well as fear and mistrust, has died down, allowing the sector and its players to develop niches, respond to demand, and better identify what fintech can do to make the financial industry more efficient, responsive, cost-effective and add value.