19 January 2017

FinTech: The Disruptive Enabler

by Tom Watson, Ivey Business School

Wrap-up report of conference held in Toronto, Canada on 30th November 2016 – Hosted by SWIFT Institute and Ivey Business School’s Scotiabank Digital Banking Lab

This event featured speakers from Scotiabank, RBC, BMO, CIBC, TD Bank, Bank of Canada, Payments Canada, World Economic Forum, University of Toronto, University of Delaware, clearXchange, Kabbage and MaRS Discovery District.

Try to picture shopping without credit cards or mobile payment solutions, or managing a self-directed investment portfolio without online brokers or investing apps. Now, imagine needing to vacation with traveller’s cheques or visit a bank simply to withdraw cash. The first automated teller machine (ATM) in Canada required customers to use a key, user card and access code just to get their hands on $30. But the ATM’s introduction in 1969 was a revolutionary development because it opened the door to 24/7 banking, which meant no more lining up on Fridays to get money for the weekend. Technology has long been the driving force behind improvements to back office and front office banking operations alike, which is why the industry’s combined annual IT budget currently tops US$350 billion worldwide. And thanks to this money, along with the US$40-plus billion that has been invested in so-called FinTech ventures since the global financial crisis, it is safe to assume revolutions of banking-sector past will pale in comparison to what is coming.

What is FinTech? There are a variety of answers to that question, but the term essentially refers to innovations in financial technology. Nobody knows exactly how big an impact the current digital wave of FinTech will have on the financial sector over the next two decades. But by 2036, you can certainly forget about regular branch visits or banking at an ATM. In fact, you can probably even forget about using banking apps, according to thought leaders at Digital Disruption in Financial Services, a special FinTech event recently hosted in Toronto by SWIFT Institute, the global financial sector’s cooperative, and the Ivey Business School’s Scotiabank Digital Banking Lab. Assuming cyber security remains manageable, panellists at the 30th November 2016 event predicted the digital world will eventually allow you to bank anywhere at any time without access to a computer or smartphone. Think about all the wasted time you currently spend in traffic. That won’t be an issue in 2037, when you will probably travel around with a personalized AI assistant (think Siri, Google or Cortina on steroids) embedded in special glasses or a hat (or in your head). After hailing an automated transport pod to take you to work or out for dinner, your robo life manager will be there to offer advice on investing matters, help you find the best deals on consumer goods or do other productive things like arrange a crowd-sourced mortgage or peer-to-peer loan. As you travel from A to B, you might just earn enough reward credits making transactions to pay for your trip.

“You never know, the cool new thing amongst the kids in 20 years might just be carrying around paper-based bank books,” Jesse McWaters, the World Economic Forum’s financial innovation lead, told the conference room packed with bankers, tech entrepreneurs, regulators, lawyers and academics. But the future-of-banking panellist also pointed out that the world tends to overestimate changes expected in two years while underestimating the changes that a decade will bring. And so in 20 years, McWaters figures the banking customer experience will be nothing like it is today. Financial institutions, he says, will likely exist below the surface of consumer perception, providing a secure platform for an ecosystem of products and services, including plenty of third-party offerings. And visible or not, banks will not just

be in the business of providing financial services and offering market advice. Using a combination of behavioural science, biometrics, transaction data and customer tracking data, financial services firms will exist to offer advice throughout your day. For example, your bank will coach you to be a better spender. “I think that’s a fundamental shift in the way we perceive the role of financial institutions that really could be coming over the next 10 to 15 years.”

Behind the scenes in 2037, blockchain technology will enable distributed ledger systems and digital currency options that will vastly improve payment and settlement systems, reducing industry costs along with consumer frustrations. In the future, for example, consumers will probably no longer receive service calls from bankers with legacy systems that force customers to reveal sensitive account security data over the telephone just so their bankers can check if customer security has been breached. According to a digital survey conducted at the SWIFT Institute/Ivey event, the disruptive potential of blockchain technology was the top area of interest amongst attendees.

When industries are disrupted by technology, a battle for market dominance typically takes place between the old guard and new entrants. Incumbents often lose, especially ones that try to defend leadership positions with business models that are past their best-before dates. Think about what technology did to the music industry. That’s why interest in FinTech has exploded over the past few years. But as explained by Ivey Professor Michael King, one of the directors of Ivey’s digital banking research, there is a false perception, generated by a misquoted McKinsey study released early in 2016, that FinTechs are expected to take away 60 per cent of banking industry income. What the report actually said was that FinTech firms are targeting areas that generate 60 per cent of industry revenue. If truth be told, nobody really knows how the battle for market share will turn out. There will, however, almost certainly be massive disruption to existing business models. But what does that mean? King told the industry gathering to imagine trying to travel around Europe by plane back in 2010, when the volcano Eyjafjallajökull erupted in Iceland, forcing the largest air-traffic shut-down since World War II. Despite that comparison, attendees were still advised not to expect traditional Canadian banks to be universally grounded by FinTechs.

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