The Future of FinTech: Collaborating for good of the customer
‘FinTech’ with all of its disruptive, David-vs-Goliath build-up is in full swing with global FinTech investment growing by 75 percent, or $9.6 billion, to $22.3 billion in 2015, according to an Accenture report. SWIFT Institute decided to take a look behind the hype and examine where FinTech sits within the more long-term historical trends relating to financial technology, as well as touching on two main topics within FinTech innovation: Big Data and blockchain. We spoke to Bruce Weber, Dean of Lerner College of Business & Economics at the University of Delaware, and David Dab, Chief Innovation Officer at ING Belgium, about their predictions for the use of innovative technology within the financial services industry.
Bruce Weber started off by challenging the current hype surrounding FinTech, asking whether the recent bout of innovation is a new phenomenon, or an extension of existing developments. One of the first FinTech revolutions came with electronic trading and paperless trade settlement in 1970, removing the necessity of floor traders and messenger boys running back and forth between firms with share certificates. In 1969 and 1970, US stock markets had to close on Wednesdays for about a six-month period because the manual, paper-based settlements system could not keep up with the spike in trading volume. ATMs appeared as early as the late 60s and caught on in the 1970s. “The FinTech revolution has been around since the early 70’s,” Weber said. “We are not dealing with something that has just started; we are instead seeing something that is disruptive but is evolving. There has been a long tradition of financial services firms taking technology on board to streamline and automate important functions. As soon as one function or market is computerised, new opportunities arise.”
Weber believes, however, that we were currently at an inflection point with mobile and cloud computing, and ubiquitous internet access, which allows greater consumer accessibility to their financial accounts than ever before. He explained, “I think that what is new within the last five to ten years is the notion that maybe these new technologies could actually replicate the services of the dominant, incumbent banking firms. Now, every FinTech inventor or investor is interested in challenging our assumptions about what the end customer wants to do. Would they want to have their credit card replaced by their mobile phone, or their government-assured commercial bank accounts held in Bitcoin instead? These are the big open questions.”
David Dab agreed with the fact that today the FinTech scene presented a very complex landscape with a lack of clarity and a definite tendency towards hype. “If you look at it from a distance,” he said. “It is just a normal stage of development of an initial proliferation of ideas and companies leveraging new technologies and possibilities.”
FinTech’s future: the best of times…
When asked about the best-case scenario for the future of FinTech, Weber immediately responded that the investment landscape of household investors has become so much more efficient and cost-effective than it was in the 1980’s because of technology and competition. “The amount of trading cost that has been taken out to the benefit of retail investors is huge, probably more than 90% in reductions across bid-offer spreads, fees and commissions by the on-line brokerage firms. It’s year-round Christmas for the individual investor,” commented Weber.
Weber believed there was an opportunity, nonetheless, to help people take more control over their own individual financial security. This would not be an easy thing to do because industry is extremely fragmented, for example, one person’s finances can lay across different retirement, investment, bank and insurance accounts. Yet there was a considerable need for the creation of a usable system providing individuals with a picture of what they should be doing with their money over the course of their lifetime and positioning themselves accordingly throughout their lifecycle.
Dab thought that the brightest prospect for the future of FinTech lay within collaboration between banks and startups. “FinTech startups don’t have the customers, access to markets or the ‘horsepower’ of a larger company. Large financial institutions are cumbersome, loaded down with legacy systems, and lacking in innovative culture. These two individual groups are in a position to complement each other.” Dab reminded us of the difficulties of startups working with large banks, both in terms of the larger banks’ organisational set-up and long decision cycles. “Banks are huge and complicated institutions. As a typical startup, you don’t know where to enter or what door you need to knock on. When you do go through that door you end up in a maze. When you eventually figure out whom to talk to and think you have a deal, all of a sudden you realise you don’t have one because another department enters into the process. The banks really need to learn to provide feedback to start-ups a lot faster. It looks simple, but banks are bad at doing that.” This is why David Dab is heading up ING’s FinTech Village, an initiative backed by ING Belgium in collaboration with the ING Group and other key partners such as SWIFT Innotribe. FinTech Village is a four-month programme for technology-driven startups offering solutions relevant for financial institutions, helping them provide superior financial services for their customers. The programme at Fintech Village is designed with a single objective, to help startups prepare and execute a Proof of Concept with the bank in an accelerated manner.
The worst of times….
The largest threat to the future of FinTech in Weber’s opinion was cybersecurity, incorporating the whole notion of digital identity, security, verifying and validating. As technology has become more powerful and capable of moving increasingly bigger sums of money around, the vulnerabilities are more evident and more worth attacking. “How can we prevent somebody digitally impersonating others?” Weber questioned. “Now we are looking for better ways of making sure that the person clicking on a funds transfer web-screen is really the person that is the official owner of that account. Authentication is an area that is currently creating friction for the whole FinTech space.”
The second threat that Weber foresees was getting past the myth of David vs. Goliath. Whilst a small proportion of small, agile startups would inevitably disrupt traditional financial services providers, the bulk of the FinTech companies should be creating interoperable solutions that are supportive of the existing firms. But it would be the area of common standards that the future of FinTech would be based on. These could be closed, proprietary standards, beholden to a clearinghouse or network provider for example, or interoperable, open-sourced standards like ISO. Instead of fighting over market share, co-operation between companies in the form of common standards would help grow the overall pie.
Dab agreed that the point about interoperability was absolutely critical. Whilst it was normal that the FinTech landscape would remain somewhat fragmented because of the variety of contenders, the banks themselves would have the challenge of integrating all of these new solutions into their existing IT legacy infrastructure. “API and smart connectors would be required in order to ‘plug & play’ solutions, and to quickly replace them when better innovative solutions would be produced. Furthermore, it is often the case that a bank needs to integrate several FinTech components to assemble an innovative solution. Easy connection between building blocks is important here too.”
Big Data and Blockchain
Taking two instances of innovation in the financial services sphere, we examined the areas of Big Data and blockchain. Dab did not agree with an observation that Big Data did not at times perform as well as hoped. He explained that there was no doubt that advanced analytics worked in the sense that, fed with proper data, algorithms could provide valuable insights that would be inaccessible just a few years ago. One of the challenges in order to deliver actual impact, however, was that a long chain of elements needed to be assembled. “Upstream, you need to extract, clean, transform and load the data in the right place for algorithms to start processing them,” Dab rationalised. “Downstream, the insights produced by algorithms must be integrated into the fabric of a company including processes, systems and people. All along the chain, automation and increased scalability is needed. The challenge is that the weakest element of that complex setup tends to command the overall performance.” Additionally, Weber specified that one had to be continuously on guard against inaccurate inferencing when using Big Data. The introduction of near-field readers and radio-frequency identification (RFID) chips, otherwise known as Source Data Automation, were expected to help in this area because they would reduce the potential for error by initially collecting data in digital form.
Turning to the development of the potential of blockchain, both Weber and Dab agreed that distributed ledger solutions require multiple parties to use the solution and agree to its standards almost by design. Weber likened the prospective implementation of blockchain systems to the development of the ATM network in the US. “ATMs started out as closed, proprietary networks,” Weber explained. “And then the banks realised that they were not getting any further advantage installing stand-alone ATM machines, they decided it would be better to connect them and agreed on a shared format.” Weber believed it would be more useful to think of the blockchain platform in relation to a technology stack, clarifying that blockchain was at a very low level within that technology stack. But it would be at the top of the stack, the interaction with the customer, where the bulk of action in a future FinTech world would most likely lie.
Given that the FinTech space cannot be considered as brand spanking new, we asked if there were lessons from the past that this generation of innovators could learn from. Weber pointed out that because financial services relationships were considered very ‘sticky’, the overall adoption might be slower than has been forecast. Despite this, he believed that once ideas caught on, winners would emerge very quickly because of the nature of network externalities. Once a winner would have established himself as the leading standard, everyone would then build to his specifications.
Dab made the observation that the industry dynamics and structure within financial services were quite different at the different stages of the value chain. Certain areas were more consolidated (for example, central clearing counterparties and central securities depositories), whilst other areas had more room for fragmentation and a proliferation of new solutions (for example, alternative trading platforms). It was expected that FinTech would similarly structure itself differently according to the distinct areas along the value chain.
Both Weber and Dab felt quite strongly over the potentially stifling nature of regulation with a detrimental impact to FinTech innovation. Whilst regulators, of course, have their reasons for creating legislation to ultimately protect the end-consumer, they both asked if it was worth the cost of complying to. Dab commented, “We must not prevent startups from doing what they want to do for the wrong regulatory reasons. Regulators need the maturity to embrace the inevitable change. One does not necessarily need to always apply, for example, the same regulatory standards to a small pilot concerning a few clients than to a large scale roll-out.” Weber concluded, “I think sometimes we don’t have enough faith in the markets. Players in the markets gravitate towards the safe solution or solution that gives them the best prices without having our regulators prescribe, for instance, what price ought to be applied to every trade.” The future of FinTech, less the hype, seems to promise a world of more cost-effective services and more collaboration, whilst the pitfalls of cyberattacks and over-regulation need to be avoided. Having both startups and traditional financial services providers work together to help build common standards and smart connectors should ease the path of the ultimate connection between innovation and the end-customer – via the interface of today’s traditional financial institutions.