The Fintech revolution is well underway. Waves of innovation are crashing over the solid rocks of the financial services industry, creating much noise and excitement. But how is Fintech really driving new economic and social value, and for whom? And where will it take us? Our new project with Grant Thornton is taking a fresh look at Fintech.
Financial innovations do not seem to feature in the history books quite as prominently as such engineering and scientific wonders as the steam engine, penicillin or space travel, but do not underestimate their power to transform our lives.
The development of the sophisticated social technology we know as ‘money’ propelled society from subsistence to specialisation of labour. The development of credit and banking fuelled the industrial revolution, and the advent of computing from the 1970’s spurred innovations from the ATM to the USD 493 trillion global derivatives market.
The development of finance has without doubt spurred on the march of social progress, but in common with all technologies, financial innovation is not automatically a force for good. That depends on how we exploit it.
Our personal and cultural relationships with money has always been troubled. History tells us that where there is financial trading and credit, a bubble seems sure to follow, and since the global financial crisis of 2008, even prominent financial system insiders questioned whether all the innovation had been socially useful.
So how should we greet the latest wave of financial innovation widely known as Fintech?
Are we witnessing a revolution in financial services?
We see this as the most rapid change in financial services since the 1986 deregulation and computerisation of UK finance known as the ‘Big Bang’. Technology is revolutionising debt & equity markets, payments, credit assessment, regulatory compliance, personal finance and many other facets of financial services bringing forth new business models, new services and new entrants.
Much of the focus so far has been on alternative finance platforms – crowdfunding and peer-to-peer (P2P) finance. This market reached £3.2 billion of lending and investment in 2015 and has brought new investors, borrowers, companies and projects together in new ways that increase transparency and extend finance to some that would otherwise fail to find it. Is this a disruptive innovation that will sweep away incumbent banks, rather as Instagram displaced Kodak? Or do the recent signs of slowdown in the UK P2P market and US regulators probe into alleged malpractice at Lending Club herald the high water mark of the challengers?
Perhaps, but in any case we are taking a look at Fintech from a much broader viewpoint. Not only are we interested in start-ups that are exploiting new digital and mobile technology to serve customers, but also in how existing financial firms are taking advantages of new possibilities.
Some of the biggest changes might be apps from the likes of Mondo and Squirrel that help people to manage their money better.
Will advances in data analytics bring huge advances in credit assessment and market insight through apps such as Aire, Credi Karma and Kensho?
Will advances in artificial intelligence take finance advice into a de-personalised future, or will it drive new and more convenient opportunities for human interaction?
Some of the greatest impacts might be those that are felt ‘behind the scenes’ rather than from the more obvious new consumer brands and products, for example in revolutionising compliance and regulatory management, or start-ups focusing on cyber and data security such as Crypto Labs and Privitar.
The true promise of blockchain (mutual distributed ledger) technology is still hard to discern and although the hype might have arrived already, the real evolution and adoption of such technologies might still be a process measured in decades.
In order to generate insights for policymakers, public and professionals we are conducting research and engagement in tandem with Grant Thornton’s Vibrant Economy programme in order to illuminate how these different scenarios might unfold.
Who are the winners and losers from this revolution?
But more fundamental to our enquiry is to stand back and ask how is this revolution going to drive to economic opportunities and social progress?
To answer this question we will take a new look at Fintech through the three different lenses of trust, purpose and regions.
- Can technology increase trust in the financial industry to deliver appropriate, fair and transparent products favouring new entrants whose reputations are untarnished by the global financial crisis? Or as digital finance becomes all pervasive, will concerns over data security and privacy favour well established brand who have served us for centuries?
- Will technology anchor financial service more securely in serving the real economy? Does Fintech naturally benefit households and companies more directly, boosting investment in productive sectors and extending access to finance?
- Can Fintech play a strong role in supporting regional growth, firstly as a provider of local jobs and wealth creation and secondly by increasing flows of investment capital into regional economies.
The only thing that’s certain is uncertainty
Financial service professionals are well versed in the adage that “past performance is not an indicator of future results”, but dealing with uncertainty has been given a turbo boost by the UK’s referendum vote to leave the EU on 23 June. Brexit adds a new layer of complication to understanding how technology might affect financial services, with many unresolved issues from bank passporting to recruitment potentially having adverse effects on incumbents and start-ups alike.
Over the coming months we will be blogging in more depth on the key issues that we identify for the sector, and reporting back some of the findings from our engagement with senior professionals, regulators and other financial sector stakeholders. If you are involved in Fintech and would like to share your insights with us then please get in touch.