Ironically the phrase financial technology (subsequently shortened to fintech) was coined as part of the creation of the Financial Services Technology Consortium by Citicorp (more commonly known by its banking name Citibank) in 1993. Many of us will remember Citicorp at the time was at the forefront of technological innovation, spending millions on creating systems and products in-house, in turn giving it a real edge over its competitors (Citicorp even set up multiple stand-alone technology businesses, the most well-known of which were CITIL and COSL, which fetched millions when Citicorp sold its shareholding). Its objective in forming the Consortium was stimulate cooperation with other players in the industry as well as technology companies.
Fast forward 20+ years, we haven't seen the co-operation sought by Citicorp between banks and technology providers to establish standards, protocols and change how we bank. In part, this is due to technology companies becoming financial service providers themselves (the 'front-end disruptors') and competing with banks – marketplace lenders, e-wallets, online-only banks, etc. Then there is the banking sector's legacy technology, unwillingness to let go of margins in highly profitable areas like remittances, and the super-high valuations of 'front-end disruptors' themselves.
But is disruption far from becoming reality?
Ordinary depositors still trust their money with brick-and-mortar banks; the regulatory environment for disruptors is still not clear, and there isn't a single well-known name that everyone around the world can relate to – at least not to the same extent as Citibank, Deutsche Bank or Barclays. Then there are the additional challenges of literacy, the unbanked and of course smartphone penetration.
The evolution from traditional banking models to fintech will be driven by the demand-side rather than from within the financial services sector itself. Banks resisting change in favour of maintaining margins or minimising capital expenditure are likely to get left behind or disappear. PSD2, if and when adopted, will also help fast-track this demand-side push.
Early technological innovation in banking was largely confined to the back and middle offices, creating what has become 'legacy' systems as well as outsourcing/offshoring of operations. The fintech revolution as we know it, has primarily focused on the front-end, changing the way consumers and corporates buy financial services. We are about to see newer technologies permeate through the back and middle offices of banks once again, thanks to wider adoption of block-chain technologies, artificial intelligence, and IaaS/PaaS. Once the cost-benefit analysis of these changes are clear, we should see a rapid transformation of the sector.
Historically insurance has trailed banking in its adoption of new technologies. By its very nature insurance is difficult to disrupt given the unpredictability/forward risk nature of the business, specialist understanding of actuarial modelling (life insurance and pensions/annuities) and the concentrated nature of the industry. Similar to banking recent change has been to the front-end of the industry in helping lower customer acquisition costs and improving user experience. But in sharp contrast to banking, the insurance industry has seen comparison websites/marketplaces (Insurtech, anyone?) and insurers work closely with each other, helping bring down customer acquisition costs and lowering the cost of insurance for the computer-savvy, without feeling threatened.
Changes in the middle and back offices with block-chain technologies and smart contracts, telematics as well as advances in genetics, will potentially create greater transparency, better matching of pricing and risk, and streamlining claims processing that have otherwise been associated with poor service from the sector as a whole.
Trading and capital markets
Looking back over the last decade or so, it is evident that the capital markets have seen relatively few but some of the most profound technological adoptions with the advent of algorithmic trading, dark pools and newer trading venues/multilateral trading facilities (MTFs). The days of floor-trading have all but gone and traditional exchanges have increasingly turned into technology businesses providing low latency connectivity and hosting, real-time data and multi-asset class trading capability.
One obvious reason for the quick adoption is that unlike in other financial markets, the incumbents had the most to gain from change and had the balance sheet to support the change. Custody, clearing and settlement are areas where change is yet to come, with real-time settlements still far on the horizon. Smart contracts, artificial intelligence and shared ledgers will fundamentally change the role of some of the back-office incumbents.
Wealth management and investment advice
The wealth management market has probably resisted change thanks to the preference of the millennials and the pre-millennials (where most wealth is still concentrated) for face-to-face personal advice. The forced advent of paid-for advice following RDR-esque changes which have shifted advisers to seek fees from their clients in various countries, have meant investors are increasingly taking control of their own finances.
Change is evident in the introduction/penetration of lower-cost exchange traded products, robo-advice and personal financial tools. This transition has not been fully inclusive, creating a category of wealth holders who remain unadvised. Robo-advice is nascent and will benefit from longevity but unless there is significant uptake by investors it will remain a niche area for some time.
In some ways the payments industry has been far ahead of banking and insurance in adopting technology. Visa and MasterCard had a vested interest in making technology work given the absence of legacy systems that banks had the deal with, susceptibility to fraud, and the sheer volume and velocity of money flow. Their structure and cash-rich nature has helped alongside the licensing regime loosening over the years.
Micro-payments has been the last bastion of this industry to see change due to the relative cost. The proliferation of mobile technology has provided the much needed impetus to effect change. If anything, this is the single biggest innovation in bringing the unbanked into the mainstream of banking especially in emerging markets. In more developed countries, mobile technology has helped combine convenience, security and loyalty.
Another big change has been crypto-currencies (the precursor to the wide-spread adoption of underlying block-chain technologies) which although a long way away from becoming fiat currencies, are increasingly mainstream in e-commerce, remittance as well as savings/stores of value.
All in all, the imperative for change will come from users – consumers, corporates and institutions alike – but the pace of change will be influenced by regulation, the state of the economy and the balance sheets of financial institutions. Front-end disruptors will continue to wean away clients from incumbents and there is a slight chance that one or more may even become powerful enough to usurp some banks along the way to access clients, licenses, and established brands.