The financial sector was one of the first to embrace technology. It was back in the 1960s that banks and insurance companies began to install their first mainframes. These were machines supplied by IBM and others. They cost a fortune, were arranged like lines of large wardrobes, were instructed in what to do by reading holes in appropriately named punched cards and ran so hot they required their own pristine air-conditioned rooms. But they revolutionised record-keeping and the ability of these organisations to handle and communicate with vastly increased numbers of customers.
Then in the 1980s and 1990s, technology spread. Concepts such as end-to-end transaction processing brought change to middle as well as back offices. The application of technology to dealing and to the markets brought in the front office. Competitive advantage went to the trading room with the best, fastest and usually most expensive kit. There were good reasons why the struggle between securities houses to gain an edge became known as ‘the arms race’.
Why fintech is different
But somehow fintech is different from what has gone before, and not just in the scale of the hype that surrounds it. Technology in financial services in the past was largely about internal efficiency; doing established things in quicker, better ways. If one were to attempt a definition of fintech, it is that it has the power to transform the business relationship with the outside world, on paper at least. It makes possible entirely new ways of thinking about financial services and opens up the opportunity to do business in entirely different ways. The FCA’s sandbox, in which companies can experiment with innovative approaches to financial sector business unfettered by current regulation, is a very practical recognition of this. We are not there yet, although there are some business models, such as peer-to-peer lending, the smart advice systems of investment platforms, and savings apps to aid thrift, which can legitimately claim to be fundamentally different from what has gone before.
The parallel is with the invention of manned flight. When the Wright Brothers took to the air for the first time in a powered vehicle in 1904, it changed the way people thought about transportation. Fintech is technology becoming airborne. Its only boundaries are those of the imagination.
"Fintech is technology becoming airborne. Its only boundaries are those of the imagination"
This is partly because of cost, partly about power and partly about reach, but mainly about the combination of all these things. Access to more people, with more data, in different ways and at a fraction of the cost opens up entirely new routes to market and renders old, long-cultivated relationships obsolete. But it is also about the power of disruption. The world’s largest hotel company, Airbnb, does not own any hotels; the world’s largest publisher, Facebook, does not generate any content; and the world’s largest retailer, Alibaba, does not own any stores. Fintech is about the arrival of a Facebook in finance. It is the possibility that someone with no background in traditional finance could change the competitive landscape overnight.
Established players respond
A 2017 survey by business consultancy PwC says that 88% of incumbent financial services firms are concerned that they are already losing revenue to innovators and, naturally enough, three-quarters of them say they are going to try harder themselves to innovate, either by using their own internal resources or, more likely, by forming a fintech partnership with one or more of the new players.
But one should not underestimate how difficult it is for any board to take a bold leap into the dark. This prompts Roger Jenkins, briefly the chief executive of Barclays, to make a distinction between incremental change and transformational change. In his view, too much of the spend on technology among the big established players is aimed at achieving incremental change, and he attributes this in part to risk aversion. Boards do not feel comfortable with the pace of change, and have been burned in the past by technologies that failed to perform as promised. They want to keep the new firmly under control. Jenkins understands why boards are reluctant – boldness can so easily turn out to be rashness – but he believes it is a challenge the sector has to face up to.
They will also soon have to accept that it will change the regulatory landscape. The arrival of the EU’s revised Markets in Financial Instruments Directive (MiFID II) will require a step change in the volume and detail of reporting and monitoring demanded of firms. It is expected that the vast quantities of computer-generated data will be managed and analysed by equivalent technology on the regulatory side. A world where computers regulate computers is symbolic, but it also shows how far and how fast fintech is changing our environment.
Anthony Hilton FCSI(Hon) is the award-winning former City editor of The Times and the London Evening Standard.
This article was originally published in the Q4 2017 print edition of The Review. The print edition is available to all members who opt in to receive it, except student members. All eligible members who would like to receive future editions in the post should log in to MyCISI, click on My Account/Communications and set their preference to 'Yes'.
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