Watch the City Debate 2018Some 76,500 people currently work in the fintech sector in the UK, according to data from the City of London, a number that is expected to grow to 105,000 by 2030. This is concentrated in London, as is the case with the wider financial sector, but fintech workers still account for a fairly small minority of the 513,000 people employed in the City. But the products and services they develop are likely to have an outsized influence on the financial services sector in the years ahead. 

Just how revolutionary the changes prove to be is a matter of debate. And what is fintech anyway? On one level, says Michael Mainelli, Chartered FCSI(Hon), co-founder of commercial think-tank and venture firm Z/Yen Group, fintech is simply a portmanteau of ‘finance’ and ‘technology’. But he says the word has over time taken on greater significance than that simple explanation suggests, with the strong interdependence between the two elements leading to the development of new skills, processes and regulations. This has given birth to a host of new terms similar to fintech, such as regtech (regulation technology), insurtech (insurance technology) and legaltech (legal technology).

Technology has of course already had profound consequences for the financial services sector. The basic underlying idea – the automation of financial services – began with the rollout of ATMs in the UK in 1967. Since then the sector has seen other important developments, such as the establishment of domestic and international payment systems like SWIFT, as well as electronic trading and online banking. More recently, the ubiquity of smart phones has prompted a new wave of financial services innovation.

“Financial services need fintech firms (fintechs) to meet the changing needs of customers,” says Rav Hayer, banking data and analytics partner at PwC. “Customers want simplified, quicker services at the touch of a button. Fintechs can be nimbler. They're able to challenge the thinking of banks.”

Blockchain developments

One of the most prominent areas of fintech development over the past few years has been distributed ledgers, more commonly known as blockchain. Blockchains store information about transactions that is then publicly available, with the records replicated on every computer on the network – that makes the transactions both easily verifiable and also very hard to tamper with. 

Blockchain lies behind new cryptocurrencies such as bitcoin. In theory it can do away with the need for a trusted intermediary, such as a bank, as the system is set up so that anyone and everyone can verify the information themselves. Michael from Z/Yen says: “The advantage is that smart ledgers allow organisations to work together without giving central third parties a strong natural monopoly.”

But the idea of a trustless financial system is not one that everyone accepts as being viable. Indeed, trust is as much an issue for technology firms as it is for financial firms. Rachel Kenyon, business engagement lead for fintech at the University of Manchester, explains: “Consumers are willing to sacrifice security for convenience to an extent, but there is an expectation on companies to protect them, their finances and their data. As such, balancing convenience with trust is key to the success of fintech.” 

There are other problems with blockchain, including the amount of energy it uses and the speed at which the system can process transactions (see boxout).
Blockchain and bitcoins in the real world
One often overlooked aspect of the fintech revolution is that, just like traditional finance, it needs physical infrastructure. Bits and bytes might seem amorphous, but they need to be stored somewhere. This has led one firm, Xapo, to build a high-security bitcoin vault in the Swiss Alps.

In addition, mining bitcoins takes up huge amounts of energy and requires space both for all the computer servers and the power plants needed to keep them running – according to the bitcoin energy consumption index compiled by Digiconomist, as of end-January 2019, bitcoin mining is using close to 48 terawatt hours of energy a year. According to Digiconomist, this is around the same amount of power consumed by an advanced economy like Singapore.

Physical space is also needed for the companies and their staff. Fintech firms benefit from the network effect of clustering in the same way any industry does. 

Among the other real-world challenges for this new technology are the limits to the speed at which transactions can be processed over blockchain. The bitcoin network, for example, generally only processes between three and seven transactions per second. By comparison, Visa says its payments network can handle up to 24,000 transactions per second.
Michael contends that blockchain technology will not replace banks and other trusted intermediaries, but it could lead to new ways of doing business. “Smart ledgers apply to areas where we have failed to establish central third parties, such as anti-money laundering documentation transfer,” he adds.

Companies in the fintech space are well aware of the challenge of balancing convenience and trust. “Fintech growth is being driven by people’s desire to have more control over their money,” says Angus Dent, chief executive of peer-to-peer lending platform ArchOver. “Handing control to the consumer has been a welcome move in a sector marred by a lack of trust and transparency. Paradoxically, the next decade will see investors handing over this hard-won financial control to the technology itself. The challenge will be ensuring investors still feel they’re in the driving seat.”
Career challengesAsset managers and hedge funds have been making use of artificial intelligence (AI) and machine learning to inform their investment choices for some years, but some sector observers suggest that the pace of innovation is likely to increase. “The investment and wealth management world has changed a lot with technology over the past 15 years but much less than most other sectors,” says Cyril Delamare, CEO of asset management firm ML Capital (see our article on the opportunities and threats of digitalisation). “This will change with the new generations starting to save for the future and wanting to see in the wealth management providers a much more technological aspect.”

For many of those working in financial services, such developments could spell career uncertainty. “The combination of finance and technology will result in what [economist] Joseph Schumpeter referred to as a process of creative destruction [of old ways],” Antony Jenkins, former chief executive of Barclays and founder of fintech firm 10X Banking, told the audience at a joint CISI and Centre for the Study of Financial Innovation debate on the role of fintech, held in London in March 2018. 

The way is open for “a more transparent and cheaper and quicker way to manage data and money,” he argued. “AI will allow faster and better decision-making for credit risk, fraud and marketing. The real question then is to what extent technology will automate the process of intermediation and decision-making. If a great deal, as looks distinctly possible, then why would you need banks at all?”

Not everyone is quite so pessimistic about the position of financial firms, though. Others taking part in the debate, such as Nikhil Rathi, CEO of London Stock Exchange, argued that fintech brings new skills and talent into the City and he pointed out that major tech firms such as Facebook, Google and Amazon have hired thousands of people in London since the Brexit referendum in 2016.

Even so, there is still doubt about what technology developments will mean for the City. At the event in March, the audience was polled before the debate and voted 51% to 49% against the motion that 'This house believes fintech will save the City'. By the end of the debate they were even more sceptical, with a resounding 73% saying fintech would not save the City.

Watch the debate on CISI TV

Despite the conflicting opinions, it is clear those working in financial services will have to adapt because technology isn’t going away. 

William de Lucy, chief executive of fintech training firm Amplify, says demand is increasing for front desk sales and trading staff to have programming and quant abilities. “These roles would not normally demand this knowledge but as technology is ever more integrated into supporting their day-to-day roles, an understanding and appreciation of that technology can help them perform their roles better,” he says. “The trend is for an amalgamation between man and machine.”

It is a view that others share. Looking to the future, Michael says: “Our skills will be more about technology than finance. Perhaps we should require some programming skills for all financial professionals.”

“There is clearly a shift in requirements from businesses with regard to both research and graduate skills around developments in data science and digital technologies,” says Rachel. “The most effective way to ensure universities are meeting future business needs is for academia and industry to work more closely together.”

In particular, she points to the growing need for greater understanding of programming and technological functionality. “These skills are now required within product and service design, business strategy, marketing and beyond,” she says.
“Perhaps we should require some programming skills for all financial professionals”  However, academia is not known for its institutional agility and it can often take several years to revise a degree curriculum, both to ensure it still meets the required accreditation standards and to put in place suitably knowledgeable staff to teach it. But training future generations of workers will not be enough; there is also a need to improve the skills of existing staff. “Universities should work with business partners to develop and deliver lifelong support for alumni, with routes to update knowledge and skills,” says Rachel. “Delivering targeted continued professional education in partnership with businesses will keep existing workforces up to date. Such activity could be funded by businesses who receive a direct benefit via a better-qualified workforce.”

Dr Paolo Tasca, executive director of the UCL Centre for Blockchain Technologies, agrees that the investment landscape of the future “cannot be accurately predicted”, but he says some of the current avenues for exploration are: tokenisation – in which assets like shares in private companies or debt issued by start-ups can be tokenised and traded among a much wider community than has been previously possible – as well as fractional ownership of physical assets. 

He says the impact of these developments depends on improvements to apps, to enable users to engage with these investment opportunities themselves instead of relying on professional managers. “Big data could push the needle in either direction,” he says. 

AI, machine learning and blockchain may fundamentally alter the sector but not everything that becomes possible as a result of these advances will prove to be useful. Computers may be good at solving problems, but they can’t necessarily identify unmet needs. In a recent interview with The Review, Antony says: “The most important thing for individuals, and indeed for organisations, is to have agility because we can’t predict what the world will look like in five years. We need people who are flexible, curious, dynamic, energetic and can grip these new wonderful tools we have at our disposal in technology to solve real customer problems.”

Even so, technology will still be needed to turn those ideas into products and services. “So far ‘tech’ has surpassed ‘fin’ as the driver of change in our sector. Perhaps our portmanteau would be better as techfin, rather than fintech,” says Michael. 

Seen a blog, news story or discussion online that you think might interest CISI members? Email bethan.rees@wardour.co.uk.