Recently, I have been trying to pinpoint a subject for my first article to The Outlier and to be honest my first complete non-scientific article ever. Suffice it to say a week later, and having crisscrossed a dozen different subjects, I ended up with FinTech. Now a good question is, why FinTech? Nowadays many people seem to think that the financial sector — at least as we know it — is a thing of the past, slowly awaiting it’s long deserved fate: oblivion. But is that really the case?
Well…. it seems not quite so! Whatever you might think of the financial sector, it is certainly at the center of the Big Data revolution. From automated agents (trading) and recommendation systems (matching products with clients) to block-chain (distributed-ledger) and deep learning there is a plethora of potential applications of big data technologies there.
To make things even more interesting to you — aspiring entrepreneurs out there — financial institutions are investing heavily in FinTech, Accenture puts that number to 50 billion since 2010. Adding to that FinTech companies are attracting an increasing amount of interest and funding from venture capitals and all sorts of funding vehicles. In 2017 alone, FinTech companies raised approximately $17 billion, according to CB insights.
It is increasingly evident that new solutions developed for or from existing players and possible disruptors will redefine the entire sector, according to Accenture. Giants may fall or downsize and new players may emerge in the future. While all this is mere speculation one thing is certain: a lot is going to change and these changes are going to be primarily Data Science driven.
What Is FinTech
Simply put, according to Investopedia FinTech is an umbrella term used to describe any technological innovation which improves the way people transact their business. In other words the term FinTech can be attributed to any innovation using technology, ranging from the completely mundane tasks of improving bookkeeping and record-keeping to the creation of fully automated traders and digital currencies.
“FinTech creates opportunities for banks to improve their product offerings, service delivery and save costs. It’s a key way to enhance business, especially in an era where more and more people conduct business electronically”.According to the Following video by OCBC bank.
1. Distributed ledger technologies (DLT’s). Examples of DLT’s are bitcoin and Ethereum. I will not deal with the details here, articles about bitcoin today are more popular than the Kardashian’s in the U.S. Except from the obvious crypto currency trading which recently expanded to traditional exchanges with the launch of the first bitcoin futures (listed in Chicago Mercantile Exchange, CME), DLT’s also have applications in drafting electronic contracts and open banking aiming to create applications which integrate financial services from different companies and institutions .
2. InsurTech, an abbreviation of insurance technology, aiming to implement cutting edge technology solutions in the insurance industry.
3. RegTech, aiming to improve compliance with regulations, which it seems even lawyers have difficulty keeping track of.
4. Recommender Systems, aiming to match clients with products, the idea is to create automated systems, much like the recommendation algorithms of Netflix or Amazon, but for financial products, investments, savings accounts, cards etc.
5. Unbanked/Underbanked services, unbanked is a term which refers to people around the world with no or limited access to conventional banking services. While primarily targeting developing countries, even in the U.S. the number of unbanked and underbanked people is estimated at over 10 million according to Forbes.
6. Cyber-security, mainly fraud detection applications.
For a detailed presentation see this article by McKinsey & Company
A Brief History of FinTech
FinTech history originates in the mid 1800’s with the deployment of the first telegraph systems, and the first transatlantic cable linking Europe with the America’s, which allowed communication over long distances. In 1918 the first automated system for fund transfer connecting the US reserve banks with the treasury department was developed, using cutting edge communication technology. Well, in today’s terms it’s difficult to describe a communication system using Morse code to transmit information as cutting edge, but it probably was back then…
The second half of the 20th century signaled important developments, which gradually transformed the financial sector to what we know today. The first credit cards were created, followed by the first cash machines and the first Interbank payment systems. In 1971 the first automated trading system was created marking the emergence of a new technology… the internet! By the end of the century, the first online checking accounts and the first virtual banks were a reality, leading to what we know today as the financial sector.
The differentiating line of modern FinTech, according to Investopedia can be traced to the beginning of the 21st century. Until then FinTech was typically employed in the back-end of financial institutions, meaning that it was not part of the customer interaction, but was instead used to improve internal processes. Typical back-end processes include accounting, administration, document handling etc. Whereas nowadays FinTech is also employed in the front-end of business operations where the term front-end refers to the part of the business which interacts with the clients including customer support, sales, marketing.
Recent large scale AI-projects include projects such as COIN which stands for “Contract Intelligence” from JPMORGAN. A platform developed to analyze legal contracts and has already saved the bank approximately 360.000 lawyer hours according to Bloomberg. The bank of America on the other hand has developed Erica, a chatbot according to CNBC.
For a very good presentation of “ Innovations in Finance with Machine Learning, Big Data and Artificial Intelligence.”. Check these amazing reports by JP Morgan.
The FinTech Startup World
“Most of the banks are currently realizing that the financial services are about to get completely changed if we look at 5–10 years down the road. If they don’t change they will no longer exist.”. Watch the following video for more insights into the world of FinTech startups, it is part of a very interesting channel about FinTech that Roy suggested.
According to Inc.com Fintech start-ups have raised a total of more than $18 billion in the U.S. alone since 2015. Notable examples are companies like Apptus and Avant, with the former specializing in helping companies reach their business objectives and the latter providing tailor made loans directly to consumers. Both companies are valued near $ 2 billion each.
In Europe according to KPMG, the U.K. is still the leader of Fintech investments, with Germany and France having a strong presence. In the Netherlands as of April 2016 there were approximately 430 FinTech companies, according to HollandFintech.
At this point I would like to share with you my take home points from writing this article:
First, broadly speaking about the start up world, many times I have the feeling that the hype is much greater than the actual impact. The start-up industry’s main recruitment strategy is selling hope and as goes with all industries like that only a few enjoy success in the end. Also, a conclusion I have come to strongly believe the more I learn about this world is that in order to implement change you first have to know the state of affairs that preceded it. Take block-chain for example, everyone seems to be thinking it is the miracle solution to every problem: from cross-border money transfer to sexual consent (no joke!). Don’t mistake me, I do believe in entrepreneurship, it’s just that I also believe that people tend to focus too much on the positive side (what can be achieved) and too little on the negative one (how difficult it actually is, lack of experience, domain knowledge etc.)
Second, about the financial industry: I believe that although the status quo is about to be challenged and a lot of new technologies will make our lives significantly simpler, I don’t think that established companies will go under, at least not by the hundreds. This is because it is one thing to advocate for change and an entirely different thing to actually follow it. In other words, how willing would you be to trust your money to a start up you have never heard of? Although taking a loan from one is probably a different story! After all, do not forget that most of the investments in FinTech are made by established companies. Having said that, I do believe that we are going to see a lot of interesting solutions and technologies that will simplify our lives, and ‘meet’ a lot of brilliant innovators/founders. Hopefully some of us will make the headlines at some point in their lives. Who knows maybe the next PayPal is about to emerge soon…