Our top takeaways from NYU Stern’s FinTech Conference 2017
Wharton Fintech Club attended the 2nd NYU Stern Fintech Conference on Friday, 3 November 2017, on the theme of “The Transformative Potential and Regulatory Challenges of FinTech”.
It was an exciting conference — our curious selves learned a lot in big group keynotes and small group discussions.
Our key takeaways were:
(1) Customer expectations are the true force powering the change today. Fintech players are reshaping the industry primarily based on customer demands
(2) B2B payments are the new growth horizon for the payments industry
(3) Financial infrastructure, blockchain and cryptocurrency are top of mind and tip of tongue. But the question is… how can we separate the signal from the noise?
(4) Machine learning and artificial intelligence are transforming FinTech. The challenge today, however, is to tackle difficult questions around fairness, ethics, and regulation.
In the article below, we elaborate on each of these takeaways.
(1) Customer expectations driving change
Speaker: Matt Harris of B Capital
Lending overtook payment technologies in terms of dollars invested in 2016. Further, there has been diversification in investments as evidenced by increased dollars going towards personal finance, digital currency, and insurance startups.
Although Fintech activity has increased by numerous folds, exits look anemic. Incumbents in the financial services sector feel comfortable spending money and have big balance sheets at their disposal. As a Fintech company, acquisition by incumbents is currently the most prevalent way of exiting. However, other forms of exits such as IPOs need to be built out further.
(2) Payments — The End of Cash?
Where are the opportunities?
“Find paper checks and kill them.” — Matt Harris, B Capital
Although we have seen saturation in the merchant-payments battleground, there is significant untapped opportunity to modernize B2B payments. 62% of B2B payments in the US today are made by paper checks. A shocking statistic.
Contrast this with retail payments, where paper checks have effectively gone away. Looking into the future, in the B2B space, moving from paper-based to software-based solutions for processes such as cash management, accounts receivable management and trade financing has great potential.
Future of cash:
“Skype is free. In theory, if moving voice (in bytes) can be free, why shouldn’t moving cash electronically (bytes) be free in the future?” — Sharad Sharma, Co-founder, iSPIRT Foundation
Physical cash or plastic credit cards will be here for a good number of years. Prashant Gandhi, Managing Director and Head of Digital Payments, JPMorgan, believes that the change in the US will take time, since more than 50% of transactions today are still done with physical cash.
To some extent, we are still working on moving from cash to card, with mobiles not in sight. Square, for example, has built their business around making it easier for small and medium-sized businesses to accept payment from debit/credit cards. Moving from cards to mobiles will require additional device capabilities and network compatibility.
Sharad pointed out that P2P payments are not free in the US because of legacy infrastructure. India, on the other hand, is less encumbered by legacy systems, and has been able to reinvent its entire payment stack. With Unified Payments Interface (UPI), built via underlying protocol APIs, this is an entirely new stack on which payments can be built upon. In 3 years, it will carry more money relative to the economy than Mastercard in the US. It has the potential to unleash a credit cycle.
(Read more about UPI in India in our previous blog post here and the underlying India Stack APIs here)
(3) Financial Infrastructure, Blockchain and Cryptocurrencies
A recurring theme was blockchain technology and if panelists thought it would be as disruptive as some perceive it to be.
Prof. Vasant Dhar of the Stern School of Business pointed that historically, financial services have been incomplete, in part due to regulation. Fintech startups have entered to replace components of financial services. Blockchain however, has the potential to entirely replace the existing financial infrastructure.
Matt Harris of B Capital concurred, and added that blockchain cuts across all financial services verticals, giving it the potential to fundamentally transform the financial infrastructure that we are familiar with today.
Prashant Gandhi of JPMorgan talked about how the underlying blockchain plumbing is disruptive and very foundational. Banks are looking to integrate blockchain solutions although it has been culturally hard to push change.
Ryan van Grack, Head of SEC’s FinTech Working Group highlighted how blockchain technology has gained intense regulatory attention. “Blockchain and Distributed Ledger Technology (DLT)” is one of the three main issues that the SEC Fintech Working Group is focusing on (the other two are automated investment tools/robo-advisers and crowdfunding). In July, the SEC issued a report making clear that DLT/virtual currency does not remove transactions from the purview of the regulators.
Additional observations came up during the breakout lunch session on the topic of Blockchain FinTech Applications with Tom Jessop, President of Chain:
- In order to have a meaningful debate around cryptocurrencies, we must first have a working definition for what it is. His suggestion was: Crypto assets (cryptocurrencies) are a new asset class that enable decentralized applications.
- Blockchain functionalities such as file storage and electronic payments) are not new, but what is new is the form of organization. These functions can be operated without a central company with blockchain. We can extrapolate from there that in the long run, the value of a crypto-asset will be driven by the use of the application that it enables.
- It is not currently clear that decentralized platforms are better or more suitable for most corporations/people relative to traditional software. On most dimensions, centralized systems are faster, better, more stable and more scalable!
- However, centralized applications are better at one dimension, and perhaps essentially the only way to achieve it. This dimension is censorship resistance. Access is open and transactions are immutable and unstoppable. The question at this point is for whom does this trade-off makes sense — which set of users would prioritize censorship resistance over speed, cost and scale.
(4) Automation and Artificial Intelligence in Fintech
“What is powering the change today? Customer expectations are changing. As consumers, we expect more.” — Scott Mullins, Amazon Web Services
“How can we create meaningful levels of liability if you cannot put a robot in prison?” — Jeffrey M. Bandman, Former CFTC FinTech Advisor and LabCFTC Founding Director
On the topic of AI in Fintech, the discussion was around the ethical and regulation issues that arise in using customer data and machine learning.
Prof. Vasant Dhar of the Stern School of Business explained that the choice of whether to automate a process should be thought of as a trade-off between predictability of the machine (i.e., a basis of trust/ how often it goes wrong), and the cost of error (i.e., can we deal with the cost of making a mistake). In other words, when deciding whether to automate, we should ask the question — “can we trust a robot to do things for us?”
Prof. Michael Kearns of the University of Pennsylvania discussed the challenge of defining “fairness” in the algorithms for machine learning, especially given any t biases in the data that the system collects. For example, can you tell a machine to choose a certain minority group over another and where do we draw the line to create a “fair” algorithm? He raised the question that left us thinking — are there sweet spots in Fintech for AI to be implemented? For example, payments could be a low-hanging fruit, since for instant transfers, there is already no room for human interaction.
Jeffrey M. Bandman, Former CFTC FinTech Advisor and LabCFTC Founding Director alluded to the challenges on the regulatory side. How can we create meaningful levels of liability and responsibility if you cannot put a robot in prison? And by extension, how can regulators achieve their overall objectives of consumer protection, market integrity while promoting innovation?
All in all, we truly relished the experience to be a part of this debate and dialogue. Thank you NYU Stern for organizing a fantastic conference and for extending the invitation to attend! We look forward to collaborating in the future.
