Fintech: revolutionary innovation in financial services
Unless you’ve been living in a cave, you’d have heard the phrase “FinTech”. It’s a term often banded about, but despite being in vogue, its exact meaning is lost on many, Richard Bowry, Senior Associate at Hassans law firm reports
It is hardly surprising when you look at some definitions of the term Fintech. For example, one definition states “Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century.”
Confused? That is hardly surprising. Does it matter? Absolutely. FinTech is not a fad or buzzword. Without doubt, Fintech is something that will radically change not only how we do business, but how we live as a society. And it will happen within the next 4 or 5 years.
So what is FinTech? After all, technology in finance is nothing new, is it? That is true. The use of gold, the invention of money, the double-book entry system, calculators and the computerisation of records are all finance technology. However the last ten years has witnessed an explosion of new technologies, often internet and mobile communications based, that is transforming our world. Of course banks have been using advanced computer technology for many years, but until now financial technology has largely taken place in the back office, and whilst it has enabled more things to be done more quickly, often they are still done in hours or days, rather than seconds and minutes, and advances to date have not fundamentally changed the finance industry itself.
Although Fintech is about improving the speed and efficiency of how we conduct business, it is far more than that. It is changing the nature of business itself. FinTech, in short, encompasses revolutionary innovation in financial services. FinTech has enabled:
– consumers to make payments by multiple of means (some avoiding the banking system altogether);
– the matching of customers who want to lend with those that want to borrow, again by-passing the traditional banking system;
– the purchase of goods, services and investments without the need for intermediaries;
– personalisation of products, such as insurance, that can be personally priced based not on objective criteria such as age, but on the characteristics and behaviour of the particular customer;
– entirely new interactions, business-to-business (B2B), business-to-consumer (B2C) or peer-to-peer (P2P);
– the creation of new forms of currency.
FinTech enables new applications, new processes, new products, new businesses. For example:
1. Your banking: Banks are the ultimate middle-men. They borrow from you at low interest, and lend to others at higher interest. Technology will allow many new quasi-banks to exist, many without expensive retail space and multitudes of staff. New companies and existing global companies (e.g., Amazon) will have electronic wallet systems linked to payment networks, through which most of your shopping can be done without ever touching a traditional bank.
2. Your shopping: Use wearable tech (e.g., a watch) to tell you the cheapest place to buy what you want, and then use the device to buy it. No queuing to pay.
3. Your borrowing: Internet platforms have exploded in popularity, doing hundreds of millions of pounds in loans. Where banks can take weeks to approve a loan, peer-to-peer lenders take as little as 24 hours. Platforms will lend where banks will not.
4. Your home: The same wearable tech you use to shop can connect to a central system integrating and controlling all your remote smart home gadgets.
5. Your holiday: Foreign exchange is needlessly expensive. Today money transfer companies enable you to transfer money for a fraction of the traditional price. In effect they simply match those wishing to buy and those wishing to sell a currency, and arrange the swap. You pay an admin fee.
6. Your investing: Have instantaneous access to information, and trade on an automated basis. Invest in crowdfunded IPO’s (public share offerings). Traditional IPO’s are increasingly filled out by institutions. Ignore them, and invest P2P.
7. Your business: You want to start a business. If the bank won’t lend, consider internet based peer-to-peer lending, or perhaps crowdfunding where monies are raised by pitching on the internet. You do not have a trading history to work with credit card companies? No problem. Use internet companies making it easier for small businesses to accept card payments through cheap terminals, or consider accepting virtual currencies. Your accountancy and audit fees seem excessive? Invest in software that virtually automates the accounting process.
Blockchain – the most exciting aspect of FinTech
The word “Blockchain” is also commonly heard but again its meaning is unclear to many. Put simply, blockchain is a new technological method of recording and verifying data. Currently computers store and verify data, however ultimate control of that data is centralised and this can limit the scope of its use. Blockchain is different. It creates a digital ledger of transactions however that ledger is not stored in one place, but is rather distributed across thousands of computers worldwide. Everyone in the network has complete access to an up-to-date version of the ledger.
Blockchain is a way to let users make and verify transactions on a network instantaneously without a central authority. It can be used for nearly anything that needs to be independently recorded and verified as accurate. This is commonly called “distributed ledger technology” and is basically a secure and transparent way to digitally track the ownership of assets. Importantly, it can speed up transactions dramatically and cut costs while lowering the risk of fraud.
Let’s add some detail. A blockchain is a digital ledger of transactions distributed amongst a network of computers. It uses cryptography to allow each participant on the network to add to the ledger in a secure way without the need for a central authority. Once a block of data is recorded on the blockchain ledger, it’s extremely difficult to change or remove. When someone wants to add to it (i.e., add new data), participants in the network, all of which have copies of the existing blockchain, run algorithms to evaluate and verify the proposed transaction. Verification is possible as all participates have the blockchain history, so if a person is purporting to sell, say 100 bitcoins, the blockchain can verify through the history of transactions that such person does indeed own at least 100 bitcoins. On the system, if a majority of the participants agree that the transaction looks valid, (i.e., verifies the information matches the blockchain’s history), then the transaction is approved and a new block is added to the chain.
There are different blockchain configurations that use different consensus mechanisms, depending on the type and size of the network and the needs of participating companies. The bitcoin blockchain, for example, is public and “permissionless”, meaning anyone can participate and contribute to the ledger. Many firms also are exploring private or “permissioned” blockchains whose network is made up only of known participants. Each of these blockchain implementations operate in different ways.
Why is this so exciting? Blockchain technology has a host of applications, none more obvious than the banking industry. Currently, banks maintain huge computer operations integral to the bank. Within the system, processing data is comparatively straight-forward. Communications between systems and organisations (for example, a transfer between banks) is far more complex. If banks shared data using blockchain technology, it could remove a layer of intermediate processing that is currently necessary. Blockchain can therefore speed up transactions and reduce cost.
So what is the benefit to the consumer? If banks and other financial institutions are able to speed up transactions and reduce costs, it will mean cheaper and more efficient services. Exchanging and transferring money abroad, for example, should happen almost instantaneously at a fraction of current cost.