“Disruptive technology” has become the key phrase often touted by industry commentators as a positive, liberating concept to denote the tangible departure from the 20th Century – it has become synonymous with innovation and progress in the 21st Century.
The rise of ‘fintech’ has led to a process of global transformation of the traditional finance and banking sectors, which has precipitated the emergence of bitcoin currencies, blockchain systems and startups specialising in online alternative lending or consumer credit history analysis. This steady transformation is likely to lead to automation of the entire financial process, which may well facilitate widespread sectorial consolidation. To this end, it certainly seems that fintech is disrupting the conventional financial ecosystem. Technology is permeating the global financial system, with tech companies’ software collating financial and customer data on a global scale by the exponential growth in client uptake, which is enabling those big fintech firms to make better, more data-informed credit decisions on a broader range of clients.
The issues facing the financial sector as a result of this emergent fintech revolution are multi-factorial. There is the distinct possibility that it will contribute towards the process of forced redundancies in the finance sector to automated service provision of previously human supplied jobs. According to Citigroup, approximately 1.7 million jobs could be lost over the next decade as a result of the digitisation of operations within the banking sector.
With such fine margins, embracing the technological shift towards automation could prove to be a key driver towards greater profitability for banks. Indeed, their average return on equity languishes around the low single digits whilst their cost of capital exceeds this at around approximately 10%.
The trend towards fintech seems inevitable. Investment in blockchain technologies is expected to soar in 2017 as banks rival with one another to achieve the best margins and commercial superiority. The main catalyst could be the new EU regulations coming into force which stipulates that banks must provide third-party access to their customer’s data if those customers authorise it. This regulatory change may facilitate fintech startups entering into the commercial banking space, and other non-standard companies like Facebook using online payment gateways as a way to store customers’ valuable encrypted financial data to complement its advertising tracking software. This could position Facebook and their tech rivals in a favourable position where they can measure customers’ spending patterns and trends in their online browsing to build a well-informed personal credit profile for its user base – a wealth of information which the commercial banks could only dream of.
Investment banking seems safe for now as deals are done between people and not computers. This area remains a very people-based business in the world of banking as corporate financiers need to pull together lawyers, accountants, PRs and investors to get the deal over the line. There is no algorithm which can replace this form of human interaction. However, many of the functions within commercial banking can be operated by highly technical software, often with greater speed and efficiency.
As we embrace technological progress and hail its ability to disrupt markets and bring with it greater efficiencies, it is important to note that some in the banking sector could be faced with a precarious future. They run the risk of becoming industry relics much like the British miners since the Thatcherite policies throughout the 1980s. But it is not all doom and gloom. With change comes new opportunities to shape a new era of data driven banking which will evolve the current financial framework to include more disruptive technologies. The possibilities in the fintech sector are seemingly endless, it is a case of embracing the advances in technology to make the most of it.