Fintech and the future of finance

I am no longer a non-believer. I remember the day I didn’t believe I would ever see a picture sent down a telephone line, yet now the fax is nearly obsolete. I remember thinking I would never want to access the internet from my phone; I am now jittery without the ever-present link to an online world. So when I am told that artificial intelligence will enhance financial services, I no longer shake my head in disbelief, but embrace the concept as present and growing in importance. However, the growth in new technology behind financial services, or fintech, opens up a whole new world of threats and opportunities that we must learn to understand.

This was the subject matter at the Leeds University Business School Ideas in Practice seminar - The Future of Finance - which included presentations and panel discussion from Squire Patton Boggs, Barclays and Agriledger, and saw Dr Iain Clacher, Pro Dean – International and Associate Professor of Accounting and Finance, launch the Centre for Financial Technology and Innovation.

The threats of fintech

Fintech is big business. Investment in the global fintech market more than doubled between 2017 and 2018, to over $111bn , and it is increasingly pushing at the boundaries of traditional financial services. During the Ideas in Practice event, we heard from our speakers about key threats and opportunities that fintech brings, from improvements to the user experience and transparency on costs, to the unintended consequences of human failures in areas such as artificial intelligence. We were also warned that some of the technology is ‘trendy’ and, as such, may have a short shelf life.

This echoed my key concern: Fintech has not yet been tested in an economic downturn. Having spent 20 years working in investment management, the ghost of the tech boom at the turn of the millennium still haunts me.

Little-understood, tech-based, loss-making companies are attracting huge amounts of investment and coming to market with untested offerings. It has a very familiar ring to it. A rising tide lifts all boats, but if that tide turns are the companies financially stable enough to withstand the withdrawal of support? How vested are the incumbents, the partners and the investors in the immediate deployment of this technology? Or will they happily defer or revert to traditional methods if things get tough? The key here, as a business user, an investor or even a consumer of bleeding-edge technology is due diligence in all aspects of the business, its offering, its target market, its backers, and its management.

The latter point, I fear, is missing from many a due diligence investigation. The attitude of the management team will reflect their comprehension of the sector they are about to step into. Tech founders with a tech background will be used to a ‘beta test’ (a second stage of testing with a sample audience). Those few words put at the top of a web page that serve as both warning and excuse for failures. It goes wrong, you apologise and roll it back; everyone knew it might happen, it was in beta test, no worries. That is simply not acceptable when dealing with consumers and their money.

The regulator, the Financial Conduct Authority (FCA), is very proactive in working with fintech firms that want to deliver a usable product or service first time, within the bounds of the regulation. This is called a regulatory sandbox. Firms do exist with management teams that do not want to engage however, erroneously believing a belated apology for failure after the event will suffice. To protect yourself, look for experienced financial professionals on the board or acting as advisers, the use of the FCA’s sandbox, or founders with financial services experience.

The new string to the bow of a management team is engagement with academics through the new University of Leeds Centre for Financial Technology and Innovation. Testing theories using the skills and depth of knowledge the University possesses gives the firm an advantage before it comes to market. Educating management gives them a sector-wide perspective that will inform long-term strategy.

The opportunities of fintech

Our fears over the ‘Future of Finance’ addressed, the audience then led a lively Q&A session, which focussed largely on ‘Fintech for Good’. One of the key aims of technology in financial services is to deliver ‘Personal Financial Management’: giving the less advantaged the opportunity to benefit from financial services.

In particular, the audience wanted to know why there hadn’t been faster progression in this area. The answer is that it isn’t as simple as launching a product that targets that sector of society. A lack of education, a distrust of institutions and in some cases a lack of the tools, such as smartphones, to access the new services, were all holding back distribution.

Education and gamification (making any process more like an online game than a chore) were seen as key drivers for success. Gamification is considered by many fintech firms as a way to engage with new consumers who would otherwise dismiss financial services as dull. As word spreads, the tipping point, where it becomes the norm to use the technology (and the financial services it offers) rather than distrust it, gets closer, faster.

Is the future fintech?

The range of topics discussed at the event was wide and varied, reflecting the broad spectrum of areas that innovation in financial services has led to. Whilst there may be concerns over which of the start-ups will survive in the long-term, this has always been the same of any new technology. Those of you old enough to remember BetaMax will attest to that.

The main theme was that fintech is here to stay and collaboration is key to success across the board: in communities to encourage usage; in the regions to take on London; in the UK to take on the rest of the world; between the traditional and the new; and between business and academia.