The world is rapidly changing, thanks to innovation, technology and internet. The financial industry, usually a later adopter, is catching up in applying advanced systems, processes and technology. Say hello to fintechs (finance + technology).
Most people used to think this space was reserved for start ups, however, the game is changing, as big companies transit quickly more and more into the technology sphere. Check out The Wall Street Journal‘s 5 fintech trends to watch in 2018. Watch this space.
Trend 1: Financial firms are jumping into the fintech game.
“A large number of established financial services firms are taking aggressive action to determine how they can use these technologies within their ecosystems,” says Dilip Krishna, a managing director, who heads innovation for Deloitte & Touche LLP’s financial services practice.
Some are acting as venture capitalists and investing in their projects to see what specific problems these technologies can solve, as well as working on proof-of-value activities that in some circumstances have led to early claims of moving to production. Others are joining different consortia — as seen with blockchain — to partner and work with the industry. Still others are watching to see what happens next. “Overall, they’re embracing the agility and flexibility that fintech offers, developing innovative financial products of their own to help people manage their money in new ways,” notes Krishna.
Trend 2: The scope of potential blockchain benefits continues to grow.
Blockchain technology and its enablement of peer-to-peer transactions eliminate the need of a central intermediary to do asset transfers. And asset transfers aren’t limited to money. They could be titles, vehicles, home sales, etc. “Blockchain also creates efficiency,” says Prakash Santhana, a managing director in Deloitte Transactions and Business Analytics LLP. Payment transactions typically go through a central intermediary that uses several steps to authenticate and authorize the person who’s allowed to send that value, the transfer of the transaction details, and the actual settlement. Settlements can take two or three days. Blockchain compresses the steps into one step that can be done within a few seconds or minutes.
A third benefit is the creation of an audit trail. Blockchain relies on a distributed database. All the information is duplicated on each copy of the database, and all the data is public. A user can go into the blockchain ledger and, because it’s immutable, prove the transaction occurred and be assured the record hasn’t been modified or corrupted as long as it lives on the distributed ledger. “As a result, there are many financial services industry sectors that can drive performance by using this technology to increase transaction speed and transparency,” Santhana says.
Trend 3: Across the globe, regulators are showing interest in fintech.
“There’s been progress to help regulators keep pace with and even foster fintech innovation, including blockchain,” says Krishna. In places such as Singapore, Australia, and the U.K., regulators are actively looking to set up sandboxes to test scenarios and identify how the technology can be leveraged to solve problems. “Many regulators are determining ways they can be a part of and enable the process, instead of just responding to it,” adds Krishna.
For the time being, U.S. regulators are actively watching, but giving space for the players to figure things out. “The challenge for fintechs,” says Santhana, “is balancing innovation with risk and controls.” Technology will likely play a key role in how fintechs will continue to provide customers with control over their finances without running afoul of regulators.
Trend 4: Executives are beginning to understand the potential implementation challenges.
Fintech and other emerging disruptive technologies generate excitement, but with disruption come potential changes to existing architecture and the creation of new implementation and deployment challenges. “There’s broad recognition that the technologies can be used to solve certain problems, but financial operations and services are complex. Also, these solutions aren’t point-and-click,” says Krishna. “We’re currently in the realist phase of ‘This is what these technologies can do. Now how do we incorporate them?’ Financial executives also should consider the short- and long-term impacts on existing processes and systems.”
Trend 5: The industry is realizing this is a marathon, not a sprint.
“There’s been a tremendous amount of hype in this space and a lot of venture capital activity,” notes Vikram Bhat, a principal with Deloitte Risk and Financial Advisory, and leader, Banking and Capital Markets, Deloitte & Touche LLP. “There’s both anticipation and worry around what these technologies can do related to the financial services industry,” he adds.
Bhat suggests that business and ecosystem models will evolve along with with emerging technologies. “As technologies further develop ― and with regulatory guidance still emerging ― there will be a continued period of uncertainty before organizations see the full impact of disruption,” adds Bhat.
Some common questions executives ask about fintech include:
- Will these new services replace existing architecture or be offered in parallel?
- Does the benefit promised by the new technology improve the existing product, or is it just adding features and complexity no one is really seeking?
- What kind of architectural or process changes need to be included in strategic planning?
- To which business areas should fintech investments go?
In a highly regulated space like financial services, there’s potential risk in going all in on something that hasn’t withstood the test of time or passed regulatory scrutiny. “Executives should be looking at fintech trends and thinking in terms of experiments and pilot programs,” says Santhana. Blockchain is an example of how financial services organizations can create targeted applications and products to test out new approaches in a controlled environment.
“Startups have a little regulatory leeway, but there’s only so far they can go, solo, with their own platforms,” says Bhat. Forming partnerships and industry alliances is one way to broaden adoption of new technologies and work out implementation kinks. Reaching out to other companies and finding areas to work on together can improve customer relationships and user experience. It can also help the technology become more mature.
As Krishna points out, organizations have to figure out implementation gaps and understand customer needs, and one of the most effective ways is to work together to find those answers.
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