From digital banking apps to automated robo-advisers – the white heat of financial technology and the businesses behind it are revolutionising money and its markets.
- Fintech’s established players are posing a threat to the traditional providers of financial services, which are having to adapt or die.
- McKinsey has identified seven key technologies that will drive competition and reshape business models over the next decade.
To some of us, it’s an ugly abbreviation, but one that has become increasingly embedded in the modern lexicon of finance. Fintech – short for financial technology – has come to symbolise all that is cutting edge about financial products and services.
Fintech’s scope ranges from digital banking apps and payment processing to state-of-the-art trading platforms and space-age-sounding robo-advisers that automate financial planning and investing without the need for human interaction.
And its established players are seen as the almightiest of threats to the traditional providers of financial services – banks, in particular – unencumbered as they are by tangled networks of legacy IT systems or back books of customers with underwater mortgages and loans. Or, crucially, expensive bricks-and-mortar branch networks.
Fintech is one of six themes Fix the Future has grouped under the technological change megatrend. Its sprawling impact is shown in the near 1,000 companies across the world, from 30 different industries, whose fortunes we have judged to be affected by the rise of fintech.
These companies range from the unsurprising – banks, fund managers and insurers – to the less so, like staffing businesses, advertising agencies and internet retailers. All are held by the world’s elite fund managers. Given how pervasive financial technology is becoming – in payments processing and transacting, for example – it is arguably less of a surprise that it is not just banks that are exposed to the theme.
The thinking is pretty clear: the more consumers buy and borrow online and digitally, the less we need our high street branches to pay in cheques and withdraw cash. And the more whizzy we expect our banking apps to be, processing transactions and updating our balances in an instant, and letting us take out secured loans, safely, within minutes.
Behind the simplicity of the idea, however, is an array of highly sophisticated technologies, pioneered by some of the new players in the financial sector but which are rapidly being adopted by the incumbent banking giants.
In a report published late last year, the consultancy McKinsey argued that seven key technologies would drive competition and forge the reshaping of financial companies’ business models over the next decade.
In brief, they are artificial intelligence (AI), blockchains, cloud computing, the internet of things, open-source software, low- or no-code development platforms, and hyper-automation.
More specifically, McKinsey argues that the application of AI and machine-based learning – identifying patterns in complex financial networks and disparate data sources, for example – is capable of generating $1tn (£807.5bn) of additional value for the banking sector worldwide, every year.
AI is already helping banks introduce digital assistants to their apps and websites and protect customers’ data and privacy with tools such as facial recognition. But McKinsey also highlights its potential to introduce smart elements to behind-the-scenes activities, such as transaction processing and fraud detection.
Additional value AI could generate for the banking sector every year, according to McKinsey
Blockchains, sometimes called distributive ledger technology, sound complex but, in essence, make it possible to record and store transactions in numerous places at the same time. This allows transactions to be logged and verified without the need for a middleman’s rubber stamp.
This kind of technology is also being used by central banks to explore the idea of creating their own digital currencies – and McKinsey points to the possibilities for blockchains to help improve the oversight of monetary policy. Essentially, that means controlling the supply of money into an economy by being better able to see how, when and on what it’s spent, and therefore spot when more or less is needed.
The ability to store data in the cloud is by no means unique to financial institutions, but McKinsey notes that being able to do so, and in an increasingly advanced way, sets banks free from their non-central activities of information technology and data storage. At the same time, it enables them to honour their security and privacy obligations to customers.
The cloud is helping to change the way that banks operate, spawning developments such as open banking and banking as a service. These models serve different purposes, but both involve banks providing their services to non-bank companies, mainly via third parties. An example is an airline or retailer being able to offer cards or loans to its customers without having to have a banking licence.
In summary, the authors of the McKinsey report say: ‘These key technologies and trends are becoming increasingly intertwined and integrated, giving massive impetus to fintech and financial industry innovation.
‘As it stands, it is niche financial subsectors that are most adept at harnessing technological innovations to launch applications, generate value and shape the competitive landscape.’
And this is where the best fintech players come into their own.
An ugly abbreviation or otherwise, fintech is here to stay. And investors are betting as much on its ability to transform sluggish, age-old financial institutions as they are on the new players emerging in their own right.
However, the fierce sell-off in tech-sector shares and the threat of a looming global recession mean that investor confidence in fintech companies has taken a beating. Listings of companies such as Klarna, which facilitates online payments and credit, and Zopa, the digital lender, have failed to materialise amid considerable pressure on valuations and waning appetite among buyers.
Silicon Valley Bank, a specialist lender to fintechs, has noted some new fintechs are struggling to raise funding as interest rates rise. The bank also notes that some of them are likely to face stiffer competition from traditional financial lenders, with deeper pockets and more entrenched deposits bases.
Still, that could actually be good news for some of the stocks held by the world’s most successful investors as plenty of them are also traditional providers of financial services.