FinTech can refer to both customer-facing financial products and the transformation of the technology which financial institutions and new market entrants use. An important goal of FinTech is innovation that makes financial transactions cheaper and more accessible - think of groundbreaking services such as Stripe, TransferWise or Kickstarter. Accenture reports that $5.3 billion was invested into FinTech in the first quarter of 2016. Such innovation and investment are also reflected in the development of new types of FinTech, including robo-advisors, coloured coins, smart contracts and regtech, which we are likely to see more of in 2017.
Wealth management and robo-advisors
A robo-advisor is a digital platform providing financial investment advice and taking automated investment actions based on the characteristics of the user, such as their age, risk requirements and financial needs. As robo-advisors use advanced algorithms and artificial intelligence to make decisions, they significantly increase accessibility and decrease the cost for users in the investment management industry. Robo-advisors are already well established in the US and the UK. Consulting firm AT Kearney reports that assets controlled by robo-advisers may rise to $2.2 trillion globally within five years. We anticipate the uptake of robo-advisers in Ireland increasing throughout 2017.
As with many new technologies in the financial services industry, robo-advisors bring a range of regulatory and other challenges. In Ireland, the Central Bank will most likely regulate the use of robo-advisors. It will have a number of important decisions to make while the technology is in its infancy here. For example, as each robo-advisor platform may use a different algorithm and operating model, users will have to be alerted to the associated risks. The traditional financial services sector will also need to determine the best way to integrate robo-advisors into its current product offerings and build trust with users.
Bitcoin is the most popular virtual crypto-currency in the world. Fintech entrepreneurs are creating new virtual currencies and developing new ways of representing physical assets as digital assets by leveraging blockchain, the technology behind bitcoin.
In 2017, we are likely to see the introduction of new virtual currencies, as well as new ways of managing physical assets using blockchain technology. In essence, 'coloured coins' allow groups of individuals to manage assets digitally and create their own financial ecosystem. Coloured coins cut out the receipt and transfer of physical currency and allow users to transfer of an item or an act of value and swap it for another item or act of value.
For example, a physical item, product or service could be translated into a digital coloured coin and the owner of that coin could exchange it digitally for other products or services. This allows the creation of a modern barter system where, instead of seeing every payment as being made in the form of cash, payment can come in many forms.
Coloured coins minimise the number of transactions required for the transaction and allow new definitions of "value" to be defined by specific markets or communities. It is not yet clear how regulators will approach this new technology as the class of assets it may manage is so diverse.
In today's world, legally binding contracts are the building blocks of finance and commerce. A smart contract built on blockchain could provide parties with a secure replacement for traditional business documents. A smart contract could be adapted to track the location of a contract, record an undisputable history of changes to the contract and verify electronic signatories. In 2017, we could see smart contracts being piloted for everything from wills, to corporate share purchase agreements, to real estate conveyances. We may even see the music industry adopt smart contracts to automatically keep track of ownership of music rights to facilitate royalty payments.
Smart contracts can also be programmed to be self-enforceable. IBM is developing self-executing smart contract programmes which could be rolled out next year. In IBM's proposed platform, the blockchain database hosts the secure smart contract along with an algorithm specifying the execution rules. Once the execution rules are met, the contract is automatically executed. An obvious benefit of no party controlling the self-executing contract is that all parties can trust it. There are other potential benefits such as lower compliance costs and scalability that may arise with the wider uptake of smart contracts in the future.
Regtech, shorthand for regulatory technology, leverages technologies, such as cloud computing, big data analytics, and artificial intelligence, to facilitate regulatory compliance. Deloitte describes regtech as the new FinTech and we are likely to see it hitting the mainstream in 2017.
For example, a regtech app can conduct automated and efficient anti-money laundering checks on new clients. Regtech can also update and store new regulations to automate risk management and enable businesses to stay up-to-date with regulatory changes. Automated regtech technology can increase the efficiency and effectiveness of compliance and also reduce costs and human error. All businesses using regtech will need to remember that the output will only be as good as the algorithm behind the technology and the usual data protection and cyber-security risks will still need to be considered.
We are likely to see a number of FinTech innovations like robo-advisors, coloured coins, smart contracts, and more in 2017. These present the opportunity for governments and the financial services sector to make financial transactions more efficient and reduce fraud and errors. But as these new financial technologies touch highly regulated areas, there are still major legal and regulatory challenges that stakeholders will need to address to fully exploit them.