In his 1982 film, Blade Runner, Sir Ridley Scott portrayed 2019 as a world dominated by artificial intelligence (AI) and technology, eliminating a number of roles performed by humans. This article in no way prophesises Ridley-Scott's dark neo-noir picture, but warns readers to not underestimate the development of “FinTech”. Technological developments will provide automated personalised financial advice, more efficient clearing and settlement processes and easier payment methods for consumers. Financial institutions should view these developments (three of which we explore below) as an opportunity to partner with FinTech entities and adapt their services to meet consumer demand and remain competitive.
Robo-advice (an automated algorithm based financial adviser) will, no doubt, have a great impact on the financial services industry. This piece of AI will arguably provide more accurate advice than human financial advisers and do so at a lower cost. While some may perceive this as a threat, robo-advice could be the solution to providing advice to clients with fewer total assets. Traditionally, asset managers have struggled to create profitable relationships with these types of clients but robo-advice, as a more cost-efficient solution, may be the bridge to full-service advice to clients with specific investment needs. American wealth management entities such as BlackRock, Two-Sigma and Renaissance Technologies are already investing in and using robo-advice to assist their advisers.
Human oversight is critical to ensuring the correct functioning of robo-advice. Financial institutions and regulators will need to use mathematicians to determine the appropriateness of the algorithm used in the robo-advice.
Blockchain promises to transform the financial services industry. Blockchain is a shared public ledger for transactions. It is vaguely similar to a ledger that a bank would maintain to record all transactions for all of their customers. However, only the bank can see its ledger and has its own security mechanisms. Thousands of participants globally share Blockchain. Readers of the Blockchain may hear words such as "node" and "miner". Both are participants in the Blockchain network. A "node" is a participant that checks and validates transactions before adding them to the 'Blockchain'. A "miner" is actually part of the transaction - either buying or selling a product.
Blockchain is always growing because participants enter into and record transactions which they add as "blocks" to the chain of transactions. This peer-to-peer verification combined with encryption ensures the accuracy of information and efficient settlement, hence by-passing banks and clearing houses in performing financial transactions. The Blockchain maintains details and balances from the original block to the most recently completed block. This is incredibly beneficial for financial institutions as Blockchain is very difficult to corrupt because its distributed ledger and cryptographic data renders it almost impossible to replicate.
Blockchain can cater for accurate and efficient lending to borrowers. Users will have access to information regarding someone's creditworthiness based on transactions they have engaged in with other parties in the past.
Blockchain also provides for the application of ‘smart contracts’. Each node in the peer-to-peer network acts as its own title registry, executing transfer of ownership. The contracts can self-execute and update themselves without human intervention. If a client is transitioning from one product to another, Blockchain can pre-populate information into the documentation, speeding up the transition process.
Technology: Mobile phone banking and digital cash
Technology allows customers to manage accounts, apply for loans and pay bills through mobile applications. The increasing use of QR payment methods (particularly in China) means that customers do not even need to carry physical cash or credit cards. The digitalisation of cash also allows for the use of cryptocurrencies and mobile wallets in cross-border payments and foreign exchanges. These methods of payment are faster than individuals having to apply for travel cards or exchange physical currency. Banks and other financial institutions will need to move investment towards developing user-friendly mobile applications and the use of digital money.
What does this mean going forward?
FinTech developments will assist bankers and financial advisers by paving the way for more accurate and efficient financial advice. There will also be critical human roles in regulation and algorithm validation. The banking and financial sector needs to be agile and innovative. If they want to remain competitive, financial institutions will need to explore ways to improve their processes, and ultimately the customer experience. FinTech is likely to provide many of the solutions needed.