The technology underpinning the global economy is vast and intricate. The breadth of systems employed, the depth of their complexity, and the sheer digitization of it all make it easy to believe that we have already passed through a technological revolution in finance. One could argue that this revolution started nearly 200 years ago, with the invention of the telegraph or the locomotive, both of which enabled long-distance transactions, opening up an entirely new world of finance. Or it could be argued that PayPal started a financial revolution in 1998. The truth is there have been many points of revolutionary disruption and the rate of change is quickening. Financial advancements are no longer going to be so heavily reliant on extrapolating value from communicating across distances. This methodology that is left over from the telegraph and train is being replaced by new modes of thinking and new technologies that think for us. The economic advancements predicated on the technology of the past 200 years are about to be dwarfed by what’s coming in the next ten.
Understanding how disruptive technologies are affecting the overall financial industry is truly daunting. There are individual verticals of expertize for a myriad of financial products, practices, and people. All have their own specific requirements and all are simultaneously adapting new technology and evolving their procedures at an increasing pace. To better understand the sweeping technological trends that are affecting the financial industry, ETHNews spoke to Tony Warren, executive vice president and head of strategy and solutions management at FIS, one of the world’s largest providers dedicated to financial technology solutions. From his London office, Warren told ETHNews:
“It’s clear that we’re not in a situation where digital has happened and we’re catching up. We’re actually in a situation where digital is kind of in the infancy of its evolution. We’re going to see increasing speed, lower cost storage, instantaneous data, and human expectations completely changing around what experiences they should be getting. Everyone has to get on page with these principals, otherwise, I think they will get left behind honestly.”
The scope of new technologies being employed is already well known to most people, even if they don’t realize it. Companies like Kodak and Blockbuster Video are good examples to start with. People still take pictures and watch movies, but the new technologies that disrupted those industries changed how we take and share pictures, and how we acquire and consume entertainment. Similarly, new financial technologies are not just going to change the way people use financial services, they are going to upend how we interact with money and each other. Instances of these changes are already seeping into our culture. To better understand how technological disruption influences companies, ETHNews spoke with Brian Knight, former federal attorney and senior research fellow for the Financial Markets Working Group at George Mason University’s Mercatus Center. Knight told ETHNews:
“Technology is one factor that can drive innovation, but the true driver is filling people’s wants and needs ... Banks and other incumbents are at risk of disruption, but that doesn't mean they can't adapt. Banks enjoy numerous advantages that will remain valuable going forward. The challenge for banks and other incumbents is to change their product offerings to offer compelling value compared to new competition. This might involve adopting new technologies, changing their pricing structures, or simply improving their user experience. It is possible that there will be some groups of customers or products that banks will lose outright because they cannot compete in those spaces with new entrants. This might be because the banks are hampered by regulation (e.g. borrowers who are so risky that the banks' prudential regulators are uncomfortable with the banks making loans at market rates) or because the customer segment has little attachment or appreciation for what banks offer, but there are large segments of the population that banks will likely continue to be able to serve provided they make reasonable efforts at modernization.”
The Advent of FinTech
Digital technology has changed the status quo across the industry so much that nearly every sector of operation on the planet has a rendition of its name as a compound word alongside “technology.” Words like biotech, fashiontech, adtech, agritech, and edtech have all come to signify a digital, technological revolution occurring within a given industry. This trend is sweeping across the globe as companies and industries adapt to survive and stay relevant in the digital age. Underneath all of this change is the financial industry that supports and enables it. New technologies are being implemented to enhance the financial industry and it is this FinTech that will truly change all other industries by association. This change all starts with one of digital technology’s most prominent features: the capacity to capture and analyze metadata.
Financial services run on data. Data about accounts or identities, transfers or payments, all of it offers the potential to glean deeper insights into how to serve your customers better or whether your bank is ripping you off. Indeed, money itself is a type of data and it too has been digitized along with its surrounding technologies. The data collected by financial institutions is truly enormous and it is the starting place for understanding FinTech. New technologies are being employed to understand metadata better and derive new strategies for creating value. Warren continued:
“Our solutions are automated. The data can flow between the engines. We’ve managed to get it so it’s a lower overhead ... My strong opinion is that if you don’t get the data right in the first place, you’re not going to be in a position to create high-scale automation at lower cost by leveraging technology. You then won’t be able to leverage the emerging technologies like artificial intelligence, machine learning, and blockchain to the extent that you should. [These technologies] equal the digital revolution.”
As more information is freely available across the world, there are now more flows of capital also. Consequently, there is more investor money up for grabs by financial institutions. Particularly, as people are becoming generally wealthier, they are also looking at different ways to save. Warren elaborated about how FinTech is disrupting traditional savings markets:
“Interest rates have been very low, as we all know. People can by nature be a little lazy so this is why we’re seeing index tracking in exchange-traded funds (ETF) accelerating. They charge a very low fee because you’re really just tracking the index. That whole piece is extremely susceptible to the whole technical revolution and digital innovation. If you think about it, you put robo-advice in front of the investor so it can collect data. It can [then] make the decision and the decision pushes it into index tracking funds. So [an investor] is getting the exposure. They’re getting a decent return and it’s better than putting it as a cash deposit ... What we’re now building is robots. You can now put a robot like a swivel chair to do rudimentary tasks. Importantly, to then manage exceptions [produced by automation] is having machine learning abilities and artificial intelligence. It can interact with humans but as you are building up more and more experience, it can start to make decisions on how to close exceptions. And because they’re index tracker funds, the data does become repeatable and you can start to figure out what you can do.”
Automation is going to play a significant role within the larger FinTech movement alongside data. This notion goes beyond simply having software that manipulates data for you in a desired way. The rise of machine learning and artificial intelligence will allow automated processes to be accomplished in ways that also add value beyond their direct sphere of influence. Processes are going to be combined and repackaged and automation is going to be deciding how that happens. Warren told ETHNews:
“You can end up where, literally, your nav production can become a completely automated process. It’s fully commoditized. The results of that are, you’re feeding [data] back into the front office and the decision there. You can now put automation or artificial intelligence there to look at market conditions. You can put in risk models and algorithms and machines can create the rebalancing requirement in a portfolio and push that back to the trading desk and electronic execution of trades and round it goes. It is revolutionary that these products could automatically start to do the full life cycle on their own.”
Blockchain Technology: FinTech’s Most Powerful Enabler
Machine learning and artificial intelligence are most likely going to create niches related to automation. Blockchain technology, on the other hand, is a paradigm shift that is going to open up, like the telegraph or train before it, entirely new avenues for creating value and new ways to exchange that value. Blockchain technology is essentially poised to change finance the way that the internet changed media, and depending on how blockchains get employed, they can be regarded in two ways: as a next generation database technology or as a next generation internet technology. Either of these use cases holds significant ramifications for the financial world. A McKinsey & Company report issued earlier this year estimates that more than 100 different blockchain solutions will be explored by financial institutions over the next five years. Moreover, the banking industry is expected to spend upwards of $400 million on the tech by 2019.
As blockchain technology becomes ubiquitously integrated with existing financial practices like know your customer and anti money laundering, we should expect to see more than simple “installation” of blockchains by financial companies. Outside expertize will be needed to adopt and integrate existing systems with blockchain. (Blockchain technology is also a knowledge vertical within finance now.) Institutions and banks like Citi are already taking steps to ensure they are on the right side of the blockchain disruption.
Even as blockchains are disrupting finance, they are themselves being disrupted. If Bitcoin realized the cypherpunk dream of a digitized currency, Ethereum has realized the dream of how to program that digital money. To better understand how Ethereum represents much of the promise that blockchain technology has to offer finance, ETHNews spoke to Andrew Keys, head of global business development at the Brooklyn-based Ethereum powerhouse ConsenSys:
“Similar to how the Internet commoditized how humans communicate, Ethereum will commoditize how humans agree. Through smart contracts, humans will be able to codify our agreements and automate our business processes much more efficiently than ever before. Moreover, we'll be able to represent all assets digitally (barrels of oil, bushels of wheat, dollars, bonds, stocks, gold, Beyonce concert tickets, loyalty points, etc.) and move them around with the same ease we send emails.”
Blockchains thus have a duel role in the advent of FinTech. First, they enhance the new technologies being adopted by forward thinkers in the financial industry. Second, they open up the world of cryptocurrencies to everything and everyone. Keys told ETHNews his thoughts on Ethereum’s growth potential:
“I believe we're in the equivalent of 1993 when the Internet exploded in 1996. Right now, everyone is working on private or permissioned blockchains that are analogous to intranets. Soon, Ethereum will be enabling privacy and scalability solutions to be the next generation of the Internet, whereby it will operate as the substrate for the global economy.”
Although many of the laws that will govern new technologies like blockchain are still being formed, governments and regulatory bodies have already taken note. By commenting on token offerings, the US Security and Exchange Commission (SEC) has also acknowledged the significance of cryptocurrencies. “I think the SEC investigative report was a net positive for the ecosystem,” said Keys. “It gave clear guidance and reiteration on how securities are defined, and will provide a solid regulatory framework by which entrepreneurs can comply with. In order to have real growth in this industry, regulation is necessary. I think blockchain is, by an exponent, the most disruptive 'buzz-word' or technology of them all. Blockchains provide the database structure by which all of the other technologies are implemented on top of.”
The future of finance is truly in the wild west and is being defined and affected by our developing technology. Within the next decade, people may replace their banks altogether with smartphone apps. Your refrigerator may order your groceries. Your car may autonomously earn you money while you work or sleep. You will be able to send that money around the world instantaneously or program it to pay your children allowance automatically once their chores are completed. Refugees and the disenfranchised will suddenly have access to world markets. These are just some of the financial applications of blockchain technologies like Ethereum, which stand to change our financial systems and our world.