Journey of Fintech from Present to the Future
By Bijesh Amin, Co-Founder, Indus Valley Partners
The financial services model has undergone a massive evolution. It was not long back that they relied heavily on analogue business i.e. heavy reliance on capital, people and specific locations. However, in the past 2-3 years, the industry has observed the emergence of a lot of multiple potent digital disruptors. These disruptors use business models that have been built ground-up on technologies such as, big data and AI/machine learning which are all enabled by cloud/mobile platforms, offering rich, deeply intuitive user experiences on-line. Be it any process from portfolio management or offering individual financial advice, digital disruption has impacted every part of the industry. For instance, a digital financial service company can now provide investment recommendations while leveraging machine learning to conduct on-going portfolio performance updates sent to customers via a smartphone. And then the customer can make well informed choice based on the information. Given the technology driven generation, the impact of this will be seen across all sections of the society.
Highlighting some of the key technologies that are impacting the industry massively:
- Big data begets big data: It is quite possible that big data will feed on itself in the years to come. As the level of transactions and interactions taking place online is increasing every hour, the need for analysing this big data will also rise. For asset managers in specific, this would mean that cloud platforms will be an increasingly credible – and in many cases the only economically viable model to support their investment operations along with their investors, regulators and other trading counterparties. For many fund managers “sentiment analysis” is becoming as important to gauge trends as traditional economic forecasting.
- Market micro-structure becomes increasingly frictionless: The ongoing automation is set to make a secular shift in terms of increased transparency, reduced transaction costs and minimal operational errors by limiting the human errors. This will also lead to a streamlined trade lifecycle. As the technologies will limit the power of intermediaries and connect the users of capital directly and cost-efficiently with the capital providers. Moreover, many banks will also attempt to remodel themselves as technology companies, ȧ la Goldman Sachs. This will purely be an attempt to conduct “capital lite” activities that are more reliant on a technological or intellectual competitive advantage and less impacted by regulatory capital and size of balance sheet. For example, UBS Prime Brokerage claims to have a return on assets twice as a high as some of its competitors by using technology to reduce its costs to serve hedge fund clients.
- Incumbents jump on/circle bandwagons out of fear of being “uber’d”: Financial Intermediaries are running “innovation labs”, experimenting with Block Chain, buying fintech startups, hiring increasing numbers of software engineers and data scientists etc. By taking such a “portfolio” approach they hope to either re-configure their traditional intermediation/middle-man role to fit the new online paradigm or transform more completely into a tech-driven entity with a finance arm attached. Time will tell whether such an approach will yield a viable long-term strategy or whether incumbent players will be held hostage to their legacy platforms and ways of doing business. For example, “robo-advisory” is a glib term thrown around that may have serious ramifications for the wealth management industry. It is entirely plausible that a generation tethered to their “smart”phones prefer a “robo” advisor to face-to-face contact with an investment professional. Over time as their net worth grows and their needs become more complex this may morph into a relationship with a carbon-based life form. But the ongoing need to monitor, track/benchmark and potentially ‘advise’ could always fall within the purview of the robot.
As a consequence of FinTech’s impact we will see the emergence of commercially viable digital businesses that have a sustainable economic advantage. They will not need to extract economic rents due to their privileged position as market intermediaries, providers of capital or holders of an asymmetric informational advantage. In the financial markets, models reliant on financial intermediation, access to capital and a bricks-and-mortar branch network will all need to embrace (in some cases reluctantly) a host of new technologies such as P2P, Block Chain and Big Data. In many cases there will be potential margin erosion. The hope for incumbents will be to either improve profitability by reducing servicing costs or to realize economies of scale by increasing transaction volumes on their platforms (i.e. becoming utility players). Both have the scope for translating into higher returns on capital. But the competitive pressures from interlopers will be huge and even the threat of disruption can be enough to provoke a change in business models and traditional levels of profitability.