Last month the UK Chancellor of the Exchequer, Philip Hammond, championed fintech and its ability to revolutionise the way we live our lives. Along with artificial intelligence, biotech and robotics, fintech was held up by the Chancellor as a driver of the ‘Fourth Industrial Revolution’.
Technology is changing virtually every aspect of society and the financial world is no exception. As Vice-Chair of Hinduja Bank, I have had a front-row seat in observing these developments.
From the way consumers access their bank account to the creation of blockchain technology, fintech has already dramatically altered the way in which the financial world operates. However these developments are not without their challenges. For global financial institutions and regulators alike, fintech has become a disruptive market force requiring adaptation.
Banks have historically been resistant to disruption from technology, benefitting from highly resistant business models and a loyal customer base favouring stability over innovation.
They have remained systematically important to the global economy, holding a monopoly over the repository of deposits and the world’s financial transactions.
However the erosion of trust in the global financial system following the financial crises and the omnipresence of mobile devices signalled the growth and development of the fintech sector. Peer-to-peer lending platforms and digital currencies were born. The sector has since gone from strength to strength, delivering real benefits to millions of people previously without access to the mainstream financial system.
This has been most noticeable in the developing world. In 2011, only 42 per cent of Kenyans had access to a bank account. But thanks to mobile banking, this figure jumped to 75 per cent by 2014 and has since risen, as financial inclusion has multiplied even amongst the very poorest in society. Fintech has enabled Kenyans to send and receive money via text, relying on quick and easy technology to pay bills.
The challenge to financial institutions posed by these developments is obvious. In developed and developing markets alike, fintech has bypassed the need for a personalised banking system, where the consumer visits the local branch. Currency exchanges utilising blockchain technology is revolutionising how people move their money. Cyrpto-currencies, such as bitcoin, are also scheduled to continue their impressive growth.
Those of us in the financial sector have been forced to recognise that business is at risk due fintech innovations. As PwC’s Global FinTech Report 2017 identified, more than 88 per cent of those surveyed in the financial services sector were concerned that revenue is consequently being lost.
The solution is to reconsider the role of finance and to embrace the disruptive nature of fintech. This process has already begun, as financial institutions are now increasingly looking to integrate fintech into existing operations.
At Hinduja Bank, we took the decision to move to a new Avaloq core banking system which increased flexibility and control over assets as a result of recognisable technological developments.
At the same time, the sector is also seeing an increasing number of partnerships being formed between fintech companies and financial institutions. Integrated strategies allow banks to outsource research and development, and bring to market innovative solutions. Fintechs have also benefited through increased access to funding, helping to boost internal growth.
Partnerships of this kind were up from 32 per cent in 2016 to 45 per cent in 2017 (PwC), and have allowed banks to limit the disruptive influence new technologies have on the sector. Innovation is being turned into an advantage, accelerating the ‘Fourth Industrial Revolution’ which Chancellor Philip Hammond referenced.
The investment of global financial institutions is set to drive the next wave of disruptive technologies for the financial services sector. Consumers and businesses alike are set to benefit from better services, more choice and lower costs. Yet caution is required. Fintech is quickly outgrowing the regulatory environment in which it currently sits. Questions regarding the legal standing of crypto-currencies remain unanswered, whilst anonymous block-chain transactions increase the risk of money laundering.
If we are to fully embrace the benefits of fintech, the regulatory framework must catch up with the breakneck speed at which the sector has developed. International cooperation is needed to create a future proof and international regulatory model, facilitating, not stymying, innovation. The new world of finance and banking is undoubtedly exciting, but it is not without its challenges.