Long before the Nobel Prize Committee acknowledged his insights into economics and trade, Paul Krugman made a hasty forecast about Information Technology: “As the rate of technological change in computing slows, the number of jobs for IT specialists will decelerate, then actually turn down; ten years from now, the phrase information economy will sound silly.” It was the year 1998, the Dot-Com bubble was still inflating, Google had just filed for incorporation and the worst thing happening in Brussels was Bill Gates being hit with a pie. We know IT would eventually do the trick and revolutionize the world economy along with the financial industry. Today’s Fintechs are the outcomes of that revolution rampaging in the wake of the credit crisis.
Following 2008, FinTech startups boomed as a global phenomenon in response to consumers’ eroded trust in the traditional banking system. From 2009 to 2013 global financial technology investments more than doubled and eventually tripled in 2014 hitting a total of $ 12B, iron branding these years as ones of digital revolution in the financial services sector.
Offering tech-savvy payments, crowdfunding, online P2P lending and even currency exchange, FinTech startups have engaged the banking industry in competition throughout 2015 as well. The funding momentum reached its apex in Q2 and Q3 spiking over $ 17B, 75% of which VC-backed. After a poor $ 1.7B record in Q4 ‘15, the tech-wave pocketed much trust in the ensuing quarter with reported $ 5.5B investments worldwide, where Europe and Asia made up the lion’s share.
So while everybody thought the FinTech industry was set to test its first economic downturn, it kept the bubble building up and valuations flying high. Fair enough. But what to expect next? The first quarter of 2016 made the news as the worst start for global IPOs since 2009. The markets cannot absorb the batch of unicorns at their current valuations (see LendingClub dropping 50% since last Q4), hence tech startups are all but rushing into going public and struggle to find valuable exit opportunities. History repeats itself from 2011 when Linkedin, Facebook and Twitter sat on the sidelines instead of roaring out of the gates.
Troubles are not limited to bearish market conditions. FinTech companies need to gear up for the rules hulking from global regulators. The G20’s Financial Stability Board (FSB) proposed last month a framework for classifying major FinTech areas and evaluating the potential threats to financial stability. The prime aim is to build an international regulatory framework “able to manage any systemic risks that may arise from technological change” FSB chairman Mark Carney said. Financial regulation is a tide that continues to surge and the resulting cost of new rules represents a barrier for startups globally. Yet, where some see problems, others see opportunities and this must be how RegTech came about. The marriage of regulation and technology has risen to prominence in 2015 and is becoming more and more crucial as regulatory expectations are looming. Is it going to be the next big thing? The proof of the pudding is in the eating, still the Inception-like scenario RegTech regulation would put up is sure the most ironic Compliance could ever get.
After all, FinTech is about rationalizing services and cutting fees, besides that expect some job-trimming as well. Big banks and insurance companies have been investing substantially in automation, legitimately attempting to improve their services by relying more on technology than on humans. Employment-wise, it translates into 1.7 M cuts in the next 10 years according to the latest report from Citigroup.
Such disruptive outlook may get even worse. The Fintech market is currently saturating. It is primed to crowd down and toss soon out those businesses that lack the engineering talent to orbit away from P2P lending and smart payments. A reset of ideas is being called for and big-data technologies are on the frontline to change the game. Goldman Sachs, JPMorgan, Deutsche Bank are all going big on IT, luring blockchain technologies and artificial intelligence out of basement labs and into fancy Wall Street offices.
Artificial intelligence (A.I.) in particular is the object of tremendous public interest, as well as ground for competition in the finance industry. In its early fashion, A.I. has been a financial prediction tool since 1980s, making use of quantitative algorithms to detect tradable signs. Today, the heart of the most intelligent technologies is built around an ‘enhanced’ breed of algorithms, which allow to model an interconnected web of artificial neurons on a computer and make it respond to data. All the inputs received by the system are analyzed, interpreted and used to improve the system itself. In short, machine learning. It is no coincidence that the gusto for Artificial Intelligence comes right after ‘Big Data’ has become a household word. A.I. technologies are indeed employed to process gigantic amounts of information and generate increasingly accurate predictions.
Machine intelligence hence fits effortlessly in banking. Wealth management can be carried out by sentient programs that examine everything from macroeconomic data to market prices and corporate documents, pinpoint trades and decide the best course of action. Wealthfront for instance is a well-distributed, self-reliant investing platform which can provide customized investing solutions with no human intervention. A.I. is also gaining popularity in fraud-detection, allowing to prevent illegal money transferring by tracking orders and parsing logged data. Most notably, the whole underwriting business can benefit from machine learning applications. Pricing credit risk gets infinitely more accurate by compounding uneven information, following the mantra that “all data is credit data”.
All sort of technologies that apply to the financial industry have now matured to a level where change is permanent. The Fintech market is constantly moving and a new wave of products is currently debugging and set to explode. Will the test be complete by the end of the year? What is sure is this leap is going to be bigger than the last time.