Coming technology: Fintech developers tell you what to look for and why the fintech revolution arose
• Tips on fintech developments that you should know about from chief technology officers (CTOs), engineers and developers at the FinDERv 2017 show.
• Artificial intelligence (AI) machine learning and automation; cryptography and the blockchain; plus quantum computing are long-term disruptors.
• In the short-term 'big data' analytics, cloud computing and fintech collaboration are the trends to watch as digitalization expands.
• Hear from Doug McLean, COO, Trusted Key; Brian Vella, IT architect, Ixaris; Scott Totzke, CEO, Isara; & Kedar Samant, CTO, Simility.
There are many famous business stories of companies such as Xerox and Kodak that fell from dominant positions due to a failure to understand or implement new technology that was set to disrupt their industry.
Kodak didn't replace film with digital photography despite developing many of the tools for fear of eliminating existing revenues. Xerox allowed Apple and Microsoft to walk away with some of the building blocks of the modern computer revolution after not really supporting the Xerox Alto.
Alto was the world's first true personal computer with an operating system and graphical user interface (GUI) that had icons you clicked, a mouse, ethernet networking, and so on. Ever heard of it?
The Xerox Alto represents what happens when firms don't see future technology or business trends. Leaving developments in the research lab and not moving them to the engineering lab can be as damaging as failing to develop them in the first place.
Banks know this so have turned to financial technology (fintech) firms in recent years to develop solutions for them that they can either buy, license or invest in. Smaller collaborative fintechs are often used as inexpensive external test bed firms so that financial institutions (FIs) can experiment with new mobile, cybersecurity, compliance, processing, data and other end-use applications.
A history of fintech
FIs are also trying to protect themselves against larger fintechs that might try to displace them in future, rather than collaborate as smaller ones do. Banks are wary of what tech giants such as Facebook, Google, Amazon and others that have captured customer attention can do, after seeing how they've disrupted other industries such as publishing.
As return on equity (RoE) has fallen since the 2008 crash and compliance costs increased, banks have had to accept they cannot develop bespoke in-house technology solutions for themselves anymore like they used to in the 1970s and 80s because they do not have non-operational budget anymore. Meanwhile, more nimble tech specialist firms, with no legacy IT or institutionalized staff, can easily meet front-end customer expectations of a fast 24x7, mobile service in comparison to banks that historically have struggled to free themselves from siloed operations.
The rise in customer expectation of better, faster service has coincided with the rise of social and consumer media technology, locational and tracking capabilities, context data and so on. If banks cannot meet the demand, others will. If a UPS can track a parcel, why can't UBS track a payment?
These are the drivers for fintech – cost-cutting, higher customer and regulatory expectations and better external technology and innovative capacity. It has led to a situation where start-up companies that FIs want to collaborate with have effectively become unofficial research and development (R&D) arms.
Longer established fintech core banking and processing firms such as Temenos, which existed before the phrase was a hashtag, are also benefiting from the fintech trend, although they typically focus on back-end processing solutions that offer account ledger and customer updates via Software-as-a-Service (SaaS) solutions in the cloud. These don't have to be installed or supported by banks themselves, further cutting costs and increasing flexibility as new innovations are created.
This is the background to the so-called 'fintech revolution' but what technologies are truly going to disrupt the FI marketplace now that adding a mobile channel, contactless payments or so on, is no longer new? What is on the horizon?
Delegates at this week's FinDERv 2017 trade show on 12-13 June in London, U.K., shared their thoughts with CNBC about what the preeminent coming technologies will be – in the short- and long-term – and how disruptive they might be.
Brian Vella, lead technical architect, Ixaris
"Open data via accessible application programming interfaces (APIs) as mandated in the EU's Payment Services Directive (PSD) 2 regulation and the U.K. Open Banking initiative is the key trend for me.
API standards allow two different pieces of software from different financial institutions (FIs) to interact and exchange data in a secure environment, enabling comparisons and more competition. This will feed into the trend for fintech cooperation and could encourage some more displacement players. It also feeds into the 'big data' analytical capabilities that have been unleashed by cheaper computing power and increases in available contextual data from social media, mobile phones and so on.
"Fragmentation is possible in this environment so integration capabilities will be essential. It'll also help economies-of-scale aggregated processing efficiency," continues Vella, citing the cloud as a connecting force. "Identifying the user, counterparties and so on will also be vital in this more open future where data is less structured, internal and siloed."
Longer-term, "I think the blockchain is over-hyped at present" but Vella adds "there are many applications for its cryptography-based protected protocol and the recording capabilities of distributed ledger technology (DLT)."
"AI is good for digesting lots of data, introducing automation and pattern recognition in data-rich environments."
Scott Totzke, CEO, Isara
"Vast sums have been spent on quantum computing, which doesn't use the 0s and 1s of binary code to compute but quantum physics instead, and I believe it could be the coming technology next decade. We could reach the quantum supremacy by the end of this year when 50 Qbits of processing power are possible, making it a viable operational system for a computer for the first time.
"This will have good consequences in terms of releasing more and different computing power that can be harnessed on AI, better materials design, modeling and so on. But there are also bad consequences," continues Totzke, an ex-Blackberry Canadian technologist who helped found its famously stringent security protocols and bank grade encryption.
"Quantum computing could easily break the public key infrastructure (PKI) verification procedure we've come to reply on for one-time passwords (OTP) to access a bank account, or indeed the cryptography technology that the blockchain relies upon. The RSA public key algorithm that underpins so much of modern finance, identity and cybersecurity work would also be vulnerable and DLT would be dead in the water. As a company we're trying to build the next lock and offer protection when and if it takes off. Changing such a vast infrastructure will take time so FIs and others should be thinking about this now."
Doug McLean, chief operating officer (COO), Trusted Key
"Fintech isn't a new industry as some portray it, but I do expect it to get a boost from the EU PSD2 regulation and further away perhaps from the U.S. fintech charter or state-backed equivalent. For us, as a secure identification and verification firm, the key technologies are mobile phones – as they provide an authenticating end point device – combined with strong cryptography and the blockchain. Integrating them offers numerous multi-factor ID opportunities."
True, but if Isara's fears about quantum computing expressed above come to pass traditional cryptography may not be as strong as it was.
Kedar Samant, CTO, Simility
Samant is chief technology officer (CTO) and co-founder of Simility, a Palo Alto Californian start-up set up by ex-Google employees that raised $7.2m in late 2015 in a Series A fundraising round led by venture capitalists (VC) Accel Partners. It offers a fraud prevention solution that uses AI machine learning to help fight fraud.
"Connecting the dots is what matters these days so the trend is towards establishing a data lake for investigation. AI needs data to be effective, the more the merrier, and the rise of 'big' unstructured data from social media, news and other sources helps this, as does the cloud as a connective layer. More data translates into better insights for anti-fraud or money laundering pattern spotting behavioral systems, financial market surveillance systems and other such applications. These are the key trends and technologies for me."
What you do with the technology is important too. If people, process and technology aren't aligned and embedded in stringent management, risk and governance layers, then the full effectiveness of any new technical development won't be unleashed. People rely on machines and vice versa.