How FinTech Disruptors Are Rewriting The Rules - InformationWeek

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Data Management // Big Data Analytics
09:06 AM

How FinTech Disruptors Are Rewriting The Rules

Blockchain, smart contracts, and predictive analytics are among the financial service technologies reshaping the ways transactions are conducted and customers are served. With a rash of startups threatening to disrupt legacy operations, organizations of all sizes are turning to the latest technologies to improve their offerings.

Silicon Forest Provides Fertile Ground For Startups
Silicon Forest Provides Fertile Ground For Startups
(Click image for larger view and slideshow.)

A report on the global financial-services sector last spring by PricewaterhouseCoopers should come free with every Ferragamo tie purchased by an industry executive.

Of the seven key messages in the March 2016 report, six address how new and evolving internet finance technologies pose an existential threat to the natural order of things in the financial services world.

For added drama, the seventh point -- that financial service firms are surrounded by hundreds of small, but efficient and hungry, financial technology startups -- is illustrated with a graphic resembling cancer cells attacking an internal organ.

[Want more on fintech trends? Download the Tech Digest Top IT Trends to Watch in Financial Services.]

Indeed, new business models based on distributed networks are being rapidly built by fintech startups around blockchain technology, smart contracts, big data, and data analytics. The products come integrated with new levels of cyber-security and analytics capable of producing profiles of individual customers.

PwC's report suggests there already are 700 fintechs reconfiguring products and services that once were the sole domain of the old guard.

Of course, established financial services companies are not headed for chemo. Many large and small players in the sector are investing in internet finance technology, at least for proofs of concept.

"Many areas of financial services are very rich," said Vivian Zhang, founder and CTO of the NYC Data Science Academy boot camp, in an interview with InformationWeek. "They can invest where they want, and this is one area they want" to invest in.

Zhang, also an adjunct professor at Stony Brook University, said having terabytes of data, and the ability to analyze that data, is a relatively new experience for many financial services firms.

"The bottleneck was capacity," she said, and that is gone. So armed, many executives are taking internet finance technology seriously.

At the same time, "Fewer people are using related SAS and Microsoft products," she said. Open-source software alternatives are making innovations rapid, multiple, and less expensive to come by.

In the unlikely case that incumbents were to ignore this trend en masse, they have the deep regulatory and political experience, cast-in-concrete infrastructure, and business connections required to dominate the sector for long decades to come.

Indeed, Mark Beeston, founder of London-based venture firm Illuminate Financial Management, is skeptical of those hectoring established financial services firms into quickly adopting internet finance technology.

"By and large, this is a solution searching for a problem," Beeston said in an interview with InformationWeek. "It's exciting and has the potential to have an impact, but there is so much other lower-hanging fruit for the capital markets to address -- such as regulation." Illuminate has positions in four startups that are all aimed at creating efficiencies in the existing financial services technology environment.

He might be reading the industry mood better than technology proponents.

PwC surveyed 544 C-level financial services executives in 46 countries for its report. More than eight out of ten respondents said they were only "moderately familiar" with blockchain technology. Virtually none of them said they felt "extremely familiar" with it.

At least one notable internet financial software maker is taking nothing for granted.

(Image: ktsimage/iStockphoto)

(Image: ktsimage/iStockphoto)

Startup Digital Asset Holdings cautions on its website: "Assets are not currently issued solely into these distributed networks, and may never be." The company, led by CEO Blythe Masters, who is a 27-year veteran of J.P. Morgan, pitches its software as a way of keeping conventional processes -- which depend on intermediaries -- and distributed networks synched.

None of this back and forth surprises Don Talton, senior manager of platform operations and engineering for credit score service pioneer Fair Isaac Corp (FICO). The organization helps companies spot good and bad credit risks, and sells predictive-analytics services to businesses trying to anticipate consumer trends.

"Financial services is a visually modern industry, but it's still very conservative [operationally]," Talton said in an interview with InformationWeek. Yet his company, best known for its FICO scores, is moving into new markets with deeper data analytics and looking at expanded sets of credit criteria.

Although Talton might be loath to say so, FICO's expansion into internet financial technology could be influenced by the noise of those 700 rapacious startups. Among the better known disruptors facing down the established players are:

  • Lending Club, a peer-to-peer marketplace lending platform
  • Robinhood Financial, a mobile, no-commission stock brokerage
  • Square, a mobile, small-business payments/money management service
  • Coinbase, a bitcoin transaction facilitator
  • AngelList, a resource matching platform for startups
  • Social Finance (SoFi), a student-loan marketplace platform

While it's worth paying close attention to the startups -- which are backed by respectable, if not spectacular, levels of venture capital and guidance -- usurpers and incumbents will likely coexist, said J. Dax Hansen in an interview with InformationWeek. Hansen is chair of the electronic financial services and blockchain and digital-currency practice groups at law firm Perkins Coie.

"They can't live without each other," said Hansen. Fintech disruptors lack the history and experience of their forebears, but are infinitely more flexible and welcoming of risk. And, to date, they are far less regulated.

"I am employed because of all the regulations," Hansen half-joked. The fintechs can push this technology forward faster. Their end, presumably, would come in buyouts by financial services firms, if not initial public offerings.

Pressure Points

Beyond figuring out how to stay ahead of newcomers, the big players have two imperative technology-related pressure points.

First, executives are very concerned about competitors experimenting with internet finance offerings in hopes of wringing efficiencies out of their operations. For some segments of financial services (such as insurance), cutting operating costs is an executive's best bet for boosting the bottom line.

Second, the financial services industry needs to move away from a model that holds the hands of its richest clients with kid gloves while giving everyone else a dated brochure. The wealthiest command a customer-centric relationship, while everyone else gets a product-centric experience.

Johan Joseph, principal in global accounting firm Grant Thornton, said in an interview with InformationWeek that product-centric approaches made sense during the industrial revolution, when "everything was about big, big, big volumes."

Executives today have to provide -- at a profit -- an experience that feels more universally customer-centric. That kind of approach for lower-income clients starts

(Continued on next page)

Jim Nash writes business and science articles, and also shoots urban and nature photographs. He's still searching for a common language to use with his Mensa-smart teenage daughters. View Full Bio

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