The financial industry is undergoing an extraordinary level of technological change, and the so-called “FinTech revolution” is set to disrupt established practices in the post-trade services space. Custodian banks, investors, and regulators are all trying to prepare themselves for the impending transformation in a way that brings the full benefits of innovation, while at the same time avoiding the risks associated with new processes.
How best to navigate challenges surrounding FinTech was the subject of a panel discussion that took place as part of NeMa Asia in November 2016. Moderated by Paul Beal, Head of Business Development, GBST, the session started with a debate on the amount of investment that has gone into FinTech.
The levels of investment remains high, particularly in Asia, whilst the US and UK experienced weaker activity due in part to market uncertainties.
At the same time, the kinds of investments are also evolving, as investors are starting to move from the world of consumer-focused startups to larger technology companies and traditional vendors in the financial sector, said Thomas Olsen, Partner at Bain & Company. We are seeing increasing private equity interest in financial market utilities and software vendors.
“In many aspects, there is still a lot of room for innovation among consumer-focused startups,” said Mr. Olsen. “But when it comes to infrastructure, the large incumbent providers have a lot of advantages. They are already installed, they are trusted, and they understand the workings of the industry. They can bring their technology to bear on that.”
Smaller, newer FinTech companies are also at a disadvantage compared to their larger peers, as they often lack the credentials that is essential for working with a large financial institution. To some extent, this is an issue that goes beyond technology, and touches on end-to-end security.
“You need to be absolutely certain that the technology is robust, is sustainable, and gives you the security you need,” said John Van Verre, Global Head of Custody, HSBC Securities Services. “The track record is absolutely key. So is having a proper understanding of how we work.”
Large or small, there was no question among the panel that FinTech companies would play a major role in the financial industry in the future. What remains less clear is the exact role they will play and to what extent they will disrupt the operating model of traditional banks. But instead of framing the future relationship between banks and FinTechs as a competitive one, it might make more sense to see them as collaborative partners.
“It is about how you dissect and create a new operating model that benefits from the technical developments,” said Mr. Van Verre. “This could be custodians and securities services providers implementing new technology, while some of the activities will be performed by the FinTechs.”
One of the ways that a custodian adds value is via the data that it has available, said Mr. Van Verre, and using it to help customers realise their own ambitions. “Innovation is reshaping the value chain, so some custodians will implement and be adopters of the new technologies. And at the same time, there will be a separate evolution with custodians taking on new responsibilities.”
The technology that currently gains the most attraction is Blockchain – a distributed ledger typically associated with the Bitcoin currency that is widely thought to have potential implications across the financial industry. In the context of banking for example, the technology could be used to establish a digital identification system.
“Blockchain is a difficult area, because in most people’s opinion, it is immature,” said Benedicte Nolens, Head of Risk and Strategy at Securities and Futures Commission of Hong Kong (SFC). “However, most people we speak to think it has the greatest promise.”
The wide ranging potential of Blockchain also highlights a broader issue relating to the role of regulators maintaining market stability against the backdrop of rapid technological change. As a regulator, Ms. Nolens said that the solution would be finding a balance between the opportunities that technology has to offer against the new risks that it brings.
“It is important to know the risks, and how to manage them,” she said. “And on the topic of Blockchain, people think that the risks can be reduced and it can result in material cost savings.” In addition, she suggested that automated processes are not necessarily more risky than pre-existing manual processes that involve multiple agents who can each be subject to human error.
The panel agreed that although technological change was coming to the financial industry, its arrival would be gradual. The challenge for traditional banks will be to keep on top of the latest innovations, and making changes to their business when it is appropriate. The panel also discussed the importance of standards to ensure we drive consistent market practises. It was felt that some element of standardisation and harmonisation will kick in as the FinTech industry matures.
“We run a number of innovation centres around the world so that we can become familiar with the new technologies,” said Mr. Van Verre, while describing HSBC’s approach to FinTech. “We also participate in all the big industry initiatives going on.”
“We are very open to these new developments,” he said. “Not everyone will be doing the same things in the future as they are doing now.”