Financial technology, nowadays better known under the term ‘fintech’, describes a business that aims at providing financial services by making use of software and modern technology.
More recently fintech had been perceived as the specific domain of cryptocurrency enthusiasts, but banks and other startups are increasing the prominence and mainstreaming of the industry.
Fintech has been a buzz word for a long time but the recent moves show that established names in finance are dabbling in the space. As the industry grows, attracting more funding and oversight, the corporate governance challenges will increase in complexity.
“From artificial intelligence to cryptography, rapid advances in technology are transforming the financial services landscape, creating opportunities and challenges for consumers, service providers and regulators alike,” according to a recent report from the International Monetary Fund.
Since all organisations rely on financial services in some way, from payments to banking accounts, company directors will need to become more prolific of the technological changes as they appear in innovation labs or marketplace.
Fintech, in a broad sense, covers a lot of different things from Financial services but will start to appear in other industries through new applications.
The most promising applications currently being developed in New Zealand involve payments and blockchain.
New Zealand consumers are showing signs of being early adopters of mobile technology, with very high usage of contactless payments. The big 4 banks through their Australian parent companies are all focused on improving the online payments/banking platforms for consumers.
Established financial players in Australia are experimenting with blockchain, the distributed ledger technology made famous by cryptocurrency Bitcoin. The Commonwealth Bank of Australia has built a blockchain for debt capital markets which has been tested by the Queensland Treasury Corporation, according to a January report in the Australian Financial Review, and the ASX has experimented using blockchain for clearing and settlement in securities markets, a June 2016 Business Insider report states.
Technologists are also excited about the potential for blockchain to enable widespread adoption of ‘smart contracts’. “A smart contract is a computer program that verifies and executes the terms of a contract upon the achievement of certain pre-defined events,” according to law firm Henry Davis York.
The inventor of the term ‘smart contracts’ is computer scientist Nick Szabo who likens them to an interaction with a vending machine. “Put in dimes, nickels, or quarters, and you get a soda back plus change,” Sazbo says. “That’s tedious to design a contract for, so we built a machine instead. Blockchains are the most secure environment to run smart contracts. Think of a blockchain like an army of robots checking up on each others’ work. Where traditionally you have accountants and lawyers, there are now a wide variety of things we can do with this vending machine-like mechanism to replace the job of traditional contracts.”
“Fintech technologies and applications can be analysed through a simple model of disruption that is now part of the standard toolkit for directors”.
As directors know well, the opportunities provided by the new technologies also come with risks. Governor of the Bank of England, Mark Carney, highlighted in a speech in January 2017 the stability risks fintech poses for the financial system, as well as cybersecurity, money laundering and terrorism financing concerns.
The IMF, in its report, says “that regulators may need to complement their focus on entities with increasing attention paid to activities, while also urging them to develop rules and standards to ensure the integrity of data, algorithms and platforms”.
Even with the best intentions, if the past is a guide, the widespread adoption of the technologies by society could be a rocky road, Carney suggests. “The history of financial innovation is littered with examples that led to early booms, growing unintended consequences, and eventual busts,” Carney warned in his speech.