Can fintech go where no IT has gone before?

Finance has always been an energetic early adopter of information technology, but now one expert from London Business School is asking whether fintech will reach places earlier technological innovation didn’t touch.

Chris Higson, Associate Professor of Accounting Practice, London Business School, posed the question writing earlier today on Forbes.

Dr Higson says: “Fintech is the label we give to the explosion of disruptive innovation in finance. And the sector’s future was a key talking point last week at fintech Insights Weekend, an LBS event supported by the AQR Asset Management Institute.”

“Finance has always been an energetic early adopter of information technology,” Higson says.

Fintech automates complex processes, enabling disintermediation. It brings the intensive use of data and analytics giving the customer much better information, visibility, and access to choice. It thrives on relatively low barriers to entry and, mostly, has low capital requirements, leading to greater competition. These are just some of the reasons for which Higson believes, fintech could solve some of the key challenges facing the finance industry.

“Broadly, there have been three areas of concern about the finance industry,” Higson explains.

“There is continuing concern about what the finance industry did to the global economy in 2008 and whether it could happen again, that is, the concern about systemic risk. There is a belief that some people are not getting the financial services they need, for example, limited access to banking in the developing world, the financing gap faced by SMEs, and so forth. And finally, there is a view that financial services are too costly.”

There are good reasons, he says, to think that fintech can play a powerful role in addressing these concerns.

“Already, in terms of value added, one of the most important fruits of fintech has been the marriage of finance and mobile telephony that is bringing the most fundamental financial services – reliable payments and safekeeping – to the developing world,” he says.

“Payment systems are subject to a lot of fintech activity everywhere. The lower cost technology will win, though the value proposition of the Bitcoins of the world is arguably less compelling than that of the Mpesas.”
Peer-to-peer lending is often held up as an example of what fintech does well. “But the evolution of peer-to-peer is informative,” Higson says.

“Uptake is perhaps slower than expected. Some, like Lending Club, have stumbled. Most significantly, the more agile, incumbent banks are responding by embracing the technology and the start-ups that are driving it. So peer-to-peer may keep its promise to transform SME financing, while changing the institutional landscape less than we might expect.”

Time as they say will tell, but Higson expects that when we look back in ten years’ time, it’s entirely possible that we will see fintech having driven cost out of the finance industry and driven greater efficiency into it, answering the famous Thomas Philippon (New York University - Stern School of Business) problem – that the finance industry has shown no efficiency gains at all over 130 years.