David Adams 7 Mar 2018 12:40pm

Innovation in financial technology

David Adams examines what the emerging financial technology services sector and its wave of innovations means for consumers, businesses and the accountancy profession

Caption: Photography: Unisplash

Fintech can refer to almost any technology used to provide financial services. Confusingly, the technology companies developing new digital financial services may also be called fintechs. And it incorporates other forms of tech, such as insurtech, paytech, regtech and wealthtech. Essentially, it’s one segment of a wave of developments based on using digital technology to speed up back office processes and enhance products and/or services in any industry or the public sector.

There is a strong desire for better financial services, in part because so many consumers and business leaders are used to accessing other online services quickly and easily by smartphone and computer. And they are much less tolerant of the bureaucratic delays associated with conventional banking, investment transactions or insurance claims.

“Outside financial services, consumers have a fantastic online experience,” says Murray Raisbeck, global co-leader of the fintech practice at KPMG. “They now have high expectations of an online customer journey and the financial sector probably has the biggest gap between the experience customers want and the experience they get. Fintech is bridging that gap.”

New entrants and technology developers are trying to do this by focusing on a niche rather than offering the full range of financial services. Many also offer more personalised services based on data science and machine learning.

Some are building partnerships with incumbent providers who invest in, acquire or outsource services to them. Santander, for example, has InnoVentures, a $100m venture capital fund which invests in fintech companies practising disruptive innovation. Another bank, ING, has created over 100 partnerships with fintech companies that power services including paperless online loan applications in Spain (enabled by the fintech Kabbage) and investment services in Germany (with fintech company Scalable).

New entrants that could attract large numbers of customers include mortgages and savings provider Atom Bank, online banking service providers Monzo and Starling Bank, and usage-based insurance provider Trov, which offers automatic cover on phones and other electronic devices taken out of the home without forcing customers to buy annual cover. Other interesting new entrants include “robo-advisers” – online investment service providers like Robinhood in the US, or Nutmeg and Wealthify in the UK – which allow people to invest sums as small as they like for low fees.

“New providers have improved the customer experience and provided more choice,” Raisbeck says. But the proliferation of such services presents a new challenge, he continues, adding: “You end up with multiple service providers and lots of apps on your phone, which is quite a hassle. So who will be your financial services wallet?

Who can be the aggregator?”

Starling is trying to do this, allowing customers to access payment, investment, savings, mortgages, insurance and peer-to-peer financial services provided by other companies through its Starling Marketplace feature. Similar initiatives are sure to be offered by other new entrants and existing banks in the UK as a consequence of the Open Banking initiative, which launched in January. Open Banking means customers can now authorise multiple financial services providers to securely access their bank accounts, to help them find and use best value services from other providers and/or to gain an aggregated view of their finances. The initiative is based on the building blocks of many fintech services, Application Programming Interfaces (APIs), which allow IT systems to communicate with each other.

Open Banking may offer a faster entry point into financial services provision for new players and incumbents, says David Lyford-Smith, technical manager in the IT Faculty at ICAEW. He points out that budgeting apps for consumers are already popular, even though they are difficult to use without effective services aggregation. “When it becomes possible to have a budgeting app that you can provide with appropriate access to your banking records so it can recommend that you switch to a particular account, or use a particular credit card – that’s potentially very powerful,” he says.

Fintech can offer many benefits to business customers too. Perhaps the shape of things to come is the sort of service that German fintech company Penta is offering SMEs. It launched its banking services in Germany in December 2017 and plans to expand to other countries including the UK, the Netherlands, Spain and Belgium.

Co-founders Lav Odorovic and Luka Ivicevic had both been involved in start-ups, where they formed a very negative view of business banking services in general and particularly those available for start-up companies. For example, it often takes several weeks to set up cross-border payment facilities or to provide the company’s legal representatives with debit cards. Penta’s proposition is designed to help small companies open business accounts much more quickly and easily. It is based in part on research conducted with 100 SMEs in Germany and the UK to find out what they wanted from a business bank account.

Penta’s services are delivered in partnership with another fintech company, solarisBank. Odorovic says Penta approached 12 other, well-established banks, but none could work with the APIs Penta wanted to use. Also, communication with decision-makers in the other banks was slow and hampered by internal bureaucracy while solarisBank offered a much better cultural fit.

Another aspect of fintech that is increasingly likely to have a significant impact on financial services – and the accountancy sector – is blockchain, which is built on a distributed ledger system. This offers a way to transfer the ownership of assets and record data permanently in a form that is always visible to all participants, making it secure and efficient. Its use for payments, reconciliation and settlement processes could cut costs dramatically. Many financial institutions have joined a consortium, R3, which is building a blockchain-based distributed ledger for interbank reconciliation, a process upon which all banks currently spend huge amounts of money each year.

In 2016 Santander ran a staff pilot for blockchain-based international payments, using Apple Pay and blockchain technology supplied by Ripple, one of the fintech companies which Santander InnoVentures invested in.

“The feedback was great,” says Ed Metzger, head of innovation and technology at Santander UK. “We created a number of key benefits that would be much harder to create using legacy technologies, around certainty of when the payment would arrive, how much the end-to-end transaction would cost; and exactly how much would arrive in the destination account. We’re now actively looking at opportunities to use this technology for customers in the UK and elsewhere.” Santander is also investigating the use of blockchain for trade finance.

Blockchain supports what may be the best-known fintech invention, the cryptocurrency bitcoin, which relies on transactions being recorded in a blockchain distributed ledger. Such has been the volatility of the price of bitcoin in recent months that it is perfectly possible the investment bubble around it will have burst, or at least deflated dramatically, by the time you read this article (its value was swinging wildly earlier this year, for example). But even if that does happen, cryptocurrencies based on blockchain technology will surely continue to flourish in one form or another because blockchain gives these currencies some degree of security. It is the key reason why a growing number of multinational companies are assessing future use of cryptocurrencies for low cost international transactions within their businesses.

Other fintech innovations that could have a particularly significant influence on the future of financial services are related to machine learning (a form of artificial intelligence) and data analysis. Spotting business opportunities revealed by financial and/or customer data and creating more attractive products offered in a more personalised way is at the heart of many new developments
in the financial sector.

Of course, the need to protect data and secure transactions makes it even more vital that security and fraud risks are managed effectively. Fintech based on machine learning will help here too, through the use of technologies such as Barac, which employs artificial intelligence to detect cyber attacks that have been launched using encrypted data without actually decrypting the data.

Unfortunately, as Jean-Noel Georges, global programme director for the digital transformation practice at Frost & Sullivan, points out, fraudsters have fintech of their own that is used to develop more sophisticated malware. Georges believes biometrics technology, such as those based on fingerprint identification or voice recognition, will play an increasingly important security role in combination with risk management software that assesses factors including the way individuals use their devices and the language they employ to help authenticate identity. This is another area where fintech companies are seeking to develop more effective technologies to improve the security of financial transactions and digital communications.

This mix of technology – mobile, distributed ledger, machine learning and more sophisticated security – is the reason why the term fintech deserves to exist. It represents a new generation of technologies that offer the possibility of better financial services for consumers, businesses and other organisations, as innovators force all service providers to raise their offerings. Fintech could be good news for everyone.

What fintech means for accountancy

One growing area of fintech is online accountancy software and services such as Intuit’s QuickBooks, AccountEdge, and those provided by Xero and Sage. Collectively, along with improved technology used by accountants, these technologies are fulfilling predictions about the automation of accountancy. The development of services that combine some elements of accounting with banking services, such as Counting Up, may also contribute to this process.

There has also been an increase in the use of digital invoicing. “There’s going to be an increasing trend for systems producing digital invoices,” says ICAEW technical innovation manager Mark Taylor. “If they’re in a format that can be read by another computer, then they can be automatically processed.”

Blockchain distributed ledger technology will also have an influence on the future of accountancy, suggests KPMG’s Murray Raisbeck. “As blockchain becomes a mainstream technology, distributed ledgers are going to start replacing traditional ledgers, because transactional data on the distributed ledger is much more secure and harder to tamper with,” he explains. “That means there will be less need for accountants and auditors to verify transactional data.”

Growing use of automation and artificial intelligence technologies will also have an effect. “Accountancy firms will be able to leave the technology to carry out those tasks while they use their skillsets to tackle other problems that clients have,” says Raisbeck. “That should allow accountants to add more value.”