Fintech Chain Mail: innovations, institutions and regulations with Professor Arturo Bris
What are Fintech Innovations and what trends are driving them?
According to Bris, the term ‘Fintech’ is a misnomer, considering the fact that all of traditional Finance is based on some sort of technology. To Bris, the extent to which new technologies are being merged with existing financial tools to create new business models results in what he likes to call ‘Fintech innovations’.
Like most of us, his first exposure to Fintech innovations was as a user, which gave him firsthand exposure to the on-coming disruptions and quickly influenced his academic teachings and research. Other than technology, he points out that several other trends will influence Fintech innovations in the future. Examples are population aging (which will impact how customers can interact with financial institutions), urbanization (which brings changes in the typical consumption basket), and the structure of industries (since the concepts of competitors, consumers and investors are evolving). On technology itself, while Blockchain and AI have gone mainstream, there are several others like quantum computing, cyber security and digital identities that are just as significant.
How are financial institutions reacting to Fintech innovations?
From his interactions with global executives, Bris finds traditional financial institutions are reacting differently to shifts in the landscape, with some being very agile and others complacent. Generally speaking, the geography and sub-sector of the companies seem to determine their response due to factors such as regulation and national wealth level.
That said, the main barrier to transformation among banks remains cultural. In the future, financial institutions will need to be more collaborative, with different units, like investment banking and treasury, working together rather than in silos as they currently do.
Broadly speaking, across the industry, from retail banking to wealth management or insurance, the intermediation part of the value chain is most sensitive to disruption, since it does not automatically create value, but merely removes constraints (such as information on the quality of borrowers and lenders). This has created opportunities for several retail payment, lending and insurance platforms such as Revolut, Prodigy Finance and Purple, which use technology to close the intermediation gap. By contrast, the parts of the value chain which depend on relationships beyond what technology can provide such as investment banking, should be more resilient to FinTech Innovation disruptions.
When imagining the bank of the future, Bris expects to see much smaller and specialized companies, as the dominance of universal banking diminishes. Due to the rising costs of regulations and risk management, synergies between different units like investment banking and savings and loans are fast disappearing. Moreover, the culture in these units are usually hugely dissimilar, which should facilitate the break-up of large financial institutions.
How do regulations affect fintech Innovations?
Regulations play a huge role in managing systemic risk, Bris says, but could also create massive competitive advantage for certain players. In some cases, regulations promote FinTech Innovation to the detriment of incumbents, and in other cases they hamper innovation and discourage entrants to the benefit of banks.
Bris believes it is most likely for regulators to generally move towards supporting innovation, as countries compete to develop the most conducive digital ecosystems. A supportive regulatory environment also provides the opportunity for governments to play central roles in managing citizens’ digital identities. While it is unclear whether such an initiative is better led by the private sector, issues such as pandemics, cyber security and immigration control create a significant incentive for governments to take responsibility for digital identities. In India, the Aadhaar is a government-managed digital identity system.
How is IMD preparing students to exploit Fintech innovations?
Bris notes that IMD has been incorporating new digital trends into its programs. This is especially important because a lot of finance tools are becoming obsolete, and future business leaders need to be well-equipped. There are headwinds for educators to achieving this, an example being the slow pace with which finance textbooks capture critical emerging trends.
Bris believes that executives looking to succeed in the new financial services environment need a strong understanding of the fintech innovations landscape. For corporate finance and investing specifically, basic finance concepts like valuation, risk and return will remain applicable and continue to form the foundation for tools being developed and advanced, which means they still need to be studied.
Executives must also commit to continuous learning, as the current pace of innovation shows how quickly some tools can become obsolete. For the broader public, there is a growing importance of finance educators as technology increases access to financial services through the emergence of platforms such as Robin Hood, which seem to be democratizing finance.
Interview conducted by Stephanie Hurry, Olabisi Ayodeji, Dmitry Borisenko, Matteo Conti, Emon Goswami