Fintech is deeply impacting the finance world, challenging orthodoxies and offering customers innovative ways to manage and maximise their finances. CJBS Faculty and Cambridge MBA alumni discuss what’s happening and what is next for this sector.
How are financial firms responding to the threat of fintech disruption?
Professor Rau is the Sir Evelyn de Rothschild Professor of Finance at CJBS. He is a founder and director of the Cambridge Centre for Alternative Finance (CCAF) and a member of the Cambridge Corporate Governance Network (CCGN).
Major technologies are changing the way organisations are being disrupted. Most financial institutions have always faced issues of adverse selection (how do I know someone will pay back a loan?) and moral hazard (now you have the loan, you’re relaxed about paying it back). Now, with the availability of new types of information, the solutions are changing. Most people have smartphones and are supplying information continually that they would never have given before. Information such as who you talk to, about what subjects – even how you are feeling during the conversation. Phones are basically tracking devices that are changing the way these old financial problems are dealt with.
Tim (MBA 2013), Founding Director, Plentitude.io, is a digital asset manager specialising in Responsible Investment using Environmental, Social and Governance (ESG) factors for both savings and pensions.
Let’s look at the example of robo-advisers – firms that provide online wealth management services including automated, algorithm-based portfolio management services. Within this market we’ve seen firms ignore, compete, or acquire depending on the companies involved. At first fintech disrupters were ignored, however we’re seeing more competition and acquisitions now. Competition is coming from among others, Vanguard, the largest asset manager on the planet who have created their own platform to sell directly to consumers. Competition has not always succeeded – see Investec’s Click & Invest service and UBS’s SmartWealth, both closed in recent years. Acquisition or investment is also becoming more popular – see Goldman Sachs’ investment in Nutmeg, or BlackRock’s investment in Scalable Capital.
There is also rising consumer interest in climate change and how that plays out in our savings – posing the question: is there a way that we can generate a financial return without destroying the planet? Some fintechs are starting to look at this, for example, Nutmeg. What’s interesting is that the UK regulator, the Financial Conduct Authority (FCA), is taking this seriously and has created a ‘green’ version of their regulatory sandbox – ‘Project Innovate’ – to allow new firms with interesting business models to work closely with the regulator.
How are non-financial firms engaging with Fintech to reinforce their business models and access new forms of finance?
For the non-fintech businesses, such as traditional banks, disruption by fintechs is a big issue. Lending your money through a platform can earn you higher percentage interest than putting it in a traditional bank. The volume of loans on these types of platforms has risen from half a billion to 500 billion dollars in the last few years. Another disruption is in transferring money from one country to another. There are now lots of platforms that do it for a fraction of what banks will charge.
Banks are also adapting to the habits of millennials. Those of us who are older will have started out with a traditional bank and then perhaps added second or third accounts with the new disrupters. Inertia means we will not close the traditional account. But for millennials, all they have known is a marketplace full of disrupter banks and they are likely to start their banking journey with one of those, bypassing traditional banks completely. The banks are worried about this and so you have moves like Goldman Sachs starting Marcus – an online bank aimed at millennial customers.
Broadly speaking, non-financial firms have entered the financial services market previously – look at the case of UK supermarket banks, for example. What we’re seeing more recently is different though – it’s bigger and faster – especially in China. To give just one example, Ant Financial was an affiliate of Alibaba Group and now operates Alipay, the world’s largest mobile and online payments platform. In March 2019, The Wall Street Journal reported that Ant’s flagship money-market fund was the biggest in the world, with over 588 million users of Ant’s mobile payments network – Alipay contributing, more than a third of China’s population. 
It’s obvious that Fintech is here to stay, and the only question now is – where will the disrupters lead us next?
CJBS hosts a number of specialist research centres on alternative finance models and other fintech solutions for the future;
- Cambridge Centre for Alternative Finance (CCAF)
- Cambridge Centre for Finance (CCFin)
- Cambridge Endowment for Research in Finance (CERF)
- Newton Centre for Endowment Asset Management (CEAM)