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?
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
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