MARKET COMMENTARY Is Fintech a Zero-Sum Game?

Is Fintech finally growing up and becoming part of the mainstream technology contribution to , or is it still the disruptive child seeking to impose its concepts of innovation on an outdated and unwieldy industry? And more importantly, can it be profitable?

Time to Regulate? Fintech needs to continue to have a Like with so many things it depends who serious business case to survive. It is you talk to. But at a recent roundtable It is widely acknowledged widely acknowledged that the low-hanging debate in that attended “that the low-hanging fruit for fruit for Fintechs is cost reduction. But – under the Chatham House Rule so none once that is achieved, it is in danger of Fintechs is cost reduction. of the protagonists could be identified – becoming a zero-sum game. But once that is achieved, it the clear majority of a wide cross section is in danger of becoming of mainstream bankers, Fintech disrupters High-Frequency Trading (HFT) appears and experienced industry watchers gave to be at such a crossroad. So long as a zero-sum game. ” the impression that there was money on the table HFT firms innovation is entering a new phase of used technology to take it, for the benefit maturity. And, with it, also raising some of themselves and their customers. Now fresh concerns about its ethical and that everyone who is interested in this moral direction. space has caught up, the zero-sum game has begun. Many HFTs are now turning This was echoed in a timely speech by to big data and analytics as an alternative the president of the Federal Reserve means to generate alpha due to meeting of Philadelphia, Patrick T. Harker, who the law of diminishing returns from their said it was time for Fintech firms to start original business model. embracing regulation. In fact, he said that these start-up firms should actually want However, by conceding that they are now to be regulated as this would not only moving over to compete with hedge funds build trust in their products and services, that already lead in this space, some but would avoid the potential for more expect that natural competitive forces will penal retrospective regulation. prevail. As another suggested, this was the case with the Oakland A’s baseball Mr. Harker says the explosion of team as chronicled in Michael Lewis’ investment in Fintech since the 2008 Moneyball. They had one season of glory crisis meant that this segment of the (well near-glory as they lost in the World industry had yet to experience a reversal Series final) before everyone else caught or downward cycle. He adds that “trust on to the analysis they were using to will be shaken” and “what Fintech outfits differentiate themselves and afterwards it don’t want is regulation that comes in was once again a level playing field. after a crisis. That type of regulation almost always fights the last war and that could mean tighter strictures and less room for innovation after the crash at the end of a credit cycle.”

FINASTRA Market Commentary 1 Predictive or Counter- Technology (DLT) and blockchain-type

Productive Analytics? technology could produce significant Looking forward and So how do so-called new technologies, future gains. However, some widespread “considering opportunities, such as big data, and analytic capabilities concerns remain that there is becoming Fintech’s younger cousin, continue to deliver the “mousetraps” the too great a rush in some areas to use industry leaders need to stay ahead? Is robotics and predictive analytics to Regtech, is now seen as a there still a business model for genuine replace human capabilities. “Many primary focus of investment capital creation, or is it just dog-eat- HFTs are now turning to big data in technology innovation. dog? There were real concerns that the and analytics as an alternative means ” combination of big data and ever-more to generate alpha due to meeting the law sophisticated algorithms and analytics of diminishing returns from their original are potentially creating a future creating business model.” a future where investment strategies One speaker from a major technology will effectively be front-running. Is it really vendor said that, because of those predictive analytics or just a matter of concerns, they had shifted from cause and effect? It is fair to say at this using the term “predictive” capabilities, point that there was healthy cynicism describing them rather as “cognitive”. throughout the room and no gratuitous By doing this they believe they fawning at the feet of newly-funded acknowledge the wider social and start-ups. ethical considerations and now more Looking at the insurance market, an clearly position AI as being a complement industry founded on the principle of to more effective human decision making mutualization of risk, its very business rather than an alternative. But it is not model could be threatened by the rise a universal stance. of big data as the industry seeks to use machines to become ever more Regtech: Who Benefits? discriminatory in the way it deals with While it is great to be able to augment the customers. These markets benefit cognitive capabilities of humans with big from non-discrimination. Good drivers data, there is strong evidence that many subsidize bad drivers. That is the way financial institutions are jumping at the these markets work. But the more opportunity to employ bots to reduce insurance starts to break into behavioral headcount. No signs of moral scruples analysis, the more it risks becoming more there when it comes to saving money. discriminatory and exclusive. This would Looking forward and considering not be a healthy departure. opportunities, Fintech’s younger cousin, Of course, the use of Artificial Intelligence Regtech, is now seen as a primary focus (AI) and Machine Learning (ML) can bring of investment in technology innovation. specific and tangible benefits to financial Again, the costs imposed on institutions, particularly when we get back by recent and forthcoming regulatory to the focus on costs. Likewise, in areas initiatives are being seen as the main like trade finance, which is still awash with driver for interest and adoption. One big paperwork, greater automation and the question remains though: are the benefits potential injection of Distributed Ledger created by either Fintech or Regtech being passed on to customers?

FINASTRA Market Commentary 2 For More Information Visit Turning to innovation, it can be argued On a more specific note, JPMorgan Chase finastra.com that some was designed solely with & Co (JPM) CEO Jamie Dimon said that regulatory arbitrage in mind, so as to the bank spent USD 600 million of its USD develop ways to circumvent new rules, 9.5 billion IT budget last year on emerging or at least maximize the gaps from Fintech solutions. These included Contact Us At inefficiencies and contradictions inherent a range of digital banking capabilities [email protected] in many of them. Which, rather nicely, and partnerships with Fintech firms. takes us back full circle to what Philly The objective, he said in his annual Fed President and CEO Patrick T. Harker letter to shareholders, was “to benefit Telephone focused on in his recent speech. Certainly, customers with better, faster and often +44 (0) 203 320 5000 established players are arguing for a more cheaper products and services, to reduce level playing field. errors, and to make the firm more efficient.” This is likely to be more of an American problem than a European one, given Many banks are following this more the more prescriptive nature of US laws collaborative route with Fintech start-ups, meant that there is more traction for partly to hedge their bets on potential regulatory arbitrage to exploit. Whereas future disruption, but also to recognize on this side of the Atlantic, the adoption that if they are allowed to flourish in of a more principles-based approach to isolation they could represent unwelcome financial rules means that there exists future competition. more wriggle room for both banks and Finally, we cannot avoid mentioning regulators to establish best practice, blockchain. The consensus was that both but not avoid the implications of it. blockchain and the cryptocurrencies that According to KPMG, global investment are driven by it will remain firmly on the in Fintech fell sharply to USD 24.7 billion fringe until they prove their ability to scale in 2016 from a staggering USD 46.7 billion and meet the challenges of real markets the year before. Perhaps that shows instead of theoretical ones. Some would investor enthusiasm is waning, or perhaps say that the reluctance of major central just a new realism that Fintech is not the banks to formally acknowledge Bitcoin Holy Grail some portray it to be. Either also means it is about as much legal way, it certainly shows it is going to be tender as a Scottish pound note… Deep tough to deliver a return on the more than fried Mars bars anyone? USD 100 billion wagered on initiatives in recent years. We can assume those deep pockets don’t believe it is turning into a zero-sum exercise just yet.

Aout Finastra Corporate Headquarters Finastra unlocks the potential of people and businesses in fi nance, creating a platform for open innovation. Formed in 2017 One Kingdom Street by the combination of Misys and D+H, we provide the broadest portfolio of fi nancial services software in the world today – Paddington spanning retail banking, transaction banking, lending, and treasury and capital markets. Our solutions enable customers to London W2 6BL deploy mission critical technology on premises or in the cloud. Our scale and geographical reach means that we can serve customers effectively, regardless of their size or geographic location – from global fi nancial institutions, to community banks T +44 20 3320 5000 and credit unions. Through our open, secure and reliable solutions, customers are empowered to accelerate growth, optimize cost, mitigate risk and continually evolve to meet the changing needs of their customers. 48 of the world’s top 50 banks use Finastra technology. Please visit fi nastra.com

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