The Future of FINANCE THE IMPACT of FINTECH, AI, and CRYPTO on FINANCIAL SERVICES HENRI ARSLANIAN FABRICE FISCHER The Future of Finance Henri Arslanian • Fabrice Fischer The Future of Finance The Impact of FinTech, AI, and Crypto on Financial Services Henri Arslanian Fabrice Fischer University of Hong Kong Blu ltd Hong Kong, Hong Kong Hong Kong, Hong Kong ISBN 978-3-030-14532-3 ISBN 978-3-030-14533-0 (eBook) https://doi.org/10.1007/978-3-030-14533-0 © The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2019 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or ­information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar ­methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Cover illustration: © Science Photo Library / Alamy Stock Photo Cover design by Tjaša Krivec This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland Preface We are going through perhaps the most exciting period in the modern history of financial services. The rapid acceleration of technology is enabling a funda- mental reinvention of the structure of the financial institution, while at the same time inviting the entrance of new competitors with the potential to upend the traditional order of the industry. As with any revolution, there will be winners and there will be losers; some will be able to adapt and thrive in the face of these changes, while others will struggle to reinvent themselves in the ways necessary to remain relevant. It is impossible for us to know for cer- tain who will emerge victorious from this period of tumultuous change, but we can examine the forces that have shaped the transformation so far, and consider what the future might hold. This book is written for those who want to understand the transformation that technology is driving in financial ser- vices and to consider the impact these forces might have on the future of the industry and on themselves. We believe that three key areas of innovation are poised to have an outsized impact on the shape of the financial services ecosystem. These are the fintech revolution, the advent of crypto-assets, and the rise of artificial intelligence (AI). In the chapters that follow, we will explore each of these subjects inde- pendently, helping the reader to understand the context, background, and fundamentals of these trends. Grasping these basic concepts in detail is critical as it provides the foundational knowledge to explore further. Armed with these basic concepts, we will consider the trends shaping the future of these areas of innovation. What might the future of fintech look like? What could be the implications of AI playing a larger role in financial decision-making? Will crypto-assets make their way into daily use by indi- viduals around the world? We hope that the examination of these and many v vi Preface more questions will provide useful insights to a wide range of readers, from the bank CEO debating the strategic direction of her organization to a stu- dent considering where to focus studies or start her career. Finally, while we believe that fintech, crypto-assets, and artificial intelli- gence could each have a significant and long-lasting impact on the structure of the financial system, it is the combined interaction of these three that stands to have the most transformative impact. While the confluence of these three areas of innovation may still be over the horizon, we devote our final chapter to the examination of several plausible scenarios for how they could intersect, in the hope of illustrating their potential combined power. We hope you are as excited as we are to embark on this journey on the future of finance! Hong Kong Henri Arslanian Hong Kong Fabrice Fischer Acknowledgments Writing a book is an intense journey. It devours all of your “spare” time, energy, and focus. We knew this going in, but we still underestimated it (as every author does!). However, we did it with great passion and pleasure know- ing that many may benefit, and that is very rewarding. We hope that you will enjoy reading this book as much as we enjoyed writing it. Thanking everyone who inspired us to write this book would be impossi- ble, but we would like to take the time to thank some individuals who really made a difference and helped us bring this book to fruition. A big thank-you to Jesse McWaters for his valuable support throughout the book. Without his priceless insights and feedback, this book would have never been the same. To Alessandro Di Lullo, who helped us enormously in writing the fintech section. His passion and dedication to making this book happen was exemplary. To Antony Lewis, for his priceless help in reviewing the crypto and blockchain sections. To Kevin Pereira, for his review and comments on the artificial intelligence chapters. And to Nikita Mathur and Nayantara Bhat, for their amazing support when it came to aspects of research and editing. To the entire team at our publisher Palgrave Macmillan, including Tula Weis and Jacqueline Young, for their incredible support during this journey— this book would have never been possible without their continuous support and backing. To Michael Wykoff, for his patience and meticulous proofreading and edit- ing work. To Belinda Esterhammer and her team, for the awesome work on the graphics. And to Lisa Rivero, for the help on the indexing. And the most important thank-you to you, dear reader, for your passion and interest in the fields of fintech, crypto, and artificial intelligence. Welcome to the future of finance! vii viii Acknowledgments Personal Acknowledgment from Henri Arslanian This book would have never seen the light of day without the support of my amazing family. To my dad, from whom I learned the values of hard work and integrity. To my mom, who taught me the importance of intellectual curiosity and giving back. To my parents-in-law, for their incredible understanding and support. But most important, to my wife Lara Setrakian (and my baby daughter Vera-Maria Arslanian!), for their patience and understanding for the entire weekends and holidays during which I was physically with them, but men- tally and practically in front of the computer working on this book. Personal Acknowledgment from Fabrice Fischer Writing this book has been both a joy and a massive endeavor. It could not have happened without the support of my family, the support of and enlight- ening discussions with my colleague and friend Kevin Pereira, who is as pas- sionate as I am about artificial intelligence, and the kind attention of Guillaume Huet. My warmest thanks to them and to the many others who contributed to the success of this book. Your authors Henri and Fabrice Contents Part I The Fundamentals of Fintech, Crypto, and AI 1 1 The Digital Triumvirate of Computation, Data, and Connectivity 3 2 New Interfaces for the Digital World 17 Part II The Fundamentals of Fintech 23 3 The Rise of Fintech 25 4 Incumbent Financial Institutions and Their Response to Fintechs 57 5 The Emergence of Techfin 69 6 The Changing Structure of the Financial Ecosystem 77 7 Financial Innovation and Inclusion 81 Part III The Fundamentals of Crypto-assets 87 8 The Basics of Cryptography and Encryption 89 ix x Contents 9 The Rise of Bitcoin 95 10 Blockchain As an Enabling Technology 113 11 The Proliferation of Crypto-assets 123 12 A High-Level Taxonomy of Crypto-assets 139 13 The Crypto-asset Ecosystem 157 Part IV The Fundamentals of Artificial Intelligence 165 14 Understanding Artificial Intelligence and Its Capabilities 167 15 Applications of Artificial Intelligence in Financial Services 179 Part V Future Trends in Fintech, Crypto, and AI 199 16 Fintech and the Future of the Financial Ecosystem 201 17 The Continuing Evolution of Crypto-assets 217 18 Future Trends in Artificial Intelligence 231 Part VI Artificial Intelligence Meets Crypto-assets 249 19 Selected Scenarios for a Crypto-AI World 251 A Financial Future Full of Possibilities 267 Bibliography 269 Index 301 List of Figures Fig. 1.1 Cost per gigabyte of storage over time; Once extraordinarily expensive, the cost of storing large quantities of data has dropped to fractions of a cent. Source(s): Lucas Mearian, “CW@50: Data Storage Goes from $1M to 2 Cents per Gigabyte (+video),” Computerworld, March 23, 2017, https://www.computerworld. com/article/3182207/data-storage/cw50-data-storage-goes-from- 1m-to-2-cents-per-gigabyte.html 7 Fig. 1.2 Global volume of data created in zettabytes; Data is increasing exponentially, with more new data now created each year than from the beginning of recorded history to 2003.