Financial technology, or fintech, has developed hugely over the past decade. In many ways, it has transformed the way that the financial sector operates. The automation of financial services, and their move online, have been enabled by digital technology in the form of machine learning AI, sophisticated software and complex algorithms. In terms of customer experience and security, making financial transactions is now very different from what it was just ten or 20 years ago.
Fintech, however, is not just about the customer-facing software that enables us to do our everyday banking or even trade on the stock market via our phones and laptops. Fintech also covers the “back end” of financial institutions such as banks or brokers. While the fintech stories that make the news often involve disruptive start-ups offering new ways for customers to bank or buy products, behind the scenes, the technology is in many cases in urgent need of investment and updating.
The infrastructure used for financial trading, data storage and analytics, and for managing risk and compliance, costs banks and other institutions a huge amount of money just on essential maintenance. However, despite investment in developments such as cloud computing, these systems are in some cases up to 30 years old and require a major and expensive overhaul to bring them up to speed in the modern world.
Many major institutions are still using overly complex, out-of-date systems for processes such as compliance, data retrieval and document processing. The hi-tech front end as seen by the customer is often far more impressive than the legacy systems used by employees in the back end, where a surprising amount of work is still done manually. Of course, this increases the risk of human error.
Adapt to survive
In some ways, financial institutions that operate entirely in the digital arena are better able to adapt than older institutions still rooted in brick-and-mortar banking and a 19th-century approach to finance. The recent acquisition of smart contract provider Firmo by online trading platform eToro is a part of a wider growth strategy for the investment broker that looks to a future of tokenised assets and increasing use of blockchain technology to track financial transactions. In comparison, many banking multinationals are lagging behind.
Disruption is coming
Disruptive technologies have not hit clearing, payment and messaging services between banks in the same way that they have changed how customers interact with financial providers and service vendors. These are the “rails” of the financial industry, and they are the same for both massive institutions and new start-ups. While new online lenders may promise a financial revolution, they are using the same system that is in place for decades. The only difference is that they have to pay more to use it than the banks, which essentially own the systems. There is huge potential for a disruptive financial revolution based on developing a new, modern back-end system, free from the control of the major players. The big institutions have a vested interest in keeping things as they are, but if or when change comes, it will be far better for them if they are the instigators of this change. Otherwise, like the dinosaurs, they may find that they are obsolete overnight.