The finance industry is gearing up for the fintech overhaul, the likes of which have never been seen before. Innovation is transforming the financial landscape in a variety of ways, affecting both new starters and established financial cornerstones of society, our banks. These established corporations aren't the beginning and end anymore, causing the financial services landscape to become a battleground.
A research piece by the World Economic Forum (with Oliver Wyman) was recently published, focusing on the role of financial services in society, and how fast-growing innovations within technology could be considered in a broader view.
The report, The Role of Financial Services in Society, Understanding the impact of technology-enabled innovation on financial stability, is the result of a set of interviews with industry executives and experts, to better understand the technological transformation we're currently in the throes of.
The findings of the report are followed by some recommendations. The topics covered include why this wave of new innovation is unique, how these innovations create new opportunities for enhancing system stability, where technology use has fundamentally changed risk profiles of our financial systems, and what we can do to maximise the benefits and minimise the risks of technology-enabled innovation.
How technology-enabled innovation impacts society
The positive impacts on the financial sector, and the community at large, are vast, but it's also an area lacking in perspective - not just yet anyway. Fast-moving technological innovations don't allow easily for such perspective, and that also means harnessing the power of these innovations isn't always a straightforward path.
One of the main ways technology helps the financial sector directly is in accessibility - delivery of services is now easier than ever, including the great unbanked, though in Australia this isn't something considered as a societal issue. Most people have a bank account, and services providing money transfer for the great unbanked overseas have been quietly shut down by banks here, with illegal use of non-bank funds an issue.
Lower delivery costs are also one large benefit of technology-driven innovation, along with risks that are both at once easier and harder to manage. Having everything recorded online is a benefit, but data being invisible to our eyes means we're easy to fool.
Competition is also a valuable addition to the financial markets, and while regulatory limits in Australia are causing impositions on fintech (and other) startups, steps are being put into place to mitigate this. The other great thing about technology innovations is the ability to share.
The interviews identified six key sources of technology-driven risk:
- Alternative sources of finance (capital substitutes)
- Market electronification - high frequency trading, dark pools, alternative trading platforms
- Data security - cyber risk, technology reliance, data sharing
- Industry conduct - the biggest technology-driven risk, employee monitoring issues
- Payments effectiveness - resiliency, stores of value, distributed ledger technology (blockchain)
- Regulatory arbitrage - compliance, global supervision, consistency
Debate on data
The report recommends that a public debate should occur regarding the ethical use of data used for personal and business purposes. This debate should be set up by the government, and done with financial supervisors, plus customers and practitioners. Clearly-defined boundaries should be set up to establish and maintain trust with consumers. This means setting standards.
Most rules that are already set up could not have anticipated the way data was collected and spread now. The debate should aim to establish acceptable uses for personal data, define clear criteria for data ownership and transfer between private sector players and supervisors, and be part of international policy. All perspectives should be represented.
A global forum, the likes of which doesn't currently exist, should be set up, the report says, for the public-private sector dialogue regarding technology-based transformation in financial services. This is in particular needed where supervisor support is required to develop technology.
This global forum should have leaders from both the private and public sectors, and a broad variety of academics, economists, policy-makers, and civil society representatives, with regular meetings. Collaboration is important, as is developing a framework to assess innovation and risks and benefits. This forum can then guide public policy in a more robust and cohesive way.
A set of standards should be defined by the global supervisory community on internal capabilities required to ensure that our supervisors, as a community, are well equipped to monitor markets and risks.
Standards should include the establishment of dedicated teams who specialise in different disciplines, and have emerging technologies information, so as to monitor risks and benefits better across the system.
Making our own rules - proactive standard setting
The private sector would benefit from setting its own standards and having standards bodies to enforce its own rules, instead of waiting for bad apples to ruin it for everyone, and the government/regulatory body having to step in with rules that don't fit as well as they might have.
These boards can shape the regulatory agenda, rather than be at the mercy of it. There should be collaboration and a code of conduct/set of principles.