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The Challenge of FinTechPresented to the
2017 Ohio Bankers Day Conference
16-Mar-2017
Presented by
David M. Rowe, Ph.D.President
David M. Rowe Risk Advisory
16-Mar-2017
Framework
2
1. What is FinTech and how big is it?
2. Why are banks vulnerable to this form of
competition?
3. A Field Trip to the FinTech Zoo
4. Countering the FinTech Challenge
16-Mar-2017
Section 1
What is FinTech and how big is it?
3
16-Mar-2017
FinTech – A Proposed Definition
FinTech is the application of revolutionary 21st
Century information system architecture:
– to provide traditional banking services at
massively lower cost, and
– to increase exponentially the speed, scope
and scale of risk and business analytics
4
16-Mar-2017
Global FinTech Financing Trend*
5
Latest 4 Qtr Total
$25.0 bill / year
VC-backed Share
4 Qtr Total
$14.2 bill / year
* From KPMG’s report
The Pulse of Fintech,
Q2 2016
published
17-Aug-2016
H1’2016 = $7.4 Bill
16-Mar-2017
VC-backed FinTech Investments
6
The latest 4 qtr VC
total ($14.2 bill)
is almost seven
times the 2011
annual figure of
$2.1 bill.
H1’2016 = $7.4 Bill
16-Mar-2017
Dramatic Growth in FinTech Investment
According to the KPMG Report:
• 2015 marked a record high in the FinTech sector, with total
investment in FinTech companies exceeding US$19 billion
• The moving 4-quarter total through 2Q-2016 = $25 bill
• 1H-2016 investment was at a $30 bill annual rate
• There was almost seven times as much funding deployed to
VC-backed FinTech companies in 2015 than in 2011
7
16-Mar-2017
Top Three Venture Capital Investors
8
16-Mar-2017 9
Senior Wall Street Figures Investing in FinTech
16-Mar-2017
Top 5 Bulge Bracket Investors in FinTech
10
16-Mar-2017
Section 2
Why are banks vulnerable to this form of
competition?
11
16-Mar-2017
Why banks are vulnerable
Bank employees’ impression of
their firms’ technology has changed
dramatically over the past 25 years
12
16-Mar-2017
Coming into the office at a bank used to feel like this
13
16-Mar-2017
Now it feels like this
14
16-Mar-2017
Rhyme of the Ancient Mariner
15
16-Mar-2017
Rising Expectations
At home
16
16-Mar-2017
Rising Expectations
At home
17
16-Mar-2017
Thwarted Expectations
The data are not searchable!
In the office
18
16-Mar-2017
Thwarted Expectations
In the office
The data are not searchable!
19
16-Mar-2017
Thwarted Expectations
In the office
The data are not searchable!
20
16-Mar-2017
FinTech – A Proposed Definition
FinTech is the application of revolutionary 21st
Century information system architecture:
– to provide traditional banking services at
massively lower cost, and
– to increase exponentially the speed, scope
and scale of risk and business analytics
21
16-Mar-2017
Characteristics of this 21st Century System Architecture
• It uses search and indexing tools to support
analytics applied to unstructured data
• It uses radically decoupled logical components
22
16-Mar-2017
Benefits of 21st Century System Architecture
Search and indexing tools:
– Minimize the need for expensive and error-prone
curation of data into standardized formats
– Largely eliminate continuous reconciliation testing
by drawing directly on source data
– Support massive real-time data flow filtering and
analysis
23
16-Mar-2017
Why are banks’ information system costs so high?
A banking CTO recently said that, once duplication
is removed, banks have about 10% of real underlying
data compared to what is actually stored and this
proliferation makes it harder to resolve issues in the
underlying data.
- A Senior Banking Technology Consultant
24
16-Mar-2017
Benefits of 21st Century System Architecture
Decoupled logical components:
– Allow use of common software components across
multiple applications, assuring consistency and
minimizing reconciliation issues.
– Allow modification of logical components without the
risk of disrupting existing processes that use the
unmodified components.
– Eliminate periodic massive system overhauls (with
their expensive regression testing and significant
operational risk.)
25
16-Mar-2017
It is about the ecosystem, not the applications
An Effective Ecosystem
The Web Disparate applications and devices work together despite being totally decoupled
London England is
about 285 miles
from Paris by car or
about 213 miles as
the crow flies.
Hey Siri, how
far is London
from Paris?
26
16-Mar-2017
A popular perception of technology
“Any sufficiently advanced technology
is indistinguishable from magic.”
27
16-Mar-2017
It is about the ecosystem, not applications
An application might individually be great,
but it cannot be transformative if the ecosystem is dysfunctional.
Bank IT Environments Today
A Profoundly Dysfunctional Ecosystem
28
16-Mar-2017
Old Beliefs and New Realities
1. Upgrades are always time
consuming, costly and error
prone
2. Detailed coordination of APIs
is essential to effective
interoperability
3. Standardization is required
for effective data integration
and transparency
1. We all upgrade apps on our
smart phones in seconds with
almost never a serious mishap
2. Siri responds to voice
commands and delivers
remarkably coherent answers
3. The internet is amazingly
transparent despite being
massively chaotic
Old Beliefs New Realities
29
16-Mar-2017
Early 1800s
Generational Inertia
Mid-1800s
30
16-Mar-2017
A Reasonable Analogy
Most Banks
31
FinTech
16-Mar-2017
One further thought…
Every revolutionary idea seems to evoke three stages
of reaction. They may be summed up by the phrases:
1. It's completely impossible.
2. It's possible, but it's not worth doing.
3. I said it was a great idea all along.
Another perceptive quote from Arthur C. Clarke
32
Banks need to embrace the future,
because the future is now!
16-Mar-2017
Section 3
A Field Trip to the FinTech Zoo
33
16-Mar-2017
Areas of FinTech Activity
• Lending
• Payments/Billing
• Personal Finance/Wealth Management
• Money Transfer/Remittances
• Blockchain/Bitcoin
• Equity Crowdfunding
• Institutional/Capital Markets Technology
• Insurance Tech Support
34
16-Mar-2017
Most Popular FinTech Focus Areas in 2015
35
Approximately 2/3 of Incoming Investments are directed here
16-Mar-2017
Top New
FinTech Unicorns of 2015
36
Payments
Lending
e-Commerce
Support
16-Mar-2017
2015 Top 5 by Increase in Value
37
Lending
Money Transfer/Remittances
Lending
Lending
Personal Finance/Wealth
Management
16-Mar-2017
Top 5 Performing FinTech Stocks
38
Lending
Payments
Benefits Management
Payments
Lending
16-Mar-2017
Specific Business-line Challenges to Banks
• Peer-to-Peer or Marketplace Lending
– Lending Club, Social Finance, Funding Circle, OnDeck, Prosper, Zopa,
Lending Robot, CommonBond, Kabbage, Orchard Platform, Avant
Credit, Jimubox (China), Lufax (China), Dainrong (China), Prodigy
Finance (student loans)
• Retail Payments
– PayPal, Square, Stripe, Adyen, iZettle, Klarna, WePay, Mozido
• Retail Foreign Exchange
– TransferWise, Currency Cloud, WorldRemit, Revolut*
• On-line Brokerage
– eToro , Lufax (China)
39
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Section 4
Steps Toward Adopting 21st Century
System Architecture
40
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Leveraging Consistent “Vocabulary & Grammar”
• Financial Transaction Ontologies
– e.g. LEI, FpML, FXML
• Digital Contracts
– e.g. ACTUS
• Digital Reporting Languages
– e.g. XBRL
41
16-Mar-2017
Adopt More Powerful and More Flexible Analytics
• Applicable to Unstructured Data
• Artificial Intelligence
– Anomaly detection
– Continuous real-time application of audit tests
• Agent-based Modeling
– Systemic risk
42
16-Mar-2017
Information Security
• Cryptography
– Importance of modularity
– The weakness of relational database technology
• Secure Transmissions
• Cyber Defense
– Real-time traffic monitoring
43
16-Mar-2017
Outsourcing
• Cloud-based Storage
– Encryption is essential
• Peak-load Processing
– Global load balancing
• Reduced Barriers to Entry
44
16-Mar-2017
Supervisory Focus
• Assure responsibility and accountability
• Emphasize the essential need for cyber security
• Demand appropriate staff expertise
• Push for full leveraging of what the new system
architecture can achieve
– Continuous real-time audit tests
– Leverage public data to support KYC requirements
45
Supervisors need to become a force for change …
NOT an excuse to resist change!
16-Mar-2017
Recap
• FinTech presents an immediate threat to the
profitability, and eventually the economic viability, of
traditional banks
• A coherent strategy to counter this threat is an
urgent strategic priority
• Supervisors can either encourage or implicitly
discourage an effective response
• Supervisory and bank management understanding
of this threat is essential to the long-term safety and
soundness of the banking system
46
16-Mar-2017
Conclusion
Q & A
47
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