Until relatively recently fintech had been perceived as the esoteric domain of cryptocurrency enthusiasts, but two stories in Australian markets this week highlighted the increasing prominence and mainstreaming of the industry.
Big four bank Westpac invested $40m in ASX-listed zipMoney, according to a stock exchange announcement on Monday (7 August). As part of the investment in the Fintech small cap, the bank committed to exploring the rollout of zipMoney’s ‘buy now, pay later’ services across its payments network.
On the same day The Australian reported that former Commonwealth Bank CEO and Future Fund Chairman David Murray AO FAICD had joined the advisory committee of startup Bux.com, a mobile payments company targeting the remittance market.
Fintech has been a buzzy term for a long time but the moves show that established names in finance are dabbling in the space. And as the industry grows, attracting more funding and oversight, the governance challenges will proliferate.
“From artificial intelligence to cryptography, rapid advances in technology are transforming the financial services landscape, creating opportunities and challenges for consumers, service providers and regulators alike,” according to a new report from the International Monetary Fund.
Since all organisations rely on financial services in some way, from payments to accounts to credit provision, directors will need to become cognisant of the technological changes as they occur.
“Fintech, in a broad sense, covers a lot of different things. Financial services have so many touch points for any particular organisation, and what I think you’ll end up seeing is developments or technological change in financial services is likely to be applicable or cut across other sectors,” according to Damien Timms, a lawyer who specialises in IT for startup firm LegalVision.
The most promising applications currently being developed in Australia involve payments, regtech and blockchain, according to a report released in July by the Committee for Sydney.
Payments form the largest part of the sector in Australia, according to the report, “as Australian consumers are early adopters of mobile technology, with very high usage of contactless payments… coupled with the advanced nature of digital/mobile offerings from established banks and payments providers.”
“Think of a blockchain like an army of robots checking up on each others’ work.”
Regtech encompasses the technologies that assist companies with their regulatory compliance, an area of obvious interest to boards facing complex regulatory environments. The Australian Securities and Investments Commission has proposed to establish a new regtech liaison network and conduct a number of trials using regtech applications, the Committee for Sydney Report states.
Established financial players in Australia are experimenting with blockchain, the distributed ledger technology made famous by cryptocurrency Bitcoin. The Commonwealth Bank of Australia has built a blockchain for debt capital markets which has been tested by the Queensland Treasury Corporation, according to a January report in the Australian Financial Review, and the ASX has experimented using blockchain for clearing and settlement in securities markets, a June 2016 Business Insider report states.
Technologists are also excited about the potential for blockchain to enable widespread adoption of ‘smart contracts’. “A smart contract is a computer program that verifies and executes the terms of a contract upon the achievement of certain pre-defined events,” according to an explainer by law firm Henry Davis York. The inventor of the term, computer scientist Nick Szabo, likens them to an interaction with a vending machine.
“Put in dimes, nickels, or quarters, and you get a soda back plus change,” Sazbo says. “That’s tedious to design a contract for, so we built a machine instead. Blockchains are the most secure environment to run smart contracts. Think of a blockchain like an army of robots checking up on each others’ work. Where traditionally you have accountants and lawyers, there are now a wide variety of things we can do with this vending machine-like mechanism to replace the job of traditional contracts.”
Fin vs tech
While the range of fintech technologies and applications can at first appear dizzying, Timms says that the industry can be analysed through a simple model of disruption that is now part of the standard toolkit for directors.
“You’ve got your well established financial institutions, the incumbents like the CBA with their apps and then you’ve got the tech companies who are now active in the financial services space but not exclusively, like Apple Pay,” Timms says. “Even Facebook has a payment mechanism. You’ve got all of those companies that operate at the financial services level in that they provide the infrastructure like Visa or Eftpos, and then you’ve got the stuff which is more interesting which is where everyone thinks the Fintech space operates, which is the guys down at Stone & Chalk [a leading startup space for financial services in Australia].”
“The history of financial innovation is littered with examples that led to early booms, growing unintended consequences, and eventual busts.”
As directors know well, the opportunities provided by the new technologies also come with risks. Governor of the Bank of England, Mark Carney, highlighted in a speech in January the stability risks fintech poses for the financial system, as well as cybersecurity, money laundering and terrorism financing concerns.
The IMF, in its report, says that regulators may need to complement their focus on entities with increasing attention paid to activities, while also urging them to develop rules and standards to ensure the integrity of data, algorithms and platforms.
Even with the best intentions, if the past is a guide, the widespread adoption of the technologies by society could be a rocky road, Carney suggests. “The history of financial innovation is littered with examples that led to early booms, growing unintended consequences, and eventual busts,” Carney warned in his speech.