Driven by data; ridden with liberty.
Digital technology is changing our lives, from how we make friends to how we shop. The application of digital technology to financial services is called FinTech. FinTech offers benefits and challenges to customers and financial institutions, disrupting the current market for financial services .
Estimates by Ernst & Young state that FinTech is worth approximately £6.6bn of annual revenue, employing around 61,000 people and attracting approximately £524m of investment .
For the sake of clarity, I currently work as a digital analyst for a major mortgage lender and financial services institution, having previously worked in a similar role for a prominent insurance company.
The Parliamentary Office of Science and Technology in the Houses of Parliament has written a POSTnote on FinTEch, highlighting four key areas of change opened up by FinTech: alternative finance, data analytics, payments and distributed ledgers.
Alternative finance takes the form of peer-to-peer lending and crowd-funding. The UK alternative finance had a total transaction volume of £3.2bn in 2015, which was an 84% rise on the volume in 2014. Peer-to-peer lending is regulated, like traditional lending, by the Financial Conduct Authority (FCA). These platforms tend to have lower administration costs than traditional banking institutions.
Crowd-funding is when businesses or individuals accept small donations from large numbers of people, allowing them to fund new ventures. Equity crowd-funding is where funders receive shares in a business; rewards crowd-funding means lenders receive some non-financial reward, such as an acknowledgement; donations crowd-funding provides no material reward to lenders.
The industry’s body, the UK Crowdfunding Association, has a code of practice, and only equity crowd-funding is formally regulated by the FCA. The risks involved in crowd-funding may require greater clarity by the various platforms.
Data analytics enables new business models, particularly in financial services. On their websites and digital applications, financial services can track the movements and flows of users around the sites and apps. Through regular reporting, testing, personalisation and better implementation, financial institutions seek to improve their digital assets, thereby increasing revenue and happiness with the user experience.
Data can be collected on an individual basis, such as installing a telematic box in a person’s car, to provide lower payments for financial products. The use of personal data, and the protection provided, is an area of concern. The use of customer data in all companies, rather than solely in the financial sector, will be regulated the EU General Data Protection Regulation, which comes into force in 2018 .
Customers need to be aware of how their data is being used, so that they explicitly confirm to its tracking. Security around this data is also a prominent concern. Data may be the new oil: but it still leaks.
Data analytics can also provide automation of financial advice, such as robo-advisors, which provide personal financial advice with little to no human input.
Payments is another area in innovation. We can now pay money to each other through mobile applications and mobile platforms. Overseas transactions can be made cheaper by no longer passing through major financial institutions.
Tokenisation means, rather than paying a vendor directly and handing over sensitive information, a trusted intermediary converts this information into a non-sensitive token. This reduces the crime risk associated with online transactions. In 2015, the new UK Payment Systems Regulator was established to regulate this industry.
Distributed ledger technology was the last area included in the POSTnote. Distributed ledgers are digital records than can be shared widely, among different users in different locations, without needing to have a central intermediary.
Whilst it was initially created for digital currencies, it provides a way of creating securely shared records, which can be applied for almost any asset, product or transaction.
(Video: Procurro Solutions)
FinTech offers serious challenges to existing financial institutions. The first is inclusion: the use of the internet and digital services is becoming more widely spread across society.
However, some people still rely on branches to conduct their financial affairs and manage their money. It is not a binary state: existing banks and building societies have to maintain that physical network whilst they seek to conquer the new digital world.
Identity checking and cyber-security are also serious challenges. Customers expect ease of use from their digital products, but simultaneously demand high security. There is no consistent manner for identity checks in the UK financial services industry. This is an area of innovation, with biometric scanning and voice recognition being tested and utilised.
Digital technology is changing all of our lives, and it is transforming entire industries — even governments — too.
 POST, 2016. Financial Technology (FinTech). UK Parliament. Available from: http://researchbriefings.parliament.uk/ResearchBriefing/Summary/POST-PN-0525#fullreport [Accessed: 12th June 2016]
 GOV.UK, 2016. UK FinTech: on the cutting edge. Available from: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/502995/UK_FinTech_-_On_the_cutting_edge_-_Full_Report.pdf [Accessed: 12th June 2016]
 Bird & Bird, 2016. Guide to the General Data Protection Regulation. Two Birds. Available from: http://www.twobirds.com/~/media/pdfs/gdpr-pdfs/bird–bird–guide-to-the-general-data-protection-regulation.pdf?la=en [Accessed: 12th June 2016]