Fintech today: the big issues and the future | Technology on The Gateway

Fintech today: the big issues and the future

The issues the financial technology sector is currently facing and what might lie ahead for it

Technology is becoming ever more central in the finance industry and the specialised financial technology (fintech) sector is growing rapidly.

Simon Cox of Envisioning Technology, an independent technology research foundation, says that finance and technology have in fact always been closely linked. "Money is a tool that allows society to do certain things that without it we couldn't do very efficiently. So finance is already 100 per cent technology."

And with the rise of phenomena like cloud computing and "big data" analysis, financial technology is developing faster than ever. As a result, organisations in the finance world are grappling with some big issues and looking forward to some intriguing developments.

Here are what we think are the most important current issues in fintech and most interesting predictions for the future.

5 current issues in fintech

Tight budgets

Thanks to the legacy of the financial crisis and today's difficult economic climate, organisations in the finance world are currently extremely cost-conscious.

They want the fastest and most cutting-edge technology, but are also demanding value for money from their IT teams, especially as technology is regarded in some quarters as an expense rather than an investment.

Legacy systems

Many institutions in the banking and finance world have patchwork systems built from a number of different elements, some of which might be a decade or more old, with complicated "plumbing" between them.

Keeping these diverse systems working effectively together, and making sure the older sections don't collapse, is often complex, time-consuming and expensive. But many firms regard the alternative - building an entirely new system - as even more so.

Regulation

Since the financial crisis, the finance industry has become subject to increased regulation, and many of these rules have implications for its technological systems. Increased regulation means more complex software for monitoring risk and ensuring regulatory compliance.

It also means that the pace at which some kinds of trades can be made may be artificially slowed in the interests of market stability, while electronic trading in some assets - for example, OTC derivatives - may increase as trading in them is forced onto electronic public exchanges for the sake of transparency.

Crashes

There have been a number of high-profile technological failures in the finance industry over the past couple of years that have given businesses in this field the jitters.

First came the market-wide "flash crash" of May 2010, thought to have been caused by high-frequency trading. Two years later came Facebook's IPO, where a technical error meant that some traders got their shares at the wrong price, while others didn't see their orders completed at all. Then in August 2012, US trading firm Knight Capital suffered a "technological breakdown" which caused major disruption to trading on the New York Stock Exchange and a dramatic fall in the firm's value.

Going green

With its promises of more efficient systems and transport-free working, it might appear that more technology means a more environmentally friendly way of operating, but unfortunately that's not necessarily the case. Manufacturing and running financial technology systems requires enormous supplies of natural resources and massive amounts of energy.

Some firms are therefore carefully considering the environmental impact of any new technology they adopt and encouraging their technology teams to use technology itself to address the issue - for example, by creating systems that carefully monitor and manage energy usage.

Predictions for the future...

Virtual currencies

"Having one transnational cross-border currency that's not controlled by anyone would be incredibly attractive," says Simon. So could a virtual currency - for example, bitcoin or Second Life's Linden dollars - ever overtake today's government-backed currencies?

"It's an extreme possibility," says Simon, and mentions another potential new type of money that might just be on the rise to global dominance: "Some of the social networks are evolving into a system where you can do things because of your influence, and it's starting to have some of the characteristics of a currency."

Neutrino-powered trading

The trading speed arms race is showing no signs of slowing down. So just how fast could things get? In the future, trading orders might be sent by neutrinos, subatomic particles that travel at close to the speed of light and can tunnel through the earth, which cuts their journey times even further.

A message has already been sent using a neutrino, by researchers working at the Fermilab accelerator in Chicago. They could only manage to send at a rate of 0.1 bits per second, far too slow a speed for current trading needs, but there's no doubt that the finance world will take an interest as this technology improves.

Technology and capital

Could the power of technology ever erode the need for some of the functions of banks altogether? Simon thinks that with the current crowdfunding phenomenon, we could be seeing the beginning of this process. "Fundamentally, what the City does is to take money people have - that they've put into a pension or a bank account - and distribute it [to operating businesses]."

But technological platforms, he argues, could be used to enable consumers to make investment decisions and manage risk far more easily themselves. "Then the power would be taken away from big financial institutions and transferred to the people giving and receiving the financing."

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