Revolution or hype? Fintech with the eyes of an engineer

The degree of Fintech’s hotness has puzzled me recently. What is the buzz about computers and IT being applied to banking and finance in the twenty first century? Haven’t companies used computers for accounting and the support of investment decisions for ages? Haven’t banks used computers for account management and investment decisions for ages?

Is there a breakthrough?

My first though was that there should have been some breakthrough in technology or its application to banking. There was none. There is progress in many fields indeed but all the new applications of IT in banking are trivial. In fact, despite all the hype about Fintech, banking is lagging other industries in using information technologies for automating its operations beyond administration. Without hype, manufacturing has been automated from design to product customization and post sales customer care decades ago. Mobile computing? The military has been using mobile computer networks for automated fire control for the artillery since the 1980s and even before. By the mid-1990s, the Hungarian Army deployed the third generation of its automated field artillery fire control system that has successfully proved itself at the first NATO artillery exercise held in Hungary in 2000.

However, you do not need to look so far to see how prevalent computers are. Your car is full of computers and in some models, you can call for help in an accident with a push of a button – just like with Breitling wristwatches.

Why banking is lagging other industries so far behind? In fact, the banking industry is rather slow to accommodate technology. People are sensitive to their own finances so that it is rational for the banking industry to be more cautious than others. Additionally, mystifying what they do is a source of revenue for banks and finance institutions. No wonder few industries are so infused with and held back by tradition than banking. Banks did use computers but mainly for record keeping and administration and also as fancy typewriters but there were few automations in decision making.

Drivers of change

This model worked for banks even at the turn of the century. What happened in the last few years then that initiated the change? In 2007, the worst financial crisis since the Great Depression hit the global financial markets and the IT community responded with something new and unexpected. In August 2008, the domain name bitcoin.org was registered and in October Satoshi Nakamoto, a possibly invented author, published a paper titled Bitcoin: A Peer-to-Peer Electronic Cash System. The paper described a technology called blockchain, which enables distributed public ledgers that hold immutable data in a secure and encrypted way and ensure that transactions can never be altered. Next January bitcoin, the cryptocurrency based on the blockchain technology was born. While bitcoin is indeed immature and risky, it posed a challenge to the banking industry. The message is that if banking cannot renew itself, there are feasible alternatives. At this stage, it was not important whether bitcoin is better than the money created by central banks – it is not. The key message is that banking, as we know it today, is not indispensable.

This is clearly a threat but there are also positive factors. Computing power is cheap and smart phones are ubiquitous today. This enables the automation of both background processes and customer services. Yes, we did have home computers for decades, but smart phones are much more widespread and personal. Additionally, as we can access more and more services on our phones, the pressure is mounting for banking and payment services as well. So, banking and finance finally had to give in.

However, calling engineers and developers launched an avalanche in bank digitalization. On the one hand, mystified rules and processes have been exposed and as engineers understood them, they infused banking with technology and started to take over the process of automation. Will it disrupt banking? I think it won’t. The know-how and science of finance did not change. Although it turned out that most activities in banking and finance are relatively easy to automate, and commoditization will go hand in hand with automation and will be followed by automated customization, at their heart the fundamentals of finance are not disrupted. At most, there may be shifts of power and influence in the financial sector.

On the other hand, enthusiasm of clever bankers encountering new technologies in their own fields may be another factor behind the hotness of Fintech. I remember how the best military officers become enthusiastic when we showed them new technologies. The best professionals of their field do not fear but embrace technology and push developers forward with new ideas.

Benefits and risks

So, Fintech is not disruptive and not as new as it seems. Nevertheless, it is bringing some positive and negative changes. On the positive side there is the increasing inclusion in financial services through easier access and also an increasing flexibility through technology. Technology also makes banking safer in certain aspects. For example, you cannot lose your money and it cannot be stolen from your pocket. Even if you lose your phone or computer, you can access your accounts from another device. With electronic identification, you may also apply for credit fast without visiting a bank office.

There are also risks. The most obvious is the vulnerability to cybercrime but I believe the gamification of money is more important. We got used to running applications on our phones but most of them are harmless while mistakes in mobile banking may wreak havoc in our finances. Additionally, we use our phones in many different environments with distractions and temptations in some of them. While paying with cash or using your credit card are rituals rising your level of consciousness, paying by your phone is more resembling to playing games. As a result, people may take risks they would not take otherwise or just simply spend more thinking less.

Finally, there is risk in the hype about Fintech in itself. Disguised as something new, con artists can use all the old tricks on their victims again from outrageous interest rates to miraculous investments and beyond. Having said that, I do believe that the benefits of using new technologies, regardless of using a fancy term like Fintech or simply labeling it technical development, will outweigh the risks. It is even more so in the long run as technology matures, people get used to it, and we find better ways to mitigate the risks.