Experts believe that the financial technology (fintech) space is where the eBook was in 2007 and that a revolution is about to take place. Given the latest developments in technology, the way millennials want to manage their finances, and innovative ideas and business models, rapid change is in the offing. The nimble-footed fintech companies are the catalyst for this faster rate of change.
The field is vast, however, encompassing everything from peer-to-peer lending to blockchain technology, and is highly fragmented. Consequently, it is very difficult for any individual to have expertise and experience across the entire ecosystem. Editors Susanne Chishti, CEO of FINTECH Circle (an angel network), and Janos Barberis, founder of FinTech Hong Kong, devised a unique way to create this book. They obtained 189 abstracts from more than 160 authors in 27 countries. Out of these abstracts, they selected 86 authors and asked them to write full chapters, resulting in a “globally crowd-sourced” book.
The FinTech Book: The Financial Technology Handbook for Investors, Entrepreneurs and Visionaries addresses a wide range of topics, including lending, payments, remittances, capital and investments, compliance, analytics, security, identity, cryptocurrencies, blockchain technology, behavioral biometrics, important fintech hubs, collaborations, and the API (application programming interface) economy. Chapters of particular interest to investment professionals are briefly touched on here.
“Ultra-Fast Text Analytics in Trading Strategies,” by Markus Schicho and Karin Hodnigg, CEO and product manager of Econob, describe how a company’s profit warnings, quarterly announcements, and earnings surprises (both positive and negative) directly affect its stock price. Although the impact is sometimes long lasting, frequently the agitation triggered by such news subsides after only a few minutes. In these instances, traders have less than a minute to read the news, compare the numbers with their expectations, decide whether to buy or sell, initiate a trade—and still get the jump on their competitors. Executing these steps digitally in real time poses challenges in finding relevant words, sentences, numbers (dates and earnings), named entities (companies and CEOs), indicators, and concepts while maintaining the semantic and grammatical context. Any software that is meant to support traders must enhance their analyses, enable them to configure their trades, and minimize execution times. Successful identification of such events as ratings changes or political events (Greece’s woes in 2015, Brexit in 2016); the mining of sentiments and opinions in market reports, traditional media, and social media channels; and the extraction of information from raw and unstructured texts can have enormous implications for workflows and applications.
Founders, senior executives, and compliance and risk management professionals will benefit from reading the chapters “Global Compliance Is the Key,” by Jan C. Wendenburg, member of the executive board of XCOMpetence AG, and “Big Data Is the Cornerstone of Regulatory Compliance Systems,” by Thierry Duchamp, founder and chief operating officer of Scaled Risk. The chapter by Wendenburg provides an overview of the global regulatory landscape, ranging from the regime in the United States, where banks are regulated at both the federal and the state level, to the complex yet somewhat harmonized regulations in the European Union. A company wishing to provide investment management and advice in the United States must specify which states’ laws will apply to its clients. Serving international clients requires the implementation of international anti-money-laundering procedures and the proper handling of cross-border tax issues. Start-ups hoping to overtake industry incumbents must understand the rules of the game. Otherwise, they will face legal and industry-specific problems similar to those encountered by Uber in taxi-aggregation services.
The chapter by Duchamp shows how big data technology can make risk and compliance information systems easier to implement. Big data technology was created by major players in the web industry because the traditional technologies were unable to adapt to an unpredictable number of users, fast-growing data volumes, and an increasing need for processing capabilities. The web industry was also seeking greater flexibility and agility so the look and feel of applications could evolve rapidly without system interruption. Compliance systems capture data from both (1) internal systems, such as customer relationship management (CRM), loans, insurance, bad reputation, and trading, and (2) external sources, such as LexisNexis, Dun & Bradstreet, financial data, real-time and historical news, and government records (Office of Foreign Assets Control, or OFAC, and the Fair and Accurate Credit Transactions Act, or FACTA). Big data technology establishes search engines with key indicators and rules to detect weak signals in huge sets of information and to give alerts, which can aid in early fraud detection. Regulations require being able to produce evidence of having actually triggered all controls. Big data is extremely helpful in storing results, time stamps, and related information in a single audit trail.
Paolo Sironi, thought leader in wealth management investment analytics at IBM, provides a helpful perspective on robo-advisers in the chapter “My Robo Advisor Was an iPod: Applying the Lessons from Other Sectors to FinTech Disruption.” A change in market regulations to favor fee-only advice as well as the inherent appeal of the proposition, not only to low-margin clients but also to high-net-worth investors, has helped popularize robo-advisers—an attempt to democratize advisory services that, until recently, were an exclusive privilege of private banking institutions. Robo-advisers are poised to become the new price makers in the banking relationship. A possible analogy is the introduction of the iPod and iTunes, which led to a massive shift from compact discs in the music industry. The traditional way of buying and listening to music was disrupted and changed forever. It remains to be seen whether such a disruption will occur in the financial advisory field.
The FinTech Book truly lives up to its title. It is a genuinely cross-discipline, hands-on, and comprehensive compendium that can benefit all players in the fintech space, including investors, entrepreneurs, incumbent institutions, and regulators.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.