LSE: The Technological Revolution in Financial Services 23-Apr-2021

The term “FinTech” is currently enjoying truly global recognition. Definition is much trickier though: a bit like art or artificial intelligence, everyone has a pretty good intuitive / organic understanding, while a formal, universally agreed-upon definition remains somewhat ambiguous. Given that this blog has an entire section dedicated to FinTech, I will proceed on the assumption that all of us have at least that intuitive understanding of the term.

It will be a truism to say that FinTechs are disrupting financial services on multiple levels, such as:

  • Convenience (e.g. branch-less opening of an account using a camera and AI-powered KYC software in the background; availability of all services on a mobile);
  • Cost competition vis-à-vis established models (think Robinhood’s commission-free share dealing vs. standard USD or GBP 6 – 10 fee per single trade [for retail clients] at established brokerages or investment firms; think Revolut’s zero-fee [or nearly zero-fee] fx transactions at interbank rates);
  • Innovativeness and fresh thinking;
  • Inclusion and reduction of barriers to entry (e.g. by allowing access to investment products below the once-standard minimum thresholds of GBP 1,000 or more or by making global remittances easier and cheaper);
  • Smoother and sleeker user experience;
  • Greater customisation of products to individual client’s needs;
  • …and many more…

On a more personal note, FinTech (and many of its abovementioned benefits, chief among them cost reduction and innovativeness) are like future in that famous William Gibson quote: they’re here, but they’re not equally distributed. My primary home (London) is one of FinTech capitals of the world; we all take it for granted that all the latest innovations will be instantly available in London, and Londoners are (broadly generalising) early – if not very early – adopters. I instantly and very tangibly benefitted from all the forex transaction features from Revolut, because compared to what I had to contend with from my brand-name high-street bank it was a whole ‘nother level of convenience (one card with multiple sub-accounts in different currencies) and cost (all those ridiculous, extortionate forex transaction fees were gone, reduced to near-zero1). My secondary home (Warsaw) is neither a global nor even a European FinTech capital – consequently, it’s a markedly different FinTech environment out here. Challenger banks are close to non-existent; as for other FinTechs, they are clustered in payday lending (whose use of technology and innovation is notorious rather than beneficial), forex trading, and online payments (one area which is of some benefit, though sometimes the commissions charged by the payment operators behind the scenes seem higher than they should be).

The speakers invited by the LSE (Michael R. King and Richard W. Nesbitt) have recently concluded comprehensive industry research, summarised in their book “The Technological Revolution in Financial Services: How Banks, FinTechs and Customers Win Together”. They shared some of their insights and conclusions.

Firstly, they stated that technology itself is not a strategy (which, depending on the interpretation, might run a bit counter to the iconic “we are a technology company with a banking license” declarations of many CEO’s). Technology is a tool, which may be a part of the strategy.

Secondly, technology itself does not provide a sustained competitive advantage, because it is widely available, and it can be copied by competitors. I found this observation both interesting and counterintuitive. I have always thought that for FinTechs technology *defines* their competitive advantage, but perhaps they operative word here is “sustained”. It’s one thing to come up with a disruptive solution, but if it is widely copied and becomes the new normal, then indeed the initial advantage is eroded. Still, personal observations lead me to challenge this statement: Revolut may have introduced zero-fee forex conversions some years ago (I joined in 2018), and yet many high-street banks still charge conversion fees and use terrible, re-quoted rates. They could copy Revolut’s idea in an instant, and yet they choose not to. Another example: if technology does not provide FinTechs’ sustained competitive advantage, then how come challengers Revolut, Monzo, or Starling are enjoying growth in customer numbers and have strong brand recognition, while NatWest’s Bo was but a blip on the radar?

King and Nesbitt further argue that the biggest barrier in financial services is not technology or even regulation, but access to customers. Again, I acknowledge and respect that conclusion, but I can’t fully agree with it. All the brand-name banks have generated and sat on enormous troves of data for decades, and only PSD 2 compelled them to make this widely data available – Revolut and Monzo succeeded without reverting to Open Banking as their main selling point; they just offered innovative, sleek products; countless remittance companies entered the market and succeeded not because they gained access to data Western Union previously kept to itself – they just offered better rates.

Another major component of the “FinTech equation” is, according to the authors, trust in financial services (trust defined as both data and privacy). They argue that erosion of that trust post-2008 was what paved the way for FinTechs. I agree with the erosion of trust part, but it was neither data leaks nor customer data leaks that led to public’s distrust during the 2008 financial crisis: it was imprudent management of money and too-creative financial innovation (back then sometimes labelled as “financial engineering”, even though this term is a terrible misnomer, because finance, no matter how badly some people in the industry would want it, is not an exact science, it’s a social science).

On the social side, FinTech (expectedly or not) may lead to substantial benefits in terms of financial inclusion of the underbanked (e.g. people without a birth certificate and / or any proof of ID) and / or previously marginalised groups (e.g. women). One of the panellists, Ghela Boskovich, brought up India’s aadhar system, which allows everyone to obtain ID number based purely on their biometric data, and Kenya’s M*Pesa mobile payments system (which does not even require a smartphone – an old-school mobile is sufficient), which opened the financial system to women in ways that were not available prior.

On the more traditional thinking side, the authors concluded that regulation and risk management remain pillars of financial services. On the cybersecurity side they advocated switching from incumbent thinking of “if we are hacked” to FinTechs’ thinking of “when we are hacked”, with prompt and transparent disclosures of cybersecurity incidents.

King and Nesbitt concluded that in the end the partnership model between established banks and FinTech start-ups will be the winning combination. It is a very interesting thought. On one hand, many (perhaps most) FinTechs need these partnerships throughout most of their journey: from incubators and accelerators (like Barclays Rise in London), through flagship / strategic client relationships (whereby one established financial institution becomes a FinTech’s primary client, and the FinTech effectively depends on it for its survival). Sometimes established financials end up acquiring FinTech start-ups, though it doesn’t happen anywhere as often as in the tech industry.

Overall King, Nesbitt, and their esteemed guests gave me a huge amount of food for thought around the area of great interest to me. I may or may not fully agree with some of their conclusions, and it doesn’t matter that much – we will see how FinTech evolves in the coming years, and I’m quite certain its evolution will take some twists and turns few have foreseen. The really important thing for me is inclusion, because I see it as massive and undeniable benefit.


1. Disclosure: I am not and have been an employee of Revolute to date. This is not an advertorial or any form of promotion.