The burgeoning fintech industry is one of the more modern disruptive influences, promising, according to some, to have a fundamental impact on how financial advice is marketed, distributed and regulated.
The Chancellor has made no secret of his ambitions to make the UK the destination of choice for companies wanting to establish a presence in the sector.
While it remains to be seen whether man and machine can work symbiotically to augment the financial advisory process, the growth of the sector shows no signs of subsiding.
According to a report by government department UK Trade & Investment (UKTI), the UK and Ireland is now the fastest growing region for fintech investment, with deal volumes growing at 74 per cent a year since 2008, compared with 27 per cent globally, and 13 per cent in Silicon Valley.
Global investment in the fintech sector tripled to $12.2bn (£8.63bn) in 2014 compared with the figure recorded the year before, across more than 700 deals, data from Accenture revealed.
The US makes up the lion’s share but Europe experienced the highest level of growth, with an increase of 215 per cent year-on-year. The UK and Ireland accounted for 42 per cent of European investment overall.
Julian Skan, a managing director in Accenture’s Financial Services Practice, said: “Overall investment is up significantly for 2015 and will likely start to plateau in 2016. The number of start-ups is also increasing – there were applications from 33 countries for Accenture’s Fintech London Innovation Lab this year and we took 15 companies onto the programme rather than the seven we worked with in 2015.
Majid Shabir, chief executive at fintech design agency Instinct Studios, said: “The traditional model of a new business turning directly to its local high street bank or conventional investment advice is no longer the only game in town. Fintech is helping to create smarter customer experiences to simplify the world of financial services.
“This new breed of fintech is helping improve how customers consume and understand data and allows them to make informed decisions. The net effect – it helps people engage with the financial providers.”
Technology has been a boon in the investment management process, allowing managers to capture and process data across a range of investment sectors.
For advisers, the emergence of investment platforms at the turn of the millennium has been revolutionary.
Data from Matrix Financial Clarity and published by the Association of Investment Companies revealed that purchases of investment companies on platforms by advisers and wealth managers over the first three quarters of 2015 reached £549m – representing a 241 per cent increase in comparison to the pre-Retail Distribution Review levels in the first nine months of 2012 (£161.2m).
Mark Loosmore, executive general manager (wealth) at Iress, said: “Every time an adviser logs on and interacts with the systems they use day-in, day-out to conduct business, they are using Fintech. We’re in a period of tremendous growth in applications of financial technology at the moment, which is very exciting.”
The UKTI report also highlighted three key factors behind thegrowing presence in the sector – the first being attributed to improvements in digital technology which allow consumers to manage their finances via their smartphones and tablets.
A joint report by the BBA and consultancy firm EY, revealed British customers had so far downloaded 22.9m mobile apps by the end of March 2015 – up by 8.2m from March 2014 – and customers moved £2.9bn a week using the apps.
Mr Skan said: “Banks are getting serious about changing their platforms to meet evolving customer needs and are now recognising the role that innovative technology can play in financial services as increasingly, fintech firms are looking to collaborate with banks rather than challenge them.”
Secondly, UKTI said the economic downturn and a loss of trust in traditional financial services organisations had created an environment whereby the UK consumer was open to adopting new business models and products from new providers.
In addition, the crisis meant that existing financial institutions had also failed to invest in technology and innovation.
The third factor related to regulation. UKTI said a tougher regulatory environment had created a demand for a range of new and innovative solutions.
Looking ahead, the City watchdog faces a dilemma – to stimulate innovation while mitigating the risk to ensure that consumers are protected.
A recent Chartered Insurance Institute (CII) report, which explores the risks emerging from this new wave of digital change and what challenges this offers for public policy regulation and wider society, said that regulators could not always be expected to predict consumer detriment before it happened.
It added: “The idea of robo-advice is a typical example in this respect. The Treasury is exploring what role robo-advice can play in the broader financial advice market. However, there is also a risk that such advice is unsuitable to certain groups of people, causing widespread detriment.”
As the industry continues to debate whether robo-advisers are likely to be a boon or a threat to the traditional advisory process, a new technological development lurks in the background, which will make even the most complex and sophisticated algorithms appear jurassic: artificial intelligence (AI).
As fantastical as the adoption of AI in finance may sound, it is being used by players in the industry to help them allay dual pressures of driving costs down in a competitive environment while maintaining high satisfaction levels.
Last year, Chetan Dube, chief executive of tech firm IPSoft told Financial Adviser that Amelia, the firm’s AI system designed to undertake the tasks of a typical mortgage firm’s call centre operative system, was being used by an unnamed ‘leading’ UK bank to support staff on questions of mortgage eligibility.
Ian McKenna, director of the Finance & Technology Research Centre, said: “Scientific studies have shown that the human brain is only capable of managing seven variables at one time. AI has the capacity to identify and analyse even more variables. We are not yet at a point where technology will remove the need for humans altogether, but automated advice will evolve and be used in scenarios that are often too complex for the human mind.
“The challenge for organisations is to embrace technology and look to see how they can help them deliver their service to more customers at a reasonable cost.”
Fintech has had a profound effect on the financial services sector – not least to advisers – and is likely to continue to do so in the future.
While technology is widely regarded as a blessing to the financial industry, its continued development is not devoid of risk.
In its report, the CII, said: “Given the range of new business models and services on offer, it is not hard to imagine a time before long where a major incident hits the front pages of the newspapers.
“The first moment that consumers and media question the role and safety of fintech in the broader financial services industry will be a key milestone for policymakers to underline their commitment to fostering greater overall competition into the marketplace.”
Myron Jobson is a features writer at Financial Adviser
Key Points
The UK and Ireland is now the fastest growing region for fintech investment.
The financial crisis meant that existing financial institutions had also failed to invest in technology and innovation.
Artificial intelligence in finance is being used by some financial services firms.
