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The New Fintech Revolution

(San Francisco, California, U.S.A. - Jeffrey M. Wang)


The New Financial Technology (Fintech) Revolution:

Challenges, Opportunities and Future Directions





"We’ve entered the most profound era of change for financial services companies since the 1970s brought us index mutual funds, discount brokers and ATMs. No firm is immune from the coming disruption and every company must have a strategy to harness the powerful advantages of the new financial technology (fintech) revolution" -- Business Insider. Fintech, the future of transactions and commerce, is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century. It is an area that is radically changing how we live as society and how we do business professionally. The rise of fintech has opened up a world of possibilities. Businesses can offer more services than ever and for a fraction of the price of what it would have cost before. 

In emerging markets, billions of people around the world without access to traditional financial services, FinTech could lead to a revolution in financial inclusion and membership in the global digital economy. Individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way. Financial inclusion is a key enabler to reducing poverty and boosting prosperity.

Financial technology (fintech), an economic industry composed of companies that use technology to make financial services more efficient, is usually applied to the segment of the technology startup scene that is disrupting sectors such as retail banking, lending and financing, payments and transfers, wealth and asset management, markets and exchanges, insurance, blockchain transactions, etc.. It refers to new applications, processes, products or business models in the financial services industry. However, the fintech term has started to be used for broader applications of technology in the space – to front-end consumer products, to new entrants competing with existing players, and even to new paradigms such as Bitcoin. 

The financial services industry is one of the last frontiers new technology has yet to fully conquer. Fintech companies are trying to disintermediate incumbent financial systems and challenge traditional corporations that are less reliant on software. Internet-based technology has made it cheap to collect information and to network. This has empowered the sharing economy and allows fintech companies to seize intermediation business from banks. But both fintech and "sharing economy" businesses manage information centrally – they serve as middle-men – exactly as traditional financial institutions do. The fintech revolution is forcing the financial services industry and everything it touches to evolve quickly. 

As automation technologies such as machine learning and robotics play an increasingly great role in everyday life, their potential effect on the workplace has, unsurprisingly, become a major focus of research and public concern. Companies are using automation to create efficiency and accuracy in business processes. Automation is about replacing mostly repetitive tasks, with machines. It will continue to progress from simple rules-based systems to complex augmented and autonomous decision-making systems. 

Automation seeks to replace more managerial functions with Artificial Intelligence (AI). AI is about replacing human decision making with more sophisticated technologies. These are not repetitive tasks, but rather judgment-based work which requires a more complex set of algorithms and machine learning which can use a variety of inputs to recognize patterns, predict future outcomes and make decisions. For enterprises, AI is expected to continue serving functions such as business intelligence and predictive analytics. Merchant services such as payments and fraud detection are also relying on AI to seek out patterns in customer behavior in order to weed out bad transactions. AI may help banks in their anti-money laundering or employee misconduct detection efforts by replacing costly functions that are currently done manually by humans.

Artificial Intelligence (AI) will have a significant impact on financial services, proving to be its most disruptive force, the result of which is already evident with global banks closing branches and terminating thousands of financial services personnel. Machine learning is a type of AI that provides computers with the ability to learn (or to grow and change) without being explicitly programmed when exposed to new data. Emerging fintech companies are using machine learning to adapt the changes in real time. 

With the stiff competition in fintech, ventures have to deliver a truly valuable products and services in order to stand out. The venture that provides the best user experience often wins. The developments in AI may provide that something extra especially if it could promise to eliminate the guess work and human error out of finance. In addition, data is the life-blood of AI. "Access to data" plays a central role in the scope and impact of AI systems. Data, and the various rules and processes which both enable and regulate access to and use of that data, stand at the heart of disruptive fintech businesses. Even the most advanced and intelligent algorithms and models are useless without efficient, secure and legal access to detailed, accurate and up-to-date data sets. 

If you are in the banking sector, you should be keeping a close eye to the fintech industry. Besides providing innovative new technology and ideas for the banking industry, these exciting fintech startups also provide innovative solutions for the small business owner. If you are looking for low-cost solutions to your business accounting and finance needs, from invoicing to payroll to investing, the fintech sector is an exciting space.

There are four broad categories of fintech users: (1) B2B for banks and (2) their business clients; and (3) B2C for small businesses and (4) consumers. Trends toward mobile banking, increased information, data and more accurate analytics and decentralization of access will create opportunities for all four groups to interact in heretofore unprecedented ways. Connectivity, simplification and personalization are three fundamental trends about fintech. Connectivity is about anyone or anything being able to interact, trade or exchange information anywhere and anytime. Technologies such as APIs and the Internet of Things are enablers. Simplification is about reducing complexity. There are many processes and technologies that can result in simplification, of which blockchain is only one. Personalization is about making services easier or more relevant for the user through technologies such as big data, machine learning. 

It is clear that the digital revolution in financial services is under way. Digital disruption has the potential to shrink the role and relevance of today’s banks, and simultaneously help them create better, faster, cheaper services that make them an even more essential part of everyday life for institutions and individuals. To make the impact positive, banks need to shake themselves out of institutional complacency and recognize that merely navigating waves of regulation and waiting for interest rates to rise won’t protect them from obsolescence. Embracing openness and collaboration, and making smart investments is a good place to start. The fintech industry has orchestrated in just a few short years a sweeping change in customer preferences and expectations for the modern “bank” experience. The next decade will demonstrate the impact of this disruption as customers choose financial services based on the product experience, not on the breadth of offerings.

While fintech disrupts banks, the blockchain disrupts fintech. Blockchain, the technology underpinning the bitcoin digital currency and the technology to power open finance, is a decentralized public ledger (or distributed ledger) of transactions that is revolutionizing the way people around the world exchange value. Blockchain is a comprehensive, always up-to-date accounting record of who holds what or who transferred what to whom. It is emerging as a way to let people make and verify transactions on a network instantaneously without a central authority. 

Blockchains are a very powerful technology, capable of performing complex operations. The distributed ledger technology that underpins blockchain systems is designed for near real-time transfer of data. It can deliver instant resolution to customers' transactions and interactions with their banks. Three main types of blockchains exist: public, consortium, and private blockchains. Ethereum is a public blockchain-based distributed computing platform. It provides a way to create online markets and programmable transactions known as smart contracts. Ethereum is the biggest innovation after bitcoin. 

Smart Contracts, often created by computer programmers through the help of smart contract development tools, are a central component to next-generation blockchain platforms. They are simply computer program code (such as C++, Python, Java) that is capable of facilitating, executing, and enforcing the negotiation or performance of an agreement (i.e. contract) using blockchain technology. This code defines the rules and consequences in the same way that a traditional legal document would, stating the obligations, benefits and penalties which may be due to either party in various different circumstances. This code can then be automatically executed by a distributed ledger system. The entire process is automated can act as a complement, or substitute, for legal contracts, where the terms of the smart contract are recorded in a computer language as a set of instructions. 

The main goal of a smart contract is to enable two anonymous parties to trade and do business with each other, usually over the Internet, without the need for a middleman. Smart contracts are becoming a cornerstone for enterprise blockchain applications and will likely become one of the pillars of blockchain technology. For example, A wants to send money to B. The transaction is represented online as a block. The block is broadcast to every party in the network. Those in the network approve the transaction is valid. The block then can be added to the chain, which provides an indelible and transparent record of transactions. The money moves from A to B. Blockchain technology undermines the "middle-man" business model. It makes it harder to cheat in transactions, and so reduces the value of credibility lent by trusted intermediaries.

Distributed ledgers are often viewed as most attractive to industries with businesses that lack a central institution they can trust to keep their records. The implications of decentralized ledger technology (DLT) are astounding: Digital trust is now an ever reasonable possibility; meaning online and offline assets can now be assigned ownership and the transference between those parties can be proven both linearly and cryptographically. Now, people everywhere can trust each other and transact peer to peer. And trust is established, not by some big institutions, but by collaboration, by cryptography and by some clever code. It could offer a new way to move money and track transactions across borders and other networks in a more secure, transparent and effective way than the current system. 

Blockchain will do for transactions what the Internet did for information. In the case of the Internet of Things, we’re going to need a blockchain-settlement system underneath. Banks won’t be able to settle trillions of real-time transactions between things. So this is an extraordinary thing. An immutable, unhackable distributed database of digital assets. All of the advantages derived from basic blockchain technology can be boiled down to only two benefits; corruption resistance and redundancy. This is a platform for truth and it’s a platform for trust. It is fast becoming a symbol of the fourth industrial revolution.

(United Nations, Geneva, Switzerland - Alvin Wei-Cheng Wong)

Blockchain is the technology that creates a ledger of transactions on the Internet. It is a data structure that makes it possible to create a digital ledger of transactions and share it among a distributed network of computers. Blockchain uses cryptography to allow each participant on the network to manipulate the ledger in a secure way. It quickens the ownership validation process, executes transactions in just minutes or even seconds. Like the Internet, the blockchain is an open, global infrastructure upon which other technologies and applications can be built. And like the Internet, it allows people to bypass traditional intermediaries in their dealings with each other, thereby lowering or even eliminating transaction costs. 

Blockchain shows great promise across a wide range of business applications. An increasing number of enterprises across all industry sectors are now exploring how they can use blockchain technology to remove friction from business processes and build systems of trust for value exchange. Blockchain databases, powered by enterprise-grade, scalable and secure core databases are core to unlocking the potential. 

By using the blockchain, individuals can exchange money or purchase insurance securely without a bank account. Financial institutions can settle securities in minutes instead of days. Blockchain technology lets strangers record simple, enforceable contracts without a lawyer. It makes it possible to sell real estate, event tickets, stocks, and almost any other kind of property or right without a broker. Blockchain also keeps tracks and makes sure all the payments are done properly. Businesses of all types (government, banking, insurance, finance, accounting, healthcare, legal, supply chain and logistics, manufacturing, retail, etc.) can more closely manage the flow of goods and related payments with greater speed and less risk. Unlike existing financial ledgers or databases used by banks and other institutions, the blockchain is updated and maintained not by a single company or government. Instead it is run by a network of users.

But, the fame of blockchain has also given rise to several new challenges, including interoperability, flexibility, and management. There are now many blockchain-based currencies, each optimized for different purposes. And none of these currencies are compatible with others, making it hard for users to transfer money between them. Also, there is a growing tendency to use blockchain in other fields. These fields include IoT, the supply chain, stock exchange and other domains where secure data transactions are important. However, the original blockchain used in bitcoin was not designed to scale to all possible use cases, making it difficult to use it in these domains. In addition, since blockchain is a decentralized system, once it goes wrong, there will be no one to sue and be responsible for, and there is the challenge of management. It will take some time for such problems to be worked out. The industry will have to work with governments to create standard rules and laws to govern transactions. The blockchain needs to undergo changes if it is to meet the requirements of every possible industry. The Hyperledger Project, an effort overseen by the Linux Foundation, is a collaborative effort created to advance blockchain technology by identifying and addressing important features for a cross-industry open standard for distributed ledgers that can transform the way business transactions are conducted globally.

Bitcoin is a digital asset and a payment system. It is an innovative payment network and a new kind of money. It is designed to enable users to send money over the Internet in a very simple and efficient way. Like paper money and gold before it, bitcoin is a paperless, bank-less, state-less currency that allows people to exchange value, to pay directly for goods and services. It is a system which allows you to do anonymous currency transactions and no one will come to know about the payment or about all other info related to the payment, including who sent it, who received it, etc. Unlike its predecessors, bitcoin is digital and decentralized. The bitcoin generation algorithm defines, in advance, how currency will be created and at what rate. Any currency that is generated by a malicious user that does not follow the rules will be rejected by the network and thus is worthless. Since the system works without a central repository or single administrator, the U.S. Treasury categorizes bitcoin as a decentralized virtual currency. Bitcoin is often called the first cryptocurrency. 

Bitcoin is not a fiat currency controlled by a nation-state. It uses peer-to-peer technology to operate with no central authority or banks; managing transactions and the issuing of bitcoins is carried out collectively by the network. Bitcoin is open-source; its design is public, nobody owns or controls bitcoin and everyone can take part. Bitcoin is run collectively by the users who uses the bitcoin client, and any changes to the bitcoin system have to be approved by the majority of users before they are implemented. Bitcoin clients are the base level of technology for conducting bitcoin transactions, and they store the keys needed to conduct a bitcoin transaction. They come in multiple flavors, and are customized to fit different niches. The success of bitcoin has led to the development of many alternative cryptocurrencies (or altcoins). Most of these altcoins offer their own take on the Bitcoin protocol, and are interesting in their own right. Currently, there are hundreds of alcoins out in the wild being traded every single day. But, most altcoins don’t last very long. In addition, just like the unfounded fear of many governments in the world that Bitcoin and other virtual currencies are a conduit for money laundering, smuggling, terrorism and tax evasion, they believe that the only means of curbing these harmful elements is through acceptance and regulation.

Bitcoin uses public-key cryptography, peer-to-peer networking, and proof-of-work to process and verify payments. Transactions take place between users directly, without an intermediary. Assets - digital assets like money to music and everything in between - are not stored in a central place, but they're distributed across a global ledger, using the highest level of cryptography. When transactions are conducted, they are posted globally, across millions and millions of computers. These transactions are verified by the network nodes and recorded in a public distributed ledger called the blockchain, which uses bitcoin as its unit of account. 

Bitcoin transactions are not reversible! Any transaction issued with bitcoin cannot be reversed, they can only be refunded by the person receiving the funds. Bitcoins are sent (or signed over) from one address to another with each user potentially having many, many addresses. Addresses are identifiers which you use to send bitcoins to another person. Transactions sent and received from bitcoin address. Every bitcoin address has a matching private key, which is saved in the wallet file of the person who owns the balance. Please keep your private keys safe, and make periodic backups to prevent the loss of bitcoins. Anyone with your private keys can spend your bitcoins. 

With PayPal you send funds to an email address, and similarly with bitcoin you send funds to a bitcoin address. You can send bitcoins to anyone once you know their bitcoin address. Each payment transaction is broadcast to the network and included in the blockchain so that the included bitcoins cannot be spent twice. This way, no one can copy the currency and use it for more than one time. It’s a simple but effective idea to stop double spending of the same bitcoin. After an hour or two, each transaction is locked in time by the massive amount of processing power that continues to extend the blockchain. Using these techniques, bitcoin provides a fast and extremely reliable payment network that anyone can use.

Bitcoins are created as a reward for payment processing work in which users offer their computing power to verify and record payments into a public ledger. This activity is called mining and miners are rewarded with transaction fees and newly created bitcoins. Bitcoins are kept in a digital wallet which you can keep in your computer, or on a website online, which will manage and secure your wallet for you. You can have as many wallets and bitcoin addresses (where you receive money from others) as you like. When a transaction is conducted, it's posted globally. And they compete: the first miner to find out the truth and to validate the block, is rewarded in digital currency, in the case of the bitcoin blockchain, with bitcoin. And then, that block is linked to the previous block and the previous block to create a chain of blocks. And every one is time-stamped. So if I wanted to go and hack a block and, say, pay you and you with the same money, I'd have to hack that block, plus all the preceding blocks, the entire history of commerce on that blockchain, not just on one computer but across millions of computers, simultaneously, all using the highest levels of encryption, in the light of the most powerful computing resource in the world that's watching me. Tough to do. This is infinitely more secure than the computer systems that we have today.

Besides being obtained by mining, bitcoins can be exchanged for other currencies, products, and services. When sending bitcoins, users can pay an optional transaction fee to the miners. In many places, bitcoin is less volatile than the local currency so some use it to store value while others use it to consume at hundreds of thousands of vendors across the globe and online.

Bitcoin, Ethereum and other blockchain assets are a new way for investors to gain exposure to a high-growth industry. Bitcoin and blockchain technology is a disruptive force in financial services and will likely be the foundation of the next-generation Internet also called Web 3.0. The current market price for a bitcoin is always changing due to the supply and demand for it. It goes up and down. Bitcoins are traded at bitcoin exchanges. A historical bitcoin price chart can be found at: How can we buy some bitcoin? If you are an individual investor and want to buy bitcoin the easiest way is through a digital asset exchange like Coinbase. Coinbase is one of the largest U.S.-based bitcoin companies that facilitates not only buying bitcoin, but also the storage of bitcoin. Open an account with Coinbase, and once you link your bank account you can buy and sell bitcoin. In addition, Coinbase also offers a "vault" that can be used to store your bitcoin. Since bitcoin is a new financial system that can operate without traditional banks, you control your finances. However, this financial freedom means that you are responsible for the safekeeping of bitcoin.



<updated by hhw: 8/3/17>



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