FinTech, more than just e-banking

At the recent Lugano Banking Day, banking and finance professionals from all over Switzerland convened in Lugano to discuss the future of the financial sector, focusing on the great opportunities that lay ahead and the new technologies that will shape the industry for the years to come. Although finance and information technologies have both evolved exponentially in the past few decades, often in close combination with each other, today these two disciplines are bonding in ways unseen before, forging thus a completely new industry. We have asked two experts in the respective fields of Finance and Informatics to shed some light on the meaning and implications of FinTech, Eric Nowak, professor of Finance, and Marc Langheinrich, professor of Informatics - both at USI, where they co-direct the first graduate degree program in Switzerland dedicated to Financial Technology and Computing, and the first one in Europe dedicated to computer scientists.

Professor Nowak, the finance industry is one of the most important end-users of computer and network technologies. In the new FinTech domain, should we expect finance professionals to be also tech-savvy? 

More tech-savvy yes, but not necessarily tech experts, also because the financial sector does not require all professionals to know how to write code or to program complex computer systems to, for example, develop trading platforms or computer-assisted advisory solutions. I would say though that the financial industry needs both – IT experts who understand the principles of modern finance, as well as finance professionals who understand how to make use of the new technologies with the help of those experts. That is why at the USI Master in Financial Technology and Computing we teach Informatics students the principles of financial markets and how they work, with a strong focus on quantitative finance, i.e. financial engineering, asset pricing, financial intermediation and risk management. At the same time, in the USI Master of Finance we offer a new specialization in “Digital Finance” for finance students who want to better understand these new technologies, preparing them to collaborate with IT experts.

Professor Langheinrich, do you believe that the disciplines of Informatics and Finance can, or will, speak a common language? For instance, do your students fully understand the principles of financial markets? 

At our graduate degree program in FinTech – the first one in Switzerland – our Informatics students indeed learn the “language of Finance”, among other things.  The challenge of finding a “common language” is a well-known in Informatics. For example, in my area of research – Internet and data privacy – I have been working extensively on projects defined by interdisciplinarity, where the different languages of, among others, legal scholars, political scientists, and sociologists, require interfacing on different levels. I believe that it is essential to be ‘exposed’ to different disciplines and to work out common problems together, which is what ultimately will really foster an understanding for current and future generations that are growing up in this complex and interconnected environment.

Algorithmic trading might be one of the earliest examples of this intersection between computer science and finance. Computer trading in the financial markets entails not only high-performance computing to execute orders speedily on the appropriate hardware, but also policies to avoid things to run amok on these trading platforms. The real problem with the so-called ‘flash trade crashes’ is that when computers become part of a larger complex system of interdependent, interacting computers, then it becomes difficult to understand how a complex system will really behave. For example, even if I trade on the Nasdaq, that might trigger a completely different wave of trading on the German stock market. This is just one area of many that would certainly benefit of a closer collaboration between computer scientists and financial experts. 

Prof. Nowak, financial institutions are investing heavily in FinTech, like UBS with its dedicated competence center in Ticino. Do you believe that the Swiss financial markets of tomorrow will look and act very differently from today? 

The FinTech revolution is in full swing, with visible changes at various levels. On one side, we have traditional financial institutions, like banks and fund management firms, who are increasingly developing, using, and marketing a wide range of FinTech products. On the other side, we have an entire ecosystem of initiatives and firms mushrooming all around the globe. Switzerland is an important player in this context, thanks to its renowned finance sector and its leading edge in high-tech engineering, attracting therefore many of these new market players. I would certainly mention the case of Zug, the affluent city near Zurich historically known for its asset management or commodity trading firms, where a multitude of FinTech companies have converged, to the extent that last year a professional government-backed organization, Crypto Valley Association, was established to take full advantage of Switzerland’s strengths and to build the world’s leading blockchain and cryptographic technologies ecosystem. As far as banking and finance is concerned, what we are experiencing is the growth of automated “robo”-systems being introduced to support financial professionals, taking over tasks with lower levels of sophistication, like back-office processing, trading activities (execution), and even ‘managing’ index-tracking funds.

Prof. Langheinrich, is blockchain technology here to stay? Will it be the new foundation for global finance, or even other industries? 

The ramifications for blockchain are manifold. One of the advantages of having a “public immutable ledger” is that you can now share a “common understanding”, or acceptance, of an event, as long as it is recorded. A payments system is one example, the collaborative – or sharing – economy is another where you can rent a car, for instance, based on a smart contract, so people can agree ahead of time what to pay to who in what case. And all of this can be done without the need to trust anyone, any organisation – as long as you believe in the technology, of course – because the transaction, the ‘acceptance’ will always be publicly visible. 

My colleague Prof. Pedone, one of the co-directors of our FinTech program, has been working on so-called “consensus protocols” – the theoretical underpinning of the blockchain – for many years. Take for example a traditional payment system, where physical money is exchanged, and bring it into the virtual world, were you need to make sure that the exchange doesn’t occur twice because of the risk of ‘copying’ the digital transaction. What the blockchain allows us to do is to publicize this transaction, which is then ‘confirmed’, or acknowledged, by the consensus among all members in the blockchain – the public, therefore, as there is no pre-defined membership. Consensus protocols are not particularly novel, but with the blockchain they are now seeing a huge range of interesting applications for them. Bitcoin was probably the single most important driver for that. 

Prof. Nowak, there are growing concerns in terms of regulation of the FinTech sector. Not to restrain it, rather to enable it to thrive within clear and fair frameworks. Are regulators equipped to address the new challenges that lie ahead?

The real problem is that the FinTech sector moves very fast, the speed of technological innovation is amazing, so regulators are always one step behind. I believe that the sector will experience more rapid growth and that at some point the market will eventually exuberate (as it already did with the Bitcoin), provoking a crisis which will then force regulators to shift from being ‘reactive’ to ‘active’, to avoid such occurrences in the future. This “boom-bust-regulate” cycle is a common pattern observed in the regulation of financial markets (think of the dot.com bubble or the global banking crisis). Nevertheless, the FinTech topic is on the table and regulators are well aware of its conceptual meanings and implications.

Prof. Langheinrich, do you see FinTech, i.e., the integration of technology into the way we do finance, as a blueprint for many other domains in our lives? 

The spreading of technology into everyday life has been happening for quite a while now, and the emergence of FinTech is just one recent phenomenon. The applications of technology to everyday living are in fact numerous. Just think of personalised health, which in the future will make a huge difference in society. In our Faculty, my colleague Prof. Santini is working on how the Quantified Self (also known as ‘lifelogging’) can improve our well-being. A “health-advisor” could measure one’s daily physical activity and biological parameters and provide advice on what to do to stay fit and healthy. Simplified examples are already on the market (e.g., the Fitbit). Another area that will be thoroughly changed by technology is industry, what is often referred to as “industry 4.0”. We already see a lot more intelligent services in industry – a company selling production machinery may not sell a huge costly machine in the future, but instead “rent” it as a service. Intelligent sensors in the machine will allow the company to fine-tune its operation and sell continuous services to their customers, instead of a one-time sale.

The original version of the interview is published in Ticino Welcome magazine n.58 (June-August 2018), pages 24-26.