FINTECH – DANGER, OPPORTUNITY OR FINANCIAL FACT OF LIFE?
Financial Technology (FinTech) has been around longer than most of us would acknowledge, yet millions across the globe remain blithely ignorant of its uses and merits. Sadly, many in the developing world are effectively excluded from deriving full benefit from FinTech, but this is changing. At its most basic and generic level, FinTech is a field of innovation that applies technology to deliver and improve financial services. Perhaps the most common form of FinTech most of us could not live without is the credit card dating all the way back to the 1950s. Today, the most common technological manifestation of FinTech is the use of smartphones to conduct banking, payments, investing and borrowing. In 2020 alone, the value of payments through smartphones exceeded US$ 500 billion. Indeed, FinTech is big business. After a dip in 2020, investment in FinTech for the year 2021 topped some US$210 billion.
At the level of the personal user FinTech, China’s figures are staggering. An Ernst and Young study found that a massive 87% of the country’s digitally active population use at least one FinTech application in their lives. But dangers lurk alongside the unimaged opportunity for FinTech. Much of this relates to personal data privacy and its abuse (by the state, commercial interests and criminals). Regulation lags development and this is something that authorities across the globe are seized with and has resulted in rather heavy-handed intervention by the Chinese state over the past year. The impact of such regulation has been felt by companies ranging from ABC and META, through to ANT and TenCent.
An area of growing interest is the application of FinTech to financial portfolio construction and advice. I am personally not in favour of Robo-Advisors as a replacement for skilled, experienced and qualified personal financial advice. An algorithm simply cannot identify, extract and interpret all pertinent relevant information, including that of personality when constructing and managing a personal portfolio of investments. Nonetheless, there is a place for this sector, particularly among younger, tech-savvy and perhaps for those with a greater risk appetite.
Where I do see merit and a place in the market, is the intelligent design, construction and management of algorithms in financial portfolio management. A Harvard Business Review captures the major merits of algorithms in portfolio management as follows: They can analyse huge quantities of relevant data extremely rapidly; they can identify potentially outperforming equities by finding new patterns in existing data sets; they can make new forms of data analysable, and they can reduce the negative effects of human biases on investment decisions.
Will algorithms replace human intelligence in portfolio design and management? I don’t think so, but as a powerful analytic tool in the armoury of modern portfolio management, FinTech and algorithms are here to stay.