Fintech: The Future of Finance

The term financial technology, which evolved by the end of the first decade of the 21st century, refers to any technological innovation in the financial sector. This includes automation softwares in the financial industry such as trading, investing, and retail banking, and mobile technologies that facilitate people’s everyday lives.

New financial technologies have just started to emerge. In the investing financial sector, robo-advisers can manage investors’ assets and investment portfolios. They use artificial intelligence and machine learning algorithms to analyze current market data, from tax policies to exchange-traded fund investments to overall financial portfolio data, to give suggestions to investors on how to manage and improve their portfolio. These robo-advisers require little to no human intervention and can operate under full automation.

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In China, many firms have started peer-to-peer lending using mobile applications. Online shopping platforms such as Alibaba and JD can develop credit scores using customers’ transactions and personal information, and customers can take out small loans, typically less than 10,000 yuan (approximately $2000 CAD). Commercial banks are reluctant to lend these loans, since they have small profits but come with many bureaucratic procedures, and there is no mature system for assessing consumer credit risks. There are also peer-to-peer (P2P) platforms where individual investors can invest their money. The platforms then lend that money to loan-takers, and divide these loans into small chunks and parcel them to investors to disperse risk. The return in interest is divided between the company and the individual investor.

Financial technology caused a dramatic change in the way stocks are traded. Stock trading in the 1960s used to be all human controlled, with investors calling their brokers to buy and sell. Only brokers had access to real-time prices, which were updated once a day. Then, in the late 1990s, as computing power increased, online trading began to dramatically increase in traffic and small traders had the same access to instant prices. In the 2000s, stock trading by investment companies such as mutual funds became automated. Trades were conducted using algorithms that determined the timing, pricing, and quantity of orders based on programmer developed rules. Fast hardware and internet also enabled high-frequency trading, and instead of making lots of money on few trades in the traditional way, now algorithms make millions of trades a day and make pennies, or even fractions of pennies, on each of those trades. This allows investors and financial companies to diversify their portfolio and disperse risk. The technology caused a dramatic change in the role of the investment portfolio manager; instead of making transactions themselves, they plan strategies for algorithms to take to make trades. They control the big picture and let the algorithms work on the details.

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The controversy of financial technology, or modern technology in general, lies in the replacement of jobs. Hundreds of financial analysts are currently being replaced with software, and this is just the start of the automation of the financial industry. Softwares can now retrieve data and make an analysis based on thousands of numbers from dozens of databases. Kensho, an artificial intelligence platform, can analyze current events and make predictions for investments. For example, when Brexit occurred, Kensho can analyze market data from the past that corresponds to a similar public event, i.e. a populist vote in this case and make predictions about the value of the British currency and stock market data. A simple question can also be typed into Kensho’s search box, such as “which Apple supplier’s share price goes up when Apple releases a new iPad”. Traditionally, to answer this question, financial analysts would take days to gather data and provide an analysis. Now with Kensho, this can be answered in minutes, and the analysis is based on larger sets of data with more accurate results.

According to Nadler, the CEO of Kensho, between a third and a half of jobs in the financial industry will be replaced by Kensho and other automation softwares. From clerks checking stock tickers to research analysts, the next job replaced might be employees that deal with clients. Soon, sophisticated interfaces will make the need for a professional sales associates unnecessary. Clients might not even want to work with a human being if everything can be done from their mobile phones using a simple app. Nadler has said that Goldman Sachs, one of the largest investment banks on Wall Street, will be significantly smaller ten years from now due to the increasing power of computing and financial technology.

Finance is an industry that is prone to automation since much of it is based on processing information. According to Frey and Osborne of Oxford, 54% of jobs in the financial industry are highly probable to be automated. However, at the same time, new jobs will be created to create, establish, and configure these automation softwares. So in the future, it is highly likely that jobs will shift towards the combination of STEM and finance from traditional finance.

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