Blog

Fintech: Transforming the Industry through Disruptive Innovation

Dr. Amitabh Satapathy, Associate Professor XIME, Kochi

“Banking is necessary, but banks are not”. This was the statement by Bill Gates almost three decades back. Back then, in 1994, it was tough to foresee a scenario where banks would gradually become obsolete in their core business of lending and borrowing. Thirty years later, with tremendous technological growth, the importance of banks as intermediaries between borrowers and lenders is dwindling fast. In the entire value chain of the lending and borrowing business, there seems to be a hint that the link represented by the banks in bringing both parties together appears to be the weakest and is going to be redundant.

Imagine someone needs money and wants to borrow. He needs to announce his requirement so that as many people hear, technology can quickly help him make the announcement much louder for a large crowd to hear. All those who hear his announcement now need to evaluate the proposal, especially regarding a possible default if they lend. With abundant data, including transactional data, readily available, the worthiness of the prospective borrower can be assessed relatively easily. All the prospective lenders can now quote the amount they want to lend, the repayment duration, and, most importantly, the interest rate they would charge. Among all such offers, the lender can select the best one that meets his requirements. The apprehension about willful default and possible legal repercussions can be significantly overcome when such lending and borrowing reaches millions or billions daily. Another fintech disruption digitally enabled payment platforms will facilitate and make this entire direct lending and borrowing process a seamless transaction. With the speed at which technology is disrupting the finance industry, I don’t see Bill Gates’s statement taking more time to become a reality.

When did you last see someone running from shop to shop in search of change to pay an auto driver? 
Or hasn’t it become familiar now when a street vendor looks at you surprisingly as you offer to pay them in cash instead of UPI? 
Or, have you ever heard of the urban spiel that says the toffee business in India is down because the shopkeeper no longer offers candy instead of change? 
Almost everybody, at least in India, can easily relate to the power and speed of mobile payment. This is the example of American academic Clayton Christensen’s 1990 theory of Disruptive Innovation. It refers to a process in which a new product, service, or technology disrupts an existing market by creating or significantly altering an existing one. Unlike all innovations, disruptive innovations have unique characteristics that set them apart, including altering/ adding to the value proposition. 

Another area ready to be disrupted by technology is investment. Not only has crypto established itself as a formidable asset class that’s difficult for investors to ignore, but the old-age belief that the market is efficient and long-term investment is the most intelligent decision is getting questioned. The availability of billions of data points and the surge in computing power of modern personal computers are gradually changing how the game of investment has been played over the years. Algo trading or high-frequency trading probes and questions one of the most important financial theories, the efficient market hypothesis. There is substantial evidence to prove that mathematical models can be built to predict the market with a certain degree of accuracy over shorter time frames. The role of a traditional financial analyst with expertise to forecast a company’s financials and carry out a fundamental analysis is expected to go through significant disruptions with automation and the introduction of predictive tools.

Finally, blockchain as a technology would most likely be adopted in the financial services industry. The technology has demonstrated its potential to lower the ‘cost of trust’ existing in traditional methods of transactions. It has excellent potential to improve the functioning of corporates. The technology, known as a virtual ledger that records volumes of transactions, makes information sharing faster, cheaper and more secure. It also demonstrates that the role of any regulators or governments gets significantly reduced. Although the technology sometimes sounds synonymous with Bitcoin, it has got varied applications in different industries.      

Although we have seen technological disruptions in the industry, from ATMs to mobile payment, that’s just the tip of the iceberg. It’s just a matter of time before better regulations and legal framework make this disruption formidable.
I still hope that although the much larger disruption sounds more like a reality now, the fundamentals like risk, return and liquidity will continue to be the parameters to guide us in decision-making. Long live Disruptive Innovation!