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The Fintech Disruption

In the past five years, fintech has stormed the gates of the traditional financial services industry, changing the way we do business and causing widespread upheaval around the world.

Financial transactions—such as paying bills, transferring money to a friend, purchasing products and getting a mortgage—can now be done in a matter of minutes, or even seconds, on a smartphone, tablet or laptop. And they can be done 24 hours a day, seven days a week, from wherever you are at the time. Traders who bought and sold stocks on behalf of clients a decade ago have been largely replaced by computer engineers supporting robo-advisers that use machine learning and data science techniques to create a personalized portfolio for clients.

New startups have sprung up from Silicon Valley to Wall Street, leveraging new technology in a largely unregulated marketplace to come up with new ways to reduce costs on financial transactions that previously would have been more expensive for consumers or businesses. And if you need to raise money to get a dream project off the ground, there are crowdfunding platforms such as Kickstarter.

“Fintech is a disrupting concept,” says Oliver Yao, the George N. Beckwith ’32 Professor of Information Systems and chair of the Department of Management at Lehigh. “Normally, disruption is bad, right? But this is a disruptive advancement. It’s not incremental advancement. It’s disruptive, which means it completely destroys old routines and builds new routines that are much faster and much smarter and much more intelligent—which is a good thing.”

Fintech, which stands for financial technology, describes a rising market that Goldman Sachs has estimated to be worth $4.7 trillion, according to Deloitte’s most recent Global Risk Management Survey. Fintech involves leveraging technology to solve a financial services problem in a new and innovative way.

“It’s broad-based across everything from banking solutions to asset management to insurance solutions and credit solutions,” says John Gardner ’95, general manager of wealth for the fintech startup SoFi in New York. “I think anything that plays in the realm of financial products—whether it’s in the distribution, servicing or operations of financial products—falls in the purview of fintech.”

Many people are likely unaware that they have already joined the fintech revolution, says Glenn Yarnis ’80, a private investor and member of the College of Business and Economics (CBE) Dean’s Advisory Council.

“For a lot of people who aren’t in finance, I think ‘fintech’ sounds like it’s some exotic thing,” says Yarnis, who previously worked for accounting powerhouse Price Waterhouse (before it was PricewaterhouseCoopers) and the former investment bank Drexel Burnham Lambert. “But fintech is anybody with PayPal, anybody with Venmo, anybody who uses a computer to pay a bill.”

The latest EY Fintech Adoption Index, which surveyed consumers in 20 global markets who are active online, found “that fintech firms have reached a tipping point, and are poised for mainstream adoption.”

Under the leadership of Dean Georgette Chapman Phillips, CBE has also reached a tipping point on fintech, stepping up to the challenge of preparing students for the fintech-driven business world they will enter upon graduation. The hard work of developing new courses of academic study around such a broad and diverse subject is under way (a blockchain course is planned for 2018), as is faculty research into some of the challenging new issues arising from the proliferation of fintech startups and their impact on traditional financial institutions. CBE also is developing a minor that draws classes from finance, business information systems and computer science.

“We have a critical mass here of thought leaders. It’s just a matter of putting all the pieces together and running with it,” says Michael B. Imerman, assistant professor of finance. “Now’s the time.”

In just the past 18 months, fintech use has doubled—from 16 percent in 2015 to 33 percent in 2017, according to the EY survey. Money transfer and payment services are used by 50 percent of those surveyed. The other major categories EY tracks, and their adoption rates, are insurance (24 percent); savings and investment (20 percent); borrowing (10 percent); and financial planning (10 percent).

Fintech Trends

Leading the fintech revolution are the emerging markets, as China has an adoption rate of 69 percent, while India is second at 52 percent, according to the consumer survey. The United States is at the world average—33 percent—but the upheaval is definitely being felt. MIT Technology Review reported in February, for example, that Goldman Sachs had only two traders left on its U.S. cash equities trading desk in New York. By contrast, in 2000, the Wall Street giant had 600 well-compensated humans buying and selling stock for its big clients. Those jobs are now being done by machines—automated trading programs that are supported by 200 computer engineers, according to the report.

In total, about one-third of Goldman’s staff—some 9,000 people—are computer engineers, the article said.

Meanwhile, banks and traditional financial institutions, which operate under federal regulations, suddenly find themselves playing a high-stakes game with fintech startups that operate largely outside the rules. Some fear the game may be winner-takes-all.

In an article that appeared in newspapers and online news sites around the world in December 2016, Associated Press business and technology writer Michael Liedtke predicted: “It may not be much longer before bank branches join video-rental stores and record shops as relics of a bygone era.”

The transition from that bygone era to whatever future the fintech revolution ultimately ushers in will not be smooth and will certainly cause considerable pain to some—as Wall Street traders have already learned. But as the army of computer engineers hired by Wall Street in recent years has seen, there also are exciting possibilities.

“There’s so much opportunity in this space for Lehigh undergrads,” says Alexandra Boyle ’11, a finance major who now works as sales director in the London office of OpenFin, a fintech startup that aims to be the operating layer that makes financial applications run seamlessly on desktops used by electronic-trading firms.

Leveraging Lehigh’s Strengths

One of the challenges facing Lehigh and other academic institutions in designing academic programs around fintech is its broad-based and diverse nature.

Fred S. Fraenkel ’71 ’03P, vice chairman of the Cowen Group, an investment bank and asset management firm headquartered in New York, likens fintech to a tree. Seen as a whole from a distance, it takes a much clearer shape.

“It’s when you take it down to its branches that it gets very difficult,” says Fraenkel, a former member and chair of the CBE Dean’s Advisory Council.

Those branches include payment processing, peer-to-peer lending, online banking, mobile banking or mobile transaction processing, cybersecurity and data analytics.

The common thread, and the thing that is really driving the fintech revolution, is big data, Yao says.

“In the past few years, suddenly a huge amount of data has become available, coupled with the huge improvement in computing capabilities and storage,” he says. “So we have data, and we are able to analyze it in a timely fashion. And the finance industry happens to be the most important industry and the most data-rich industry.”

Professor Nandu Nayar, Hans J. Baer Chair in International Finance and chair of the Perella Department of Finance, sees the fintech initiative as a way “we can best leverage Lehigh’s strengths.” Among those strengths is a proven track record of creating cutting-edge, interdisciplinary programs that relate to fintech, including the university’s Data X data science program, the Computer Science and Business program, an undergraduate certificate in business analytics and a master’s program in analytical finance, among others.

To prepare Lehigh students for the hot jobs created by fintech, Imerman says the college is exploring “being able to cross-train our finance and accounting majors in data science, in machine learning, in artificial intelligence—giving them the tools and ability to work with massive data sets and these new technologies and new software that are coming out.”

With its newly launched Lehigh@NasdaqCenter—created in partnership with the nonprofit Nasdaq Entrepreneurial Center—providing a crucial platform in San Francisco and the university’s proximity to New York and Washington, D.C., Imerman observes, “geographically we have the reach to be able to bridge both the literal and the figurative gap between Silicon Valley and Wall Street.”

Boyle, who joined OpenFin in 2014, points out that those who want to participate in the fintech space don’t have to be developers. “Sometimes, when you talk about a career in technology, people immediately think you have to be a developer or a systems engineer or have an IT [information technology] background,” she says.

With a background in sales and business development, Boyle learned the technology fundamentals she needs on the job. She recommends a course that introduces finance students to such basics as JavaScript and developing web applications, which she says would be very helpful.

“I would have loved to have taken a course like that at school,” Boyle says. “Maybe it would have been super introductory, and I wouldn’t be building anything complex, but there’s a lot of value in understanding some fundamentals about how technology works.”

Boyle also encourages “young women who are studying at Lehigh to pursue careers in this industry. I think, unfortunately, there is an imbalance in women represented in financial services, and specifically in technology. It’s a great opportunity.”

Fintech's Impact

A gap exists in the regulatory field as well. Regulators in the United States and around the world are looking at the impact of fintech and exploring the question of whether these largely unregulated new technology companies pose a risk to the financial system. The focus of the U.S. Department of the Treasury’s Office of Financial Research’s annual conference in December 2017 will be “Financial Stability and Fintech.” And the Deloitte survey listed fintech as one of the key risk management challenges facing the industry.

“This influx of new-age technology into financial services is really disrupting the whole industry,” Imerman says. “It’s a unique time to be studying banking because how banks respond and adapt will be critical to the survival of the industry.”

Imerman, who wrote his dissertation on bank risk and the financial crisis of 2008 and has continued to research the topic in the years since, is in the initial stages of a research project with colleagues looking at whether fintech introduces a new form of systemic risk to the financial system.

He also has research projects in the works looking at each of the three different approaches banks are most likely to take in response to fintech.

One is to examine how the market responds to mergers and acquisitions, whether a bank’s value increases more than would be expected as the result of a deal. “Rather than seeing these tech startups move in on their business lines, some banks will go out and gobble them up, bringing that technology in-house,” he says. “So far, we’ve been able to identify 50 or 60 deals over the past 10 years that involve traditional banks, commercial banks, investment banks or securities firms acquiring tech firms.”

While it is too early to draw definitive conclusions, he notes, preliminary analysis appears to show “that the market is responding positively to these deals.” The number over the past decade is relatively small, but it has been increasing in recent years, and he goes on to state, “I would expect that over the next year or two we’re going to see a lot more of these deals.”

He and his co-authors also are looking at banks that “try to develop newer, fresher, better technologies in-house and leverage the economies of scope and scale that large banks have been able to establish over time in order to be able to bring these technologies to market more quickly and cheaper than a fintech startup would be able to.” The researchers will measure this “organic innovation” through data collection and analysis of technological patents banks have filed.

Research is just starting on strategic alliances and joint ventures between banks and fintech startups that would allow banks to leverage the fact that the startups are outside of the purview of the financial regulators and possibly can do things that the banks can’t do.

Just as technology has cut the time it takes to make significant financial decisions from months to milliseconds, Boyle observes, the pace at which fintech is changing the financial services industry continues to accelerate.

“That’s what makes it so interesting,” Nayar says, “because it’s the study of a totally new area where the rules have not been written yet.”

Story by Jack Croft

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fintech is disrupting the traditional financial services industry

The College of Business and Economics is stepping up to the challenge of preparing students for the fintech-driven business world they will enter upon graduation. Illustration: Pawal Jonca

The Evolution of Fintech

Pantelegraph

In the mid-1860s, the banking industry became an early adopter of a revolutionary new technological breakthrough: the pantelegraph. Created by Italian physicist Giovanni Caselli, this precursor to the fax machine—which was in commercial use years before Alexander Graham Bell got his patent for the telephone—was able to transmit images over telegraph lines. The machine was primarily used to verify signatures for banking transactions after it went into operation linking Paris and Lyons in 1865, and could be considered the original forebear in the evolutionary chain of financial technology.

Today, the pantelegraph is largely forgotten, with the few models that survive consigned to museums. But in the 150 years since the pantelegraph’s introduction, financial technology has progressed from ticker tape to telephone to the computer mainframe to the internet to artificial intelligence. And the evolutionary chain links automated teller machines, PayPal and Venmo, and robo-advisers that rely on data algorithms and personal information to come up with individualized investment portfolios.

“Every time there’s a new technological innovation,” says Michael B. Imerman, assistant professor of finance at Lehigh, “financial markets, banks and other financial institutions have to find a way to adapt.”

A Fintech Startup

John Gardner

The rise of the robo-advisers has roiled the financial services industry, dramatically cutting costs to consumers while costing flesh-and-blood financial advisers their jobs and leaving many clients wondering who they can talk to when they need reassurance or have questions.

But SoFi, a fintech startup that started out in 2011 refinancing student loans and has since moved into other loan areas, insurance and wealth management, isn’t making its members choose. They can take advantage of a low-cost, streamlined robo-adviser using complex data algorithms to come up with an individualized investment portfolio and still have access to a live financial adviser they can call.

John Gardner ’95, general manager of the SoFi Wealth offering, says members get the best of both worlds, a strategy the company hopes will differentiate it in the competitive marketplace.

“From a consumer point of view, the robos have shifted tens of billions of dollars in fees that traditionally would have been captured by the financial services companies back to the consumer,” Gardner says. “They saved consumers money. They created a very streamlined process that makes it easy to get your money invested and set up recurring contributions. And they basically have demystified the process of investing.”

Yet regardless of how smart or lucrative the investments prove to be, many people still want to be able to pick up the phone and talk with another human being about their hard-earned money.

“Our view is, at the end of the day, you can give the best advice in the world, provide the best product, but if you can’t get people to take action, it doesn’t really matter,” Gardner says. “You need to have people feel that they’re involved in the process, be able to ask questions, and gain confidence that the person they’re asking the questions knows what they’re doing before they make a decision.

“I think lots of people gain some comfort from knowing there’s somebody on the other side of the phone that makes it a more tangible and real business.”