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Hong Kong, 12 Dec 2017 - It was a big year for FinTech in 2017 – and next year is shaping up to be every bit as exciting. Here are some FinTech predictions for 2018:
1. Bitcoin and cryptocurrencies – here come the institutional investors?
Many records were broken in 2017 by Bitcoin and other cryptocurrencies. Not only did they achieve record high prices, they also generated a lot of public awareness and interest. Expect this to continue in 2018, with potential institutional investors announcing crypto investments or launching crypto funds, plus some of the “incumbent” service providers, from brokers to banks, entering the space.
Look out for many new innovations in the retail space as well. Despite the numerous ground-breaking features of cryptocurrencies or ICOs, investing in them is still not very user-friendly. And the safekeeping of private keys requires even more experience. For example, while you can always regain access to your bank account if you lose your bank’s PIN, your crypto assets are lost forever if you lose your private keys!
2. Crypto regulations and tax – are the regulators and tax authorities set to join the party as well?
Many regulators have taken a balanced and practical approach to cryptocurrencies so far. But they have made it clear that they will crack down on any violations, with the SEC’s investigative report on the DAO being a good example. However, more high-profile enforcement cases against reckless ICOs look set to take place, with regulators seeking to make examples of some of the bad apples for the rest of the industry.
Expect the tax authorities to be more active, too, especially with the rise in the price of Bitcoin. The recent IRS request for the names of account holders at one of the large US crypto exchanges may be an indication of things to come.
3. ICOs – is the child becoming a teenager?
ICOs generated a lot of media attention in the past year, with more than US$3 billion raised via such token sales and the industry evolving fairly quickly from a “two guys and a white paper” model to one of experienced teams advised by professional firms with well-thought-through business models.
While the ICO frenzy may calm down in 2018, especially in terms of the number of ICOS and the amounts raised, expect the industry to further institutionalize, with the further development of best practices. This will be seen especially in key areas from KYC and AML processes to governance and transparency standards. Expect more industry best-practice initiatives to take place, too – the recent one from the Hong Kong FinTech Association being a good example.
4. RegTech – a wave of consolidation ahead?
Regulatory technology (RegTech) will continue to be highly interesting to financial institutions looking not only to deal with their regulatory obligations more effectively and efficiently, but also to reduce the risks and costs associated with such functions.
However, the long sales cycles and the procurement obstacles will remain a challenge, especially as legal and compliance teams are often relatively unfamiliar with RegTech. In addition, the lack of dominant players in this space will cause further consolidations in the industry, with RegTech start-ups likely being acquired by some of the traditional technology providers who don’t want to be left behind.
5. Banks embracing FinTech – the end of innovation teams?
Although innovation teams played a crucial role in the early days of FinTech, when banks and start-ups were learning how to work together, many were often criticized for lacking budget and serving more as a marketing tool than acting as drivers of meaningful change inside the organization.
With the increased familiarity and understanding of FinTech by banks’ senior management, expect many FinTechs to avoid innovation teams altogether and deal with the relevant business lines directly. As well as saving FinTech start-ups time and energy, this will continue to embed innovation as a mindset across the organization rather than having it limited to just the innovation team. Easier said than done!
6. SupTech – say hello to your new tech-driven regulator?
Supervisory Technology, SupTech for short, is the use of new technology by regulators to make their supervision more effective and the compliance burden imposed less painful. Contrary to what some may think, many regulators are already experimenting with advanced data analytics and artificial intelligence tools – not only to detect market manipulation but to process the thousands of regulatory filings received each month.
Expect some of the leading regulators to continue to act as pioneers in this space. For example, the Monetary Authority of Singapore is looking to use machine-readable templates for regulatory reporting, as well as completely revamping its data-collection exercises – even allowing financial institutions to turn down the regulator’s request if it asks for the same data twice.
7. Open Banking – aggregating your banking data with your favourite tech firm?
Discussions around open banking and the opening of Application Programming Interfaces (APIs) will continue to be at the top of the FinTech agenda in 2018, powered by regulatory initiatives such as PSD2 in Europe or the Open API framework announced by the Hong Kong regulators.
While most agree that open banking is the general path that the industry is heading towards, it will be interesting to see how incumbent banks try to position themselves in 2018 and what advances large tech firms will make. In an open banking model, will consumers trust a tech firm as their main interface or their traditional bank? The jury is still out.
8. Voice as a user interface – is Alexa your new banker?
Although the focus is still on mobile first, voice as a user interface is becoming increasingly accepted and available. Voice-enabled assistants – from Amazon’s Echo and Google’s Home in the West to Baidu’s Xiaoyu and Alibaba’s Genie in Asia – are increasingly becoming part of our everyday lives, with some studies even predicting that the majority of US households will have one by 2022.
As was the case with chatbots in recent years, expect financial institutions to continue experimenting with how they can integrate such solutions in their offerings to customers. While there are still a number of data security and privacy issues, this is an area that looks promising. So could Alexa be your new banker?
9. FinTech arbitrage – build in the West and sell in the East?
Asia is generally recognized as the global leader in B2C FinTech – mainly due to the advances that the large Chinese BATs (Baidu, Ant Financial, Tencent) have been making in how they deliver financial services to the public. But Asia is also continuing to emerge as a B2B FinTech leader, not necessarily from an innovation perspective but rather in terms of adoption and integration.
Financial institutions in Asia are generally very eager to try new solutions due to the relatively tech-savvy and demanding nature of their client base. Most financial institutions, as well as the Asia divisions of large international banks, now have reasonable autonomy with regard to what innovations they can bring on board. And this may be an opportunity for B2B focused FinTech firms around the world to develop their R&D in the West and deploy it in Asia, using places such as Hong Kong or Singapore as stepping stones.
10. Fraud and cybersecurity – avoiding bad apples and Black Swans?
The FinTech industry is continuing to grow, despite numerous hurdles. The biggest challenge could be a major incident, such as a cyberattack in which sensitive consumer data risks being stolen. Or a flagrant fraud case that could seriously undermine the goodwill the banks and the public at large have towards FinTechs. The Bitcoin ecosystem, for example, had a major setback following the 2014 Mt Gox scandal, which slowed its momentum. And the P2P lending space was severely tainted by multiple scandals and Ponzi schemes in recent years. More recently, cyber-attacks on banks have not only continued but have targeted young ICOs that may have less secure infrastructures.
For the broader FinTech industry to continue to prosper, it will be important to ensure that everyone is operating at an institutional-grade level of professionalism, integrity and transparency and to take the appropriate precautions to avoid any unforeseen events (as far as possible!).