Does Fintech Still Promise a New Financial Orthodoxy?
To some extent, this is the normal shake-out of an industry experiencing creative destruction. Once past this stage, does fintech still promise a new world order of finance? After all, consumers now expect one that is intermediary-free, smart-contract driven, crypto-currency denominated and real-time regulated, with equity and transparency for all.
Before we can find out, there are enormous challenges to overcome, challenges that aren't fintech in nature. Two big ones: the lack of trust in a digital counterpart, which makes it all too easy to thwart Asset Money Laundering and Know Your Customer (AML/KYC) laws, or the inherent volatility and illiquidity of an intermediary-free exchange mechanism.
Initial applications of blockchain-based smart contracts reveal that they are fragile and currently unsuitable for commercial use. Questions remain regarding trans-jurisdictional consistency and enforcement of contract law, the legal status and outworking of smart contracts and organizations based upon them. There is currently zero regulatory oversight for consumer protection, and even concerns regarding the soundness of the fundamental technologies underpinning smart contracts. Without resolving these issues, smart contracts remain a nascent technology lacking the legal, regulatory and business policy frameworks needed for commerce.
As we've written before, these aren't trivial problems. Initial solutions will likely be accompanied by unknown and potentially severe unintended consequences.
The longer it takes for fintech to realize its potential, the less likely the optimistic future forecast today is an accurate portrayal of tomorrow. Societal, political and institutional headwinds are sure to buffet policy makers in unpredictable ways.
Meanwhile, centuries of expectations and decades of incumbency aren't going to immediately succumb to businesses cultivated in finserv petri dishes, shielded from regulatory demands that have weak immune systems to chronic financial diseases like sustainable liquidity and credit cycles.
Driven by intense competition, evolving regulations and navigating market ebbs and flows, FIs have always been at the leading edge of technology adoption. Yet while fintech won't reshape financial services by itself, it can catalyze leaders to explore new capabilities more quickly and pushing its usage closer to clients.
But don't be mistaken: tech isn't leading this revolution. Fintech's role in the "financial services revolution" is akin to social media's role in popular uprisings: enabling changes expected-even demanded-broadly by society, not leading it.
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