How are traditional organizations across the financial services industry reacting to the rise of fintech?
Herb Kozlov: It’s on the radar of every major financial services institution, if for no other reason than they are consumers of these services, and they’re at a competitive disadvantage if they’re not as well -positioned as their competitors to adopt new technologies. Innovation is happening at the start-up level and then being incorporated and adopted by the larger institutions.
There's a real push in the payments and investments spaces. There is a lot of adoption of machine learning and artificial intelligence (AI) in investments, as well as blockchain in the payments arena, with banks investing heavily into distributed ledger technology. If it's not being developed in-house then the big financial institutions are gobbling technologies up once they are proven or show significant promise.
Why do you think these two areas of financial services – payments and investments - are seeing some of the first signs of fintech adoption?
HK: There are a lot of inefficiencies in the payments sector and addressing those is relatively simple in what is a highly regulated sector. You can be a software developer whose platform facilitates payments, like a Stripe or a Plaid, and not need to obtain a money transmitter license. The same is true in investments, with solutions like Mint. These companies are able to rapidly access the market and there are ways to gain that access without necessarily needing to get regulatory licenses. That is part of the reason why a lot of the change seen in recent years has been so rapid.
Why don't banks develop these technologies themselves if they have the capital to do so?
HK: In some cases they are but this is not the prime focus of the banks or where they are spending their tech dollars. They have so much legacy infrastructure to update and that's where their attention is internally. Of course, they appreciate anything that results in increased customer fees and fintech represents an opportunity to achieve that, by agreeing licenses with innovative start-ups or acquiring them outright.
There's also a blurring of lines, because some of the technologies that are considered fintech, like digital ledger technology, are rapidly spreading to other industries, such as healthcare, media and entertainment and advertising. So certain technologies that are considered to be fintech and have found applications in the financial services industry are not necessarily purely fintech.