By: Dennis Karpovitch
The MIT Fintech Conference was filled with brilliant ideas for the future of financial technology. The event featured many top executives in the Fintech industry as well as several entrepreneurs who pitched their ideas in a start-up competition for funding. We know that Fintech is growing at an exponential pace in many developed regions of the world. Already, a majority of the top 10 incumbents in the U.S. are technology-based, however many foreign countries are at a disadvantage; they lack the technical infrastructure needed for efficient financial transactions. As a result, there is a huge market today for Fintech in developing countries such as Brazil. A combination of broken experiences among users as well as regulator flexibility presents the opportunity for companies with the latest technologies to introduce their systems into countries with no foundation. We live in an era where consumer satisfaction is driven by instant and quick experiences; disruptive technologies like AI, Blockchain, and Robo-Advisors increase automation of many basic process and ultimately foreshadow a road to unregulated financial industries. Nonetheless, there are still many hurdles that the Fintech industry needs to overcome before it can implement revolutionary features.
During the conference, we also had the privilege of hearing from Shark Tank’s own Kevin O’Leary who offered a lot of insight into investing. His Golden Rule breaks down into several ideas that should be kept in mind: diversify—never have more than 5% in one sector; never own a position that doesn’t return capital—invest in companies with positive cash flows; focus on preserving your position rather than maximizing performance—investing takes time; and keep 10% in cash at all times because sometimes the market does go down. O’Leary also offered some advice for the entrepreneur trying to solicit an investment. The key to a successful pitch to investors is articulating the opportunity right away. If an investor can’t identify your purpose in the first 60 seconds, chances are you’ve lost them. You need to show that you have a comprehensive understanding of business models and that you are uniquely qualified to execute this opportunity.
On the topic of blockchain, it’s here to stay; but so are the intermediaries who want to regulate it. Working with policy makers will be difficult as one of the objectives of blockchain is to disintermediate payments. However, this is just one of the challenges for cryptocurrency companies who rely on blockchain technology. It’s performance is comparable to that of Visa or MasterCard which are already able to process up to 100,000 transactions a second. Other challenges revolve around blockchain’s ability to maintain privacy and security, an area which is constantly developing as technology is always vulnerable to breaches. In addition, as blockchain evolves, software updates along the way could cause operability issues with legacy systems. Despite all of these concerns, we have to acknowledge that the technology will always have an innate latency because of its complexity. Although blockchain comes with some negative externalities, its benefits exceed the costs. Consider the potential use cases: payment system, central bank digital currency, post-trade reconciliation, data reporting, digital IDs, capital formation (crowdfunding), risk allocation, and smart contracts. Fintech thrives on public confidence, yet there is a huge risk with blockchain as it enables money laundering and tax evasion. Cryptocurrencies require many upgrades for market integrity before they can be universally accepted.
Robo-advisors are also entering the scene as an opportunity for an automated investment allocation. The technology relies on rule-based analytics and software that is not motivated by commissions, but rather by profits. The target market is aimed at affluent 30 to 40 year olds, though the technology is not developed enough for the private banking community. However, Wealthfront, a mutual fund analysis company, raises a concern about this technology as it promotes passive investing. Robo-advisors have the ability to function without human judgement, thus a market controlled by robots could result in trends that don’t reflect human intuition.
Financial technology is rapidly evolving and the developing world will soon catch up with today’s technology. It’s only a matter of time until modern innovation is dispersed to areas of the world that lag behind. Blockchain, robo-advisors, and financial ecosystems are all still in their primitive stages, but they might just be laying down the next foundation for the world’s financial infrastructure. For now, the MIT Fintech conference gives us an insightful look into the world’s financial state today as well as the prospective opportunities for technological improvement.