Prof Theo Lynn and Dr Pierangelo Rosati outline how Ireland’s various pieces can combine to make fintech innovation happen.
It is a significant understatement to say that both the ICT and international financial services sectors are a major part of Ireland’s economic success. Ireland is a world leader in both. But imagine if you put them together.
Welcome to fintech!
What is fintech?
Financial technology, or fintech, is what it says on the tin: any technology used to support banking and financial services. It’s not a new concept. Technology has always been a major source of innovation in banking and financial services. However, most technology innovation has been focused within the sector.
Surprisingly, up until recently, the traditional players in the banking and financial services sectors have not been as negatively impacted by technology-based competition as one would have guessed. There are very few PayPals out there. Banking and financial services have high barriers to entry and customers have historically been slow to change their relationships with these institutions. Regulation helps.
What has changed?
Firstly, we’ve changed. We don’t trust ‘the system’ as much as we used to. In the 2017 Edelman Trust barometer study, Ireland ranked near the bottom in terms of our trust in institutions. The financial crisis eroded trust in the established banking and financial services players.
Put simply, we have trust issues.
Secondly, we’ve entered a new era in information and communications technology driven by mobile ubiquity, cloud computing, social business, big data analytics and global connectivity.
Thirdly, regulation is changing to support an increasingly digital and networked society. These three factors together are democratising financial services and enabling new players – both established technology companies and start-ups – to enter the banking and financial services markets and challenge the status quo. Banking and financial services firms have no choice but to innovate, and innovate faster, to maintain their competitiveness.
3 things to watch
Recently, the Irish Centre for Cloud Computing and Commerce (IC4) and Dublin City University (DCU) Business School launched a new Finance Innovation Group and hosted the first in a series of free public symposiums on financial innovation. Speakers from Fintech Ireland, Accenture, Deloitte, Fidelity Investments, Coalface, Ostia Solutions, IC4, Mason Hayes & Curran, European Capital Markets Cooperative Research Centre (ECMCRC), Orca Money and IBM discussed various topics on fintech, but here are a couple of things to watch:
1. Regulatory change is coming to payments in the EU and it will change everything
The EU Payment Services Directive 2 (PSD2) comes into full effect in 2018 and will regulate new forms of payment institutions, introduce new interaction models and mandate the opening of banks’ APIs to third parties. As Accenture’s Killian Barry illustrated, it will disrupt the payment sector dramatically and will open the gates of the banking fortresses to tech giants such as Google and Apple as well as innovators such as Stripe.
2. Blockchain is a slow train coming but it’s going to arrive
According to PwC, more than 77pc of financial services will adopt blockchain as part of an in-production system or process by 2020. According to Cillian Leonowicz, of Deloitte’s new EMEA Financial Services Blockchain Lab, blockchain has the potential to transform four key areas in financial services, namely: know your customer and anti-money laundering, settlement, voting, and corporation actions. As a result, blockchain will disrupt key processes in financial services worldwide, such as custody and trust administration services.
3. High-frequency trading is going to get faster and smarter
Dr Eleonora Monaco of the ECMCRC discussed the future of high-frequency trading (HFT). Popularised by Michael Lewis’s book, Flash Boys, and the associated film, The Big Short, HFT is a type of algorithmic financial trading at very high speeds. The consensus was that HFT is still going to seek to exploit higher network and computation performance, but a significant emphasis will move to seeking competitive advantage through artificial intelligence.
The symposium at DCU ended with a panel discussion, and what became quickly apparent is that there is an amazing opportunity for Ireland in fintech.
Firstly, we have a critical mass of global ICT and financial services leaders based in Ireland. Brexit is an opportunity and not a threat for fintech, allowing us to build on our existing industry base and EU participation to exploit the opportunities of PSD2.
Secondly, Ireland has the support ecosystem, including graduates and workers, for many of the capabilities needed for success in the fintech sector – analytics, customer experience, digital marketing and ICT infrastructure, to name but a few.
Thirdly, we have indigenous role models and centres of competence. Philip Berber (CyBerCorp), Colm Lyon (Realex, Fire) and, more recently, the Collisons (Stripe) are just a few of the entrepreneurs who have experienced international success in fintech. Others have gone before and even more are coming to us. International centres of fintech excellence are basing themselves here for a reason. Deloitte’s Blockchain Lab and Citi’s RIDL Centre are just two examples of multinationals recognising the potential of Ireland as a geographically advantageous and knowledge-rich country staging financial innovation.
Finally, we have a healthy and growing fintech start-up sector. Fintech is a large, growing and –most importantly – addressable market. Irish start-ups are well positioned across the sector to not only disrupt incumbents, but to help banks and financial services innovate and compete.
More than a billion dollars has been invested in fintech start-ups in the last 24 months, according to McKinsey. There is no reason why Irish start-ups shouldn’t get a better share of future funding.
Ireland has all the pieces of the fintech jigsaw. There are exciting times ahead.
Prof Theo Lynn is the lead principal investigator and Dr Pierangelo Rosati is a postdoctoral researcher at the Irish Centre for Cloud Computing and Commerce (IC4) at Dublin City University. IC4 is a multi-institutional, industry-led research centre. Dr Rosati’s research focuses on organisational competences in accounting, finance and data analysis in the cloud.