With developments in technology, regulation and the market moving at an unprecedented pace, predicting fintech trends is a daunting task. Few, for example, predicted the sheer extent of the growth of Bitcoin in 2017.
Nevertheless, here are our top five predictions for fintech in 2018.
1. Open Banking to drive innovation
Following the arrival of the Second Payment Services Directive (PSD2) in Europe, open banking was introduced to the UK in January 2018. If you are wondering what this is all about, please see our ‘Guide to Open Banking’. While some banks have been reluctant to adopt and implement open banking initiatives, we expect open banking to have a significant impact on the financial sector in 2018.
Open banking creates a number of exciting opportunities for fintech companies, which we anticipate will create a wave of third party providers offering application programming interface (API) services. Similarly, large ‘non-banking’ businesses, such as Facebook, Amazon, Google and Apple may look to expand their services in this area and create alternative payment methods and banking products, which in turn will create greater competition in the finance sector.
2. Distributed ledger technology to infiltrate the mainstream
Blockchain, smart contracts and cryptocurrency were certainly some of the big buzzwords of 2017 and we expect 2018 will be no different. You can see our introductory articles on blockchain and smart contracts for an explanation of these technologies.
Blockchain will continue its boom in 2018 as companies and individuals take advantage of the benefits by using the technology for new purposes and to solve more complicated problems long after the crypto bubble has burst. As market interest in the technology grows and consumers gain a better understanding of the technology, so will its perceived value increase.
Following the Australian Stock Exchange’s adoption of blockchain, we expect the use of distributed ledger technology to continue to infiltrate the mainstream and be adopted by companies as a key strategy, especially in respect of security and cybercrime threats. We expect that the blockchain-as-a-service industry will also see a lot of expansion and therefore providers and offerings should become less generic.
3. Regulatory divergence
As popular interest in cryptocurrencies, initial coin offerings (ICOs) and crowdfunding increases, so too will it draw the attention of regulators. In 2017 we have already seen very different regulatory approaches to certain areas of fintech, such as ICOs and cryptocurrencies, with some national regulators (such as in Japan) appearing to embrace these technologies at the same time as other regulators (such as in China) crack down.
As regulators worldwide gradually understand the technology and the risks involved, there is likely to be (in the short term at least) further regulatory divergence between different nations. ICOs in particular will become more strictly regulated in order to reduce the risk of these technologies being used for scams or reckless projects (see our 'Guide to initial coin offerings').
The sudden closure of BitConnect amid claims that it was a Ponzi Scheme is a very recent example of the considerable risks of investing in this technology. In September, the FCA released a warning notice on the risks associated with investing in ICOs and it is widely anticipated that the FCA will look to more closely regulate this in the year ahead.
One area we hope to see more clarity in is cryptocurrency financial promotions aimed at the general public (i.e. unsophisticated investors). We wonder if a crackdown somewhere might cause a panic among investors, leading to the equivalent of a ‘run on the banks’ and the prompt end to the cryptocurrency bubble.
4. Improvements to security systems
Developments in fintech have given rise to an increased concern about cybercrime and in 2018 there will no doubt be a renewed focus by many companies on security. Security remains a concern for many businesses and the chances of a cyberattack in which money or sensitive consumer data is stolen seems highly likely – for example, the $64 million hack on the bitcoin mining marketplace NiceHash in December 2017. Improvements to access and security systems are likely to be dominant areas of investment for both start-ups and large institutions which, in turn, is likely to create big business for security tech companies.
5. Increased investment in Artificial Intelligence
With many institutions and companies starting to make use of Artificial Intelligence (AI) in 2017, we expect that investment in AI will increase in 2018 as businesses look to implement AI solutions to reduce costs and overheads. Investment in AI by financial institutions will become increasingly important for delivering innovative and competitive services. However, how these services will play out in practice and whether they will benefit or harm such institutions is yet to be seen (see the HBR’s article for an interesting look at active vs. passive AI in practice).
As more and more consumers embrace and migrate over to digital banking, face-to-face communications will become less important for consumers. With the ability for third parties to act as APIs for open banking in 2018, banks may seek to collaborate with companies such as Google and Amazon to take advantage of their existing AI and voice-enabled assistants to develop user interfaces for transferring money and managing transactions.
We shall wait to see how our predictions for 2018 unfold. 2018 at the very least is set to be another interesting year for fintech. Be sure to keep an eye on our blog for further fintech trends and updates in 2018.
This article was written by Stephen Stringer.