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How will financial technology and regulation transform trading?

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There is little doubt that the financial sector has been one of the slowest when it comes to taking full advantage of technology. Of late, the sector has been embracing technology albeit still at a low pace. The good thing, however, according to PwC, is that by 2020, 28% of traditional banking and payments business will be going through fintech. Fintech is increasingly becoming critical in the financial world as it meshes financial services with technology including forex brokers, robo-advisors for investors and even Bitcoin. Still, if only 28% of all financial transactions will go to fintech by 2020, the rate is painstakingly low given the enormous benefits fintech comes with.

Regulators and fintech

In theory, regulators around the world define a level playing field for businesses where consumers get to enjoy a system that encourages innovation and stability. In today’s world, a theory doesn’t always reflect what is happening on the ground. It is extremely difficult to set a truly fair playing ground for all players as everyone wants their way to be favored.

Fintech companies have in recent past quickly moved on from just doing modest offerings in back-office operations and into areas such as investment, trading, and retail banking. This has in many respects been interpreted to mean they have become direct competitors in the industry. According to Reuters, this was partly due to regulatory void in which the fintech firms have been operating in until recently and also the lackluster innovative adaptability by traditional banks.

Change is in the air. Regulators must now decide what their goals are. A mainline ‘evolutionary’ approach would certainly mean fintech firms offering products and services that were traditionally perceived to be a preserve of traditional banks. But at the same time, Fintech companies must comply with laws which apply to traditional banks and also ensure customer protection regulations are followed to the letter, notes Reuters. On the other hand, a ‘revolutionary’ proposal which gives priority to innovation through Financial Services Innovation Offices that create a separate category for fintechs would help speed the flow of innovative financial technologies into the market.

Effect of government regulations on financial services

The regulations made and enforced by governments affect financial services in many different ways. Ideally, increased regulation translates to a higher workload for people in the financial services. This is because it usually takes time to adapt a business to new regulations.

In many cases, the increased workload and time that comes about because of more government regulation can be detrimental to the individual financial or credit services companies for some time. But, on the other hand, regulations can benefit financial services in the long-term.

Ways through which technology is transforming trading

Innovators are deploying highly focused products and services

Today, innovators are not trying to replicate a whole bank when they are designing a product or a service. They are aggressively targeting a specific section or intersection between areas of high frustration for customers and high profitability for the incumbents. This allows the innovators to get the best value for their innovativeness. A good example is the international transfers where people are nowadays paying a fraction of what they used to pay.

The technology people are automating and commoditizing high-margin processes

It is now common practice for innovators to use their technical skills to automate manual processes which are normally resource intensive for the established players. This lets them afford services to new customers the services that were presumed to be for the elite. Robo-advisors have, for example, automated full suite wealth management services and have consequently made the service affordable to millions of people.

Innovators are using data strategically

As people and their devices (smartphones, tablets, and laptops) become more interconnected, new streams of quality, real-time data are coming up. Innovators, on the other hand, are using that data to support financial decision-making for individuals and businesses.

They are not capital intensive and are platform based

There are countless companies today which are worth billions of dollars and they don’t have brick-and-mortar premises to boast of. Take Uber, Airbnb, Amazon, and Alibaba, for example. These companies use technology to connect millions of buyers and sellers and are able to grow revenues exponentially while keeping costs more or less very low. This strategy has been taken over by innovators in the financial services. Among the ones that have embraced this strategy include Lending Club and Prosper both of which are based in the U.S.

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