The Future For Big Data In FinTech Is Bright
BIG data and financial technology (FinTech) are innovative sectors which are evolving at a rapid pace. Both financial services companies and governments understand the importance of data and the need to upgrade in order to remain competitive and remain efficient.
However, some market participants feel the terms “big data” and “FinTech” are too ambiguous or complex and more clarity is needed.
The power of big data in the investment sphere
Data is fast becoming a necessity in financial services. Every transaction made in a bank is a vital nugget of data - information which must be recorded or captured for legal purposes. Goldman Sachs Asset Managements’ Steve Waxman, Portfolio Manager, Global Fixed Income and Larry Tankel, Portfolio Manager, Fundamental Equity give insight into the importance of data and its origins. The managers explain from an investment perspective big data can provide a competitive edge for companies and comment on how big data influences opportunities in the tech sector
Steve Waxman says historically airlines were the early adopters when it came to using big data. They used it to optimize revenues through targeted pricing, which is gaining traction across the transportation industry as a whole. Larry Tankel explains within the technology sector, vast amounts of infrastructure, computing power and storage are necessary to capture and process big data.
How can big data help companies reduce costs?
Steve Waxman makes another valid point - the use of big data may lower costs for companies by creating efficiency gains, particularly in the energy and utilities sectors. He cites the example of US shale oil producers which are using technology to record well data from every hole made in the ground, which could help refine processes, reduce drilling times and lower costs.
Waxman highlights, “Utilities are increasingly deploying ‘smart meters’ that amass data on energy usage and could soon help curb outages and smooth demand periods. In the renewables space, European wind farms are eyeing big data for efficiencies in operation and maintenance, such as anticipating supply and preempting necessary repairs.”
Regulatory complexity and evolving data analytics.
Over the years the changes in financial technology and the necessity to upgrade technology has coincided with the increase in regulations. The regulations in financial services are endless. In Europe there is collective investments in transferable securities (UCITS) markets in financial instruments directive (MiFID) alternative investment fund managers directive (AIFMD) and capital requirements directive (CRD).
The importance of updating IT systems and recording data.
There are a number of other regulations such as Solvency II, SOX and Basel III all of which require improved control over spreadsheets. Data protection is a growing area with IT and procurement professionals playing a major role in flagging any issues which may mean upgrading systems and meeting legislation requirements.
If investment banks do not adhere to regulations they risk being heavily fined. There have been numerous cases over the years. For example one fund management group was fined and the head fund manager fired for using manual systems such as Excel spreadsheets. The portfolio manager lost over 60% market value and this was not reflected in how the holdings were managed. The fund manager had failed to price positions at the correct value.
Regarding this particular case the compliance officer responded: ‘We were fined because of the high risks that the regulator had associated with us running $1 billion fund on Excel. The fund managers refused to use other tools because of the unique way that they modelled. Six months after the fine, they were still using Excel, and the threat of another much bigger fine forced them to use an automated product.’
Investment banks have strong compliance teams overseeing regulations and ensure guidelines are met. Banks have to hold huge amounts of data for anti-financial crime and regulatory reporting purposes. Due to the complex regulatory landscape and constant changes / upgrades - IT vendors will have to up the game and develop products to stay competitive.
How is FinTech shaping financial services?
PWC recently released the report: ‘Blurred Lines: How FinTech is Shaping Financial Services’, which found that 83% of respondents from traditional financial service firms believe part of their business is at risk of being lost to standalone FinTech companies, rising to 95% for banks.
The report highlights FinTech is gaining significant momentum and causing disruption to the traditional value chain. The “funding of FinTech start-ups more than doubled in 2015 reaching $12.2 billion, up from $5.6 billion in 2014.”
The PWC report highlights asset management and insurance firms are also on the FinTech disruption radar triggered by FinTech. It is already beginning to reshape the nature of lending and payment practices, a second wave of disruption is making inroads in the asset management and insurance sectors.
The survey states that “nearly half of insurers and asset and wealth managers consider their respective industries to be the most disrupted. When asked which part of the FS sector is the most likely to be disrupted by FinTech over the next 5 years, 74% of insurance companies identi ed their own industry, while only 26% of players from other sectors agreed; 51% of asset managers said their industry will be disrupted, while only 31% of other players agreed.”
It seems many financial services companies should be preparing [or embracing] FinTech disruption and big data.