Olugbenga Omotosho

A report of the impact, challenges and risks posed by Fintech on HSBC Financial technology, or Fintech, is described as financial refers to financial revolution that is influenced by technological development in the form of modern financial services, introduction of software and application programs, and powerful business models that improves the existing framework of the financial industry. FinTechs offer similar services like banks but does it more effectively and seamlessly. Most fintech companies mostly collaborate with their clients through online platforms such as websites and mobile apps. The latest development in information technology supports the structure and modus operandi of these platforms. The pioneering technologies which contribute to the establishment of fintech services are big data analytics, Application Program Interfaces (APIs), aggregators, artificial intelligence, machine learning, cloud-computing, and distributed ledger innovation. Fintech has encouraged the emergence of new companies and also initiated the culmination of the operations of conventional banks and their services to clients as banks are now assimilating several digital platforms into the system in order to provide superlative user experience. The cumulative implementation of big data, investments dependent on algorithms, formation of risk-analysis methods, and channels that enable users to evaluate and improve their catalogue have transformed the finance industry. The introduction of blockchain technology is also a major breakthrough that has created more awareness for fintech through the creation of cryptocurrencies and reforms of traditional form of payment. The fintech industry has grown to become the backbone of digitization, commercialization, and non-recyclable incomes. In a narrow context, this article will address the benefits, risks and challenges observed in using Fintech with HSBC as a case study. HSBC is one of the world’s leading banks that continually responds to the technological revolutions which seems to have disrupt the traditional market through fintech. Although, there is a contradiction of this recent development because HSBC organized a survey across 11 key international markets to comprehend the level of peoples’ trust in application of technology for financial matters and transactions. The research indicated that the implementation of modern technologies is restrained by absence of trust and understanding. A particular result shows that only 8% of respondents trust artificial intelligence (AI). However, 65% of the respondents had a high level of positivity and confidence for modern technology. This level of trust gave a beacon of hope for HSBC retail banking as they continue to push and strive for improved banking. A recent McKinsey study shows that (“Cutting through the noise around financial technology”, February 2016) fintech companies have the prospects to generate a considerable share of revenues, reinforced by substantial capital investment, agile business methodologies needed for gaining clients, and advanced utilization of data. HSBC is gradually creating a high level of competition by integrating Fintech into their operations. For example, Connected Money app was released in 2018 to facilitate monitoring of expenditure and cost for its users. It displays the bank account of account holders including that of competitors such as Lloyds and Barclays. Another big move made by this global company, HSBC is the collaboration between HSBC and Tradeshift. This aims to integrate financing solutions into various supply chain channels that the customers can leverage on. This partnership fosters the relationship with online merchants, reduces paperwork, and increases time and account management. The last observation, which is not the least of HSBC technologies, is the collaboration between the company and a startup Fintech organization, Pariti. This development initiated the birth of Smartsave app in 2016 – FCA’s Regulatory Sandbox initiative was the propeller for this instinctive and intelligent app. This fintech service enables users to save spontaneously and round up savings to the nearest number while leveraging on the algorithm with which Pariti works. According to Peter Wong, deputy chairman and chief executive at HSBC Asia-Pacific, Fintech does not pose any form of risk to financial companies. He noted that utilization of fintech depicts development rather than restructuring of conventional banking methods. He further added that it complements and facilitates the process of allocating capital, hence, stressing the significance that Fintech depicts development rather than restructuring of conventional banking methods. However, this notion is probably wrong because two categories of risks associated with both the investor and entrepreneur have been identified. In addition, a recent speech delivered by Tao Zhang, IMF deputy managing director, at IMF Press Center clearly delineates the benefits and risks associated with the utilization of Fintech in the banking industry. He stated that Fintech is projected to increase competitiveness in the fiscal industry and also promote financial inclusion. This implies that single entities and industries would freely obtain vital and reasonably priced products and services that are offered in the most appropriate manner. He also noted that some stakeholders criticized Fintech because it involves some inevitable risks. The criticism is that monitoring is broadly restricted to operations within the regulatory border. There are other vulnerabilities such as risks associated with cyber security, transaction processing and clearance systems, inter-platform payments, the absence of safety measures in business models, misappropriation of individual data, and problem of user detection. The issue related to payments such as speed, obscurity of users, universal acceptance of cryptocurrencies such as bitcoin, can instigate money laundering, tax evasion, and the financial sponsoring of illicit operations. In order to evaluate the risks, we shall take a look at some Fintech services which HSBC utilizes but opens up the financial system to risks. In December 2018, HSBC UK launched a robo-advice online investment facility that offers personalized advice based on the financial needs of customers. Customers with the least investment fund of £1,000 are entitled to use the “My Investment” service on mobile app or website. Robo-advisors are one of the trending technologies in the financial industry. These consultants use computerized algorithms to provide suitable choices of investments in terms of diversification and asset distribution according to the data given by the customer. These picks usually comprise both exchange traded funds (ETFs) and low-cost mutual funds. Robo-advisors have their own advantages such as provision of real-time information and regular update, expertise advice, friendly user experience, reduced cost, rebalancing, and effective collaborations with humans. However, robo-advisors may not have sound knowledge of clients like human consultants who can interact through one-on-one conversation, custom-made questions, and intimate affairs. Robo-advisors uses a predictable and simple pattern to ask questions which may not reflect a broad analysis of a customer’s current expenditure or needs. This pattern presumes that a trend in risk profile would give analogous responses to similar independent questions, which might not be actually true. (Deutsche Bank 2017). A supplementary downside is that robo-advisors do not satisfy the requirement for a good relationship between a customer and an advisor. This is evident as these technologically induced consultants cannot provide an ideal solution during economic downturns and assist users to delineate and achieve their financial objectives. This is one of the many ways by which Fintech is causing inadvertent risk for HSBC. Another form of risk identified is operational risk. This involves fraudulent transactions, stealing of data, cyber-crimes such as hacking and other illegal operations. A good example of security issues militating against Fintech is the intrusion of blockchain technology. Blockchain is a decentralized financial technology that facilitates the transfer and circulation of crypto currencies such as Bitcoin, Ethereum and other types of crypto coins. Its operation is feasible through the use of Internet and it is similar to a distributed ledger. The decentralized cryptocurrency implies that it is not integrated with a central bank or system and it lasts long in usage. The ledger openly takes record of transactions and authorizes them incognito. There is no means for change of information once they are entered. Any information stored in blockchain is preserved for life and cannot be changed subsequently. This implies that transactions can be monitored with complete precision and security made possible with an in-built encryption. However, blockchain technology can be compromised if Cross-platform malware intrudes into the system. This is a computer virus that can be transferred from a business platform to another. It is gradually gaining ground, hence, needs to be confronted with the introduction of modern security measures. One major internet crime can be traced back to Mt.Gox which was the largest Bitcoin exchange in 2014. A hacker supposedly swooped a colossal sum of $473 million worth of Bitcoin after intruding its virtual vaults. Prior to this criminal act, 24000 customers have acquired 90% of the swooped currency. The Chief executive officer of Mt. Gox, after he was indicted for embezzlement, attributed the theft to inconspicuous vulnerabilities in the company’s framework. This scrupulous act caused an abrupt downfall of Bitcoin price coupled with financial loss experienced by the customers. Under operational risk, there is also a factor known as process control. This indicates that there are other bodies that render financial services but are restricted to lower administrative policies. This could be detrimental to the economic system as these bodies develop. Individual virtual currencies are feasibly active based on one condition that the incentive framework designed facilitates exchange in a situation where users have trust issues. Giant corporations such as HSBC are also facing challenges as a result of financial instabilities, known as currency risk, in the forex market. This issue may influence the results of transactions. Furthermore, the companies that collaborate with Fintech on cryptocurrency trading, exchange, and investment may encounter increased volatility rate of cryptocurrencies. There are three cases of financial implications which are disparity in maturity, liquidity, and leverage. Disparity in maturity takes place mostly in Fintech P2P lending. Usually, loans are prolonged and the maturity is activated, even though, other stakeholders may decide to trade their loans prior to maturity. Some platforms do include an option to sell out loans on fixed-term accounts. The unanswered question is, “how will business models survive and grow under a rapidly evolving industry?” Liquidity is the rate at which a security or asset is purchased or bought in the market at a basic price. Most Fintech loan firms do not keep customers’ funds. Fintech start-ups are exploring several technologies to compete in the provision of means of payments. Banks mostly consider the problem of coincidence of wants or absence of timeframe for both production and consumption. This is needed before providing channels of payment; hence, liquid bank deposits must be created. Bank deposits are important because they enable banks to generate illiquid loans under the circumstance of fractional reserve banking. A noteworthy implication of the Fintech competition as a payment channel is that banks could lower the sum of bank deposits and reimbursements of money to the economy. The prospect of this situation is determined by the elementary phase of credit offered by banks and the dominance of substitute lending platforms like stock markets and mutual funds. However, the possibility is dependent on the degree of acceptance of payment channels and how the banks respond to it. Payment platforms demand the cooperation of both customers and suppliers but this may clearly hamper the rate of endorsement and utilization of more superior technologies. Leverage is not usually related to Fintech operations but there are some instances where it could be observed. For instance, Fintech P2P lending or crowdfunding may borrow loan in a bid to fund bond holdings or issuance of equity. A fraction of Fintech credit firms participates in leverage especially when funding loans with their individual balance sheet. A major challenge for HSBC participation in Fintech, which cannot be overlooked, is its acceptance by regulatory bodies. This is because the regulatory system of the finance industry has been overcome and outperformed by fintech and online financial markets. This issue has prompted the various stakeholders to raise concerns about making a significant approach towards Fintech. EU designed a system to encourage “open banking” in 2018, by imposing banks to enable third parties to have access to clients’ information who permit it, but the implication of this can be observed in two aspects. The first effect is that it allows banks to poach their competitors’ customers, self-governing advisers and so on. The second effect, on the other hand, encourages stiff competition between banks adopting Fintech operations and Silicon Valley Conglomerates such as Amazon, Facebook, and other mega players in the technology industry. Apart from the risks that comes with the acceptance of Fintech in the banking sector, HSBC digital chief Raman Bhatia stated that the participation of the company’s retail banking in Fintech is increasing the pace for personalized banking experience such as application of big data, fingerprint, voice ID technology, and connection with devices like Alexa. It is obvious that these modern technologies are taking over the traditional means of banking which is process-oriented and has limited capability in taking leverage of modern technology due to its regulatory structure. New generation and challenger banks such as Starling and Monzo are enlightening bank users to expect more sophisticated banking apps. As a matter of fact, Fintech companies such as TransferWise is setting the pace as they introduce new banking methods into global money transfer. According to Mr. Raman Bhatia, HSBC has no choice than to meet up with the paradigm shift in order not to be left behind in financial evolution. The main observation from HSBC insiders shows that the risks involved in partnering with Fintech companies are inconsequential as the benefits outweighs them. Despite the risks outlined, HSBC believes that the Fintech market does not pose any risk but rather creates better opportunities for customers and if it does, they are prepared to combat any threat or block any loophole that the system may expose. Therefore, it can be inferred that the participation of HSBC in Fintech markets has improved or changed the status of HSBC which was formally criticized for being a crude, traditional bank. References Business Insider (2016). DeutscheBank’s FinTech strategy [online] Available at: http://uk.businessinsider.com/deutschebanks-fintech-strategy-2016-7 [Accessed 10 August 2019] Financial Stability Board, 2017, “Financial Stability Implications from FinTech”, June. Ferrari, R. (2016). FinTech Impact on Retail Banking - From a Universal Banking Model to Banking Verticalization. The FinTech Book, 248–252. doi: 10.1002/-.ch65 https://www.infosys.com/industries/financial-services/white-papers/Documents/fintech-revolution-banking.pd https://www.imf.org/en/News/Articles/2019/06/10/sp061019-balancing-fintech-opportunities-and-risks