February/March 2020

Understanding the growth in FinTech

In the next of a series of specialist speed lectures from the University of Salford’s Business School we are looking at the FinTech sector. As one of the recent strongest areas of UK growth, the sector has become synonymous with Manchester as a centre of excellence in the North West. We interviewed Dr Jia Zhai, Lecturer in Finance and Economics at Salford Business School, to find out more about the subject.

Please describe your role at the Business School and your areas of expertise?
“I am a lecturer in finance and economics, teaching both undergraduate and postgraduate courses across the areas of finance, financial mathematics and financial technology, and I am the course leader for the newly launched MSc programme in Financial Technology (FinTech).

“My research interests focus on ‘when technology meets finance’. I have published more than 10 research articles in internationally leading journals and have presented in top research conferences worldwide including EURO, AFA and INFORMS. This enables me to contribute to the UK research excellence framework (REF) which is the system for assessing the quality of research in UK higher education institutions.”

How do you define FinTech?
“It is a simple combination of finance and technology. It describes the innovation and technological transformation within the finance sector and illustrates the evolving interaction of technology and financial services. When FinTech is discussed most people think of startups created specifically to offer savings in financial services. However, FinTech is a broader term referring to all the players in the FinTech ecosystem, for example large well established financial institutions like Barclays, JP Morgan; big tech companies like Apple or Google; companies which use technology to provide or facilitate financial services like Mastercard and Ant Financial; large accounting firms like PWC, Deloitte, stock exchanges; and lastly companies focusing on innovative technologies – such as Atom Bank (digital banking)  or OakNorth (data and technology platform).

“FinTech influences the financial services industry in the same way Uber disrupted the taxi industry and Airbnb disrupted the hospitality industry. A multitude of technologies have the potential to transform the financial services industry in areas like the Internet, Cloud Computing, Big Data, Artificial Intelligence (AI), Biometrics, Social Media and Cryptocurrencies.

“The UK has always encouraged innovation, creating a surge of growth, and thereby increasing investment opportunities for not only local investors, but also international investors. This injection of finance aids the growth of FinTech companies, and Manchester is now recognised as the FinTech capital of the North West.”

How has technology impacted on traditional finance?
“Financial institutions not only have to compete with FinTech players, but also, and most importantly, put technology at the heart of their institution’s strategy. Historically home buyers, small business and investors went to a local bank to apply for a mortgage, credit or trading account. Technology is rapidly changing these behaviours by making it easier to save, borrow and invest online with a mobile device, without dealing with a broker or mortgage advisor face-to-face. Also, the use of digital currency has increased rapidly in the last 5-10 years, and the use of cash is declining.

“Digital currency, sometimes e-currency or e-money, represents electronically stored monetary value, or internet-based money, in terms of pounds, euros, dollars, etc, or a combination of these. E-money increasingly transforms the financial services industry and consumers’ behaviour. It offers convenience for consumers with increasing safeguards in terms of privacy and security.

“An area in which FinTech helps the economy is small businesses. They depend on banks to access money and capital to keep their business going. Small businesses though have suffered greatly during the recent financial crisis due to banks closing their doors to them. The diversity of small businesses is a particular problem for banks. For example, lending to a cleaning company is significantly different than lending to a beauty salon. Also, it is hard for banks to assess the relevant information for making lending decisions, especially if the business is very small. 

“Technology may now bring transformation to the banking system. Big data has the potential to overcome the problems by absorbing all kinds of new data and information when it comes to analysing small businesses, so making loans is thus much easier. The technology can pool the data together and process rapidly and efficiently, for instance pooling the data of thousands of cleaning companies, so it can quickly tell which cleaning businesses are good or bad risks. Banking can be transformed in an efficient and effective way, with proper changes.

“Since the financial crash in 2008 banks have been averse to offering loans to small businesses. However, they have a huge amount of data and information on their clients, and it is cost-effective for them to organise and assimilate it via buying in a suitable FinTech product to do so. For example, when a small business applies for a loan, determining the ability of pay-back is now not a problem, and they can further help them analyse their business, identify which product is right to fit their needs, for example reviewing the correct loan size and suitable repayment period. Through FinTech the relationship between banks and small businesses is changing in a positive way creating a better banking system.”

What do you feel are the main challenges facing FinTech companies looking to scale?
“When FinTech businesses develop significant technological capacity, they must be aware of the huge increase in R&D costs and investments. They need to keep operational costs low, but must maintain profitability whilst at the same time build reliable innovations. The biggest challenge would be sustainable growth. To solve it, they could employ a marketing model to push rapid adoption for new products and techs, ensuring technologies and developments are monetised in a timely manner. For a FinTech business, developing new tech and marketing it to the right group of customers must also be done at the right time as there always are conflicts between cutting edge tech and market acceptance. Finally, on the journey of scaling their business, an increasing problem that needs careful management is to extend the protection for data and copyright/intellectual property.”

How do FinTech start-ups achieve success?
“There are a number of key elements that are important to a successful and healthy FinTech business. Firstly, talent. The right people are crucial to create a successful FinTech business. Tech and finance experts need to be on board as well as entrepreneurs. The location of a start-up business should be dictated by a local pool of suitable talent.

“Second, wealth. How do FinTech start-ups get financed to gain traction and expand globally? Big companies often compete directly with each other to acquire pioneering technologies and develop the best in-house FinTech solutions. Banks and financial institutions are also seeing FinTech start-ups as potential enablers – they compete with each other to acquire the best ones.

“Third, need. What are the areas in traditional financial services that need addressing? FinTech companies need to solve this to give direction to their technological development.

“Fourth, community and network. FinTech businesses should embrace more collaboration rather than competition. Collaboration is a vital driving force for growth. FinTech startups, regulators, e-commerce, investors, financial institutions (banks and insurance giants), academic partners and government agencies should come together to exchange views and ideas. Manchester holds science and social science research festivals annually and brings together different players in the FinTech community for collaborative exchanges.

“Fifth, supervision and regulation. Regulation is key to getting things correct. The FinTech sector is a complex and fragmented regulatory landscape. Agile regulatory technologies will help firms and also governments to better manage their compliance risks. Regulators need to strike a balance between encouraging the growth of FinTech and allowing innovation to flourish, while also ensuring financial stability. However, the two sides of this issue should be opposed. There is a need for a broader risk framework, incorporating all players handling customer data. It is important to have a blend of different talents and skills at the regulator, combining regulatory and technical knowledge, in order to properly examine innovation issues. Not simply to stop bad things happening but not stopping good things from happening. This works best by applying appropriate legislation from the beginning.”

Are there differences in FinTech sectors across Global regions?
“In the UK and Europe, there is less focus on payments and increased focus on insurance technology and robot-advisory services, while Asia-Pacific is still leveraging payment and alternative lending solutions. Corporate investment plays a greater role for many FinTech entrepreneurs in the Asia-Pacific region compared to the UK and Europe, and FinTech development across Europe, the US and Asia exhibit various different trends.

“In Europe FinTech is often about optimising the banking system with technological transformation. In Asia it’s about reinventing banking to include the ‘unbanked’ and moving towards cashless societies. Europe and the UK tend to have uniform regulations. The UK government has led the way with progressive policy, citing the Financial Conduct Authority’s (FCA) Project Innovate and regulatory ‘sandbox’, and the Bank of England’s FinTech accelerator, as examples of this. Asian countries tend to have separate independent rules and supervision suiting their various demands.”

How does Salford Business School collaborate within the FinTech sector?
“At Salford Business School we strongly encourage collaboration with local business. Research contribution should not be limited to publications and conference presentations, it is more about transferring research outcomes to practical uses. We have good practices in our school, such as promoting technology applications in educational institutions and local SMEs, and provide various services to many FinTech start-ups and established companies. Some of the projects are funded by research grants in the UK through Knowledge Transfer Partnerships (KTPs).”

What do you offer your students looking to become part of the growing Manchester FinTech community?
“Our new MSc Financial Technology degree programme addresses the knowledge gap created by the pace of technological transformation in financial services and markets; it has been designed to meet the latest employment needs in the FinTech industry. Experts working in the sector have helped shape the programme to ensure it is relevant and up-to-date, and it is taught at degree level at our Salford campus close to Manchester city centre.

“The course is multidisciplinary, using industry-specific business cases from our contacts in the FinTech sector to blend the relevant hard and soft knowledge and skills. While the programme focuses on the technical innovations in finance, our students also gain insight into how marketing, regulation, economic policy and financial governance contribute to give an essential range of knowledge supporting the programme.

“Greater Manchester is an ideal place to study Financial Technology; as the Northern FinTech Capital, the region has strengths across FinTech sub-sectors, including data analytics and cyber security for example. FinTech companies form an integral part of the supply chain to a number of financial services companies and many banks and financial services firms have FinTech departments based here, drawing on local expertise and supply chains. With constant investment in the FinTech future, these companies offer our students access to wide range of live projects, networking and, ultimately, employment opportunities.”

Find out more about your opportunities to work with Salford Business School. Please contact Dr Francine Morris, Associate Dean on 0161 295 2386, or email F.Morris@salford.ac.uk