Fintech – Son of Bitcoin

Toronto Skyline from Wards Island
Toronto Skyline from Wards Island

The promise of Financial Technology (Fintech) is to simplify the construction of financial services markets.  Using  Fintech for example would simplify the creation of services such peer to peer lenders, currency exchanges or stock trade clearing services.

In today’s world, all trades made on the Toronto Stock Exchange for example are cleared and settled by CDS Clearing and Depository Services on behalf of the brokerage. CDS is owned by the Toronto Stock Exchange. In the Fintech world, all trades are settled within a few minutes by a Fintech enabled clearing service.

An investor would  no longer have to wait three days to receive the proceeds of selling their security position.

Even if Fintech was implemented, the barriers to becoming a brokerage in Canada are high indeed.

  1. All brokerages operate under the regulations set by the Ontario Securities Commission as well as rules set by the brokerage industry and brokerage’s own house rules.

  2. All Canadian brokerages are owned by Canada’s deep pocketed chartered banks whose systems provide front end and backend brokerage services.

In highly regulated markets, participants live or die by proving to regulators that their business and logic in underlying IT systems is compliant with required regulations.

The follies of Fintech are many:

  1. There are no net new services provided by Fintech to the current market.

  2. The Fintech solution would require a massive integration into each participant’s financial management system.

  3. The proponents of Fintech assumed that the structure of the current financial services market would change to align itself
    with new software technology.

  4. The assumption that risk adverse financial institutions will ditch their
    existing and regulatory compliant software for Fintech.

  5. The current systems in place are reliable. Will Fintech achieve the same level of reliability?

  6. The technology challenges the regulatory environment

  7. Just because there is a new way of settling
    trades does not mean there will be new brokerage market participants who can
    easily vault over these two barriers to market entry.

  8. Changes in the regulatory environment can drive the need to change the technical landscape which could invalidate those systems which rely in FinTech
    system space with new requirements that can invalidate the technology.

  9. Finally, the issue of security has not been resolved. What is currently private information within a broker’s system is now to be exposed to the Internet. Can the $350 million theft of Bitcoins from the Mount Gox exchange be replicated in Fintech?  (hack hack).

Fintech was a non starter even before a single line of code was written.

Fintech may find a home in enabling markets for unregulated exchange of goods and services or as a way for a bank to construct an internal market for financial services.

Extra Reading

American Banker