Fintech Trends: The Year Ahead

Illustration of mobile money transfer from one person to another

As part of the Fintech at Cornell Initiative, scholars and practitioners regularly meet to discuss new and emerging topics in the field of financial technology–also known as “fintech.”

In one of the latest webinars, Fintech 2021: The Year Ahead, the conversation focused on the current and upcoming fintech trends and how the whole of Cornell SC Johnson College of Business is developing the next generation of leaders in this rapidly developing field.

Fintech trends: Three takeaways for 2021

1. Investments are driving change and competition.

Cumulative investments in fintech in 2020 are estimated to be more than $115 billion in the US alone, according to David Ehrich ’85 (CALS), who is the co-founder and executive director of the Alliance for Innovative Regulation (AIR), a nonprofit dedicated to modernizing the financial regulatory system.

Peter Balnaves, a lecturer of management at the Samuel Curtis Johnson Graduate School of Management and former fintech transformation executive, says these investments are not only a competitive threat to incumbents–such as investment banks, payment processors, and retail banks–but that they are also driving change.

New investments in fintech are “spurring incredible growth in new business models, new products, and new ways of doing business in finance,” says Balnaves, emphasizing that these investments are also leading to advancements in technologies, algorithms, and theories.

Micro-segmentation, or creating small, precise, targetable groups of customers, is one of many notable, emerging trends spurred by these innovations. It’s also an indicator that the fintech field is starting to mature, says Ehrich. “We’re actually seeing the proliferation of products to meet the custom needs of specific market segments like women, African Americans, LGBTQ consumers, or issue affinities like green finance.”

Fintechs are also seeking bank charters, an action that is necessary for “rebundling” or combining services under a single brand or as an integrated product. “Because fintech, which started off by disaggregating the consumer banking products, has discovered that there just isn’t enough margin in debit revenue, we will start to see them offering lending products and rebundling their value proposition,” Ehrich says.

2. Big data analytics will continue to fuel interdisciplinary fintech research.

New data-driven technologies continue to transform financial services. Industry leaders use more kinds of data more frequently to gather market insights and make informed predictions. Big data analytics is driving the future of financial services as well as the interdisciplinary research that serves as the industry’s foundation.

Big data and mathematical principles

For example, big data can be analyzed using mathematical principles that have stood the test of time—albeit in completely different contexts, according to Pamela Moulton, an associate professor of finance at the School of Hotel Administration (SHA). Moulton co-developed a new methodology that detects financial irregularities in big data sets.

“I was drawn to think about how big data could be used to detect fraud, because financial fraud is a significant cost in the hospitality industry,” says Moulton. “It’s estimated that a typical organization loses about 5 percent of its annual revenues each year to fraud.”

For many hospitality firms, she says, this percentage of loss could be the difference between survival and failure—especially for restaurants who operate at exceptionally thin margins.

This problem inspired Moulton and Fang Liu, assistant professor of finance at SHA, to reimagine how a 19th century mathematical principle known as Benford’s Law could be used with big data analytics to predict financial fraud.

Big data and human behavior

Big data analytics can also be analyzed with human behavior research to identify fraud in the marketplace, says William Cong, associate professor of finance and Rudd Family Professor of Management at Johnson, whose research focuses on fintech, economic data science, entrepreneurship, and applied economic theory.

In a recent study on cryptocurrency wash trading, he and his co-researchers determined that it is possible to identify a manipulated market by comparing regulated and unregulated transaction size distributions. The discrepancies between the distributions can be explained by what we know about human behavior.

They found that more than 70 percent of reported, unregulated cryptocurrency exchanges are likely to be faked, amounting to nearly $2 trillion per month.

3. Regulation will be a renewed focus.

Fintech finds itself at the intersection of technology, innovation, and regulation. “It makes for a very complex ecosystem and a very complex set of requirements on the products,” explains Ehrich.

Perhaps that’s why back office operations, such as compliance, are now starting to expand and even take on a formal name—regulatory technology, or regtech. This expansion, too, can be seen as a result of some of fintech’s recent interactions with regulators in Washington, D.C.

“Facebook’s proposed cryptocurrency Libra woke up the regulators pretty quickly when they realized that it could potentially displace the dollar,” explains Ehrich. “We learned then that the move fast and break things strategy of Silicon Valley just doesn’t really fly in Washington, D.C.”

Ehrich also predicts that the new administration leading the Federal Government will revive a focus on fintech regulation: “I think we’re going to see a renewed focus on regulatory objectives to achieve a fair financial system, improved consumer protection, enhanced financial inclusion—especially for gender parity and racial justice—and new strategies to address financial crime.”

Fintech at Cornell

The Fintech at Cornell Initiative is a collaborative effort between the Johnson Graduate School of Management, the Dyson School of Applied Economics and Management, and the School of Hotel Administration.

“The Fintech at Cornell Initiative is unique in that it serves as a fintech portal,” says Andrew Karolyi, deputy dean and dean of academic affairs at the SC Johnson College.

“It’s connecting engineers and computer scientists, business leaders, business economists,” Karolyi continues. “It particularly highlights the importance of tailoring technologies like blockchain for applications in finance, economics, operations, accounting, and other business-related fields.”

With the generous support of Moody’s, Fiserv, Tata Consultancy Services, and Broadridge Financial Solutions, the Cornell SC Johnson College of Business is able to develop the next generation of leaders in fintech.

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