Summit – Fintech is the future of finance

Words by PETER GLENN
illustrations by MARK HOFFMANN

A styleized letter FFinance is in flux and that’s a good thing, according to MRU alumnus Stephen Preston. Fintech, the merging of technology with financial services, is turning tradition on its head and opening a new world of opportunity — and challenges.

“What’s particularly exciting about fintech is that it’s disrupting the traditional financial services industry with startups that give people access to more choices when it comes to how they spend, save and invest their money,” says Preston, who graduated from Mount Royal University in 2013 with a Bachelor of Business Administration — General Management and a concentration in finance. Since then, the entrepreneur and alternative investor has spearheaded multiple startups and international real estate projects. In 2016, he co-founded Exempt Edge Inc., a division of the Olympia Financial Group. They create software for private capital markets, which provide investment opportunities in innovative companies that are not large enough to be traded publicly.

“Embracing technology and becoming a rapid innovator is no longer a ‘nice to have’ for businesses operating in the financial services industry. While it may have been a significant competitive advantage in the past, it is now mandatory and companies that aren’t rapidly innovating through technology will ultimately become obsolete,” Preston says.

As millennials progress in their careers and start to generate wealth, Preston says they are demanding more choice, transparency and DIY solutions when it comes to their finances.

“Accessing our money, budgeting and investing on smartphones is the norm. There are so many opportunities for companies and entrepreneurs that understand and embrace these trends,” he says, citing blockchain (cryptocurrencies), open banking and artificial intelligence. “The emergence and adoption of new technology will continue to completely change the Canadian financial services landscape.”

While much of the change has a smaller, startup feel, larger organizations and corporations are also shifting into these spaces — including giants like Apple, Google and Amazon, as well as banks and established investment firms.

Business schools are also responding. The University of Lethbridge is using a $10-million donation from Calgary real estate entrepreneur Bob Dhillon to reshape its business school with a focus on fintech, including blockchain and cryptocurrencies.

Preston believes Mount Royal is also on the right track in terms of preparing finance students for this new world.

“I am a big believer in the Canadian entrepreneur and it is institutions like Mount Royal with their forward thinking that play such a vital role in preparing students for the future. The small classroom sizes made it easy to communicate deeply with my profs and my classmates and the experience was invaluable in setting me up for my career,” he says.

Building trust

At the start of her Advanced Topics in Finance course, Mount Royal University associate business professor Cathy Roy-Heaton, a chartered financial analyst, writes a single word on the board: Noble.

She asks students to define the word: then they discuss the state of the industry they are studying.

“There’s certainly been a crisis of trust in finance since 2008/2009, and some of that lack of trust is deserved. There was a failure of ethics. I want students to understand that in their role as financial managers they are managing somebody else’s money. You are in a tremendous position of trust and you must enter the profession understanding that,” Roy-Heaton says.

The advanced course for students already well-versed in traditional areas of finance such as stocks and bonds, currencies, valuations and derivatives, delves into how technology is changing all of that — fast.

If the technological advances that contributed to the 2008/2009 financial crisis (think computer trading of derivatives) were a challenge then, the decade since has brought even more to grasp with fintech’s diverse collection of cryptocurrencies and programs for financial transactions and industry-specific middleware.

In the course’s Future of Finance module, Roy-Heaton looks at areas of fintech that touch on payment, security, lending, insurance, capital markets, financial services and more. Students tackle case studies ranging from the lending platforms Kabbage and Lending Loop to Bitcoin and other cryptocurrencies, as well as the blockchain that provides the backbone to cryptocurrencies and also enhances other forms of record-keeping.

While excited about their potential, Roy-Heaton says the speed at which fintech is evolving makes these disruptive technologies difficult to understand well enough to represent in a responsible way to clients.

“Every one of these things is trying to provide a solution or an alternative to the traditional way of thinking about delivering a financial service,” she says. “I kick off the course by talking about the future and talking about tech. The students are wondering about it. There’s a lot of media and information out there and it’s not always very clear what exactly the technologies are. When I teach it to our students, I want them to think of fintech as the impact of technology on finance. It is happening, and it’s going to continue to happen. It’s a matter of trying to understand where it is going.”

While banks, for example, have for decades moved money around the world and kept records electronically, they now are looking to the blockchain — a digital ledger in which transactions are recorded chronologically — as a simpler, faster way of maintaining client records and possibly more.

The Southern Alberta Institute of Technology in Calgary will join a small group of universities and colleges issuing credentials to graduating students on a secure blockchain key. The project is a partnership with On-Demand Education Marketplace built on the Ethereum blockchain.

“A lot of the genesis of fintech,” Roy-Heaton says, “is asking why can’t we do this better, faster, cheaper?”

An illustration of a bank vault cracked open. From the open vault there is a beam of light shining on a stylized person whose back is facing to the viewer.

What about bitcoin?

No aspect of fintech has captured the popular imagination as much as cryptocurrencies, particularly Bitcoin, even though many people barely understand what it is and how it works.

A digital currency that operates outside banks and central regulators, Bitcoin uses encryption to regulate the generation of units of currency and verify the transfer of funds.

According to Bitcoin.org, it’s the first decentralized peer-to-peer payment network powered by users with no central authority. Bitcoin uses the blockchain to allow a user’s computer to verify the validity of each transaction which is protected by digital signatures corresponding to the sending addresses. Anyone can process transactions using special hardware and earn a reward in Bitcoins. This is Bitcoin mining.

Now 10 years old, a kind of gold-rush mentality drove the price of a bitcoin through the roof in 2017. On Dec. 17 of that year it hit $19,783, but fell sharply and now sits at just above $5,000. Roy-Heaton was called on by Global News National around that time to explain Bitcoin and the mad rush to buy it, amidst a classic “fear of missing out” mentality.

“I shuddered in the fall (of 2017). The price of Bitcoin went crazy,” she recalls. “There were all these interviews with people on TV who had sold everything and gotten into the cryptocurrency craze and I would wonder, ‘Were they advised to do that? Did they consult anyone?’ It’s tragic in a way. It’s great if they make money, but they’re basically risking everything. You’re putting all your eggs in one basket and you don’t even know what that basket is.”

What Bitcoin doesn’t have is any intrinsic value, which sets it apart from, for example, a house that is a physical asset with an assessed value along with the property it sits on; a stock backstopped by the value of a company; or even a national currency backed in the past by gold and now by the economy and political structure of the issuing country.

“Nothing about Bitcoin fits into that,” says Roy-Heaton, who also points out that the total value of Bitcoin is small in terms of the overall GDP of Canada or the GDP of North America, which has also led to volatility in its value.

Security concerns

The blockchain is organized so that if more than half of the computers that are participating in the chain are not compromised, then the whole blockchain is safe. But is that enough to back something like Bitcoin?

While he sees a legitimate use for a currency that is anonymous (for those engaged in civil disobedience or in legal, but sensitive activities, for example), what concerns Charles Hepler, an associate professor in the Department of Mathematics and Computing at MRU is the challenge of keeping cryptocurrencies such as Bitcoin secure.

“Is their theory strong enough? I would say no, but the theory for how to break them I don’t think exists either,” says Hepler. “Is the implementation bulletproof? No, nothing is bulletproof,” he points out, not even online shopping. However, he says Bitcoin is probably as safe as anything in the short term.

But advances in computing will make that security even more challenging.

“There’s a pretty good chance that quantum computing will enable people to break the current implementation of all the cryptocurrencies, which would mean we’d need a new version of cryptocurrency. There will have to be time to transition because quantum computers aren’t mainstream yet and they’re not very big and they don’t work very well. They can’t solve big problems. But as those things come online, that will change the way we have to do security.”

Stylized illustration of mountains with a circuit pattern overlayed on them. Lightning strikes a cave entrance on one mountain while an illustrated person reachs into the mouth of a cave on the other mountain.

More energy than real mining

While its decentralized nature makes the energy used in Bitcoin mining hard to quantify, a large Bitcoin mining project near Medicine Hat that opened in September 2018 reportedly uses more electricity than the entire city of 60,000 people.

“In order to have it be secure, more than half of the computing power has to be onsite,” Hepler says. “So that means society has to put a bunch of money into hardware and computing power. I don’t know if that’s the smartest use of hardware and electricity.”

Addressing the counterfeiting problem in cryptocurrency and securing against digital disasters comes at a cost.

“The idea of having a distributed system where you keep track of important records seems very sensible to me,” Hepler says. “Distributed means it’s less vulnerable to local disasters. We do that by backing things up. When you put more work into it, it’s not as efficient, but you’re getting security for it.”

Ultimately, the weak link may not be the cryptocurrency itself. Like cybersecurity in general, it is individual computers and people using them that are vulnerable.

“There are lots of layers to the security side that make me say, ‘I just don’t trust that stuff.’ On the other hand I don’t know that it’s less trustworthy than regular money is.”

Other cryptocurrencies

Other cryptocurrencies are also growing and evolving. Ethereum, for example, is now 40 per cent owned by National Bank. Ripple has also made a splash, as it tries to sell itself as a “frictionless” alternative to the banks. Others include Litecoin, Dash, NEM, Monero and Zcash.

“A worldwide cryptocurrency has the potential to erase borders, at least as far as money goes, remove government control from the monetary system, possibly democratize wealth and create a more equitable distribution through secure and anonymous transactions,” says Alan Fedoruk, PhD, associate professor and chair of the Department of Mathematics and Computing. “Of course, this also has some pretty big downsides,” he says, pointing out the attraction of anonymous currencies to criminals.

“(As well) Bitcoin already has seen big players stepping in and trying to monopolize the system, which would keep the status quo of inequality rather than mitigate it.”

August institutions, including the Bank of Canada, are starting to research, experiment with and develop collaborations around cryptocurrencies, trying to understand better the benefits and risks. As reported in UToday (the University of Calgary’s online news source), during a speech, Bank of Canada deputy governor Timothy Lane said, “One of our priorities is to explore under what conditions, if any, we might recommend to the government that we issue our own digital currency.”

He added the bank has a team exploring digital currencies and looking at what other central banks are doing in this area around the world.

Stylized illustration of four people. Three are smaller and look inquisitively at the fourth, who is larger and differently coloured. This represents the AI among us.

AI is among us

Artificial intelligence (AI) has crept into our lives so stealthily — think Google Maps telling you where to drive and the rise of home devices such as Alexa, Google Home and Amazon Echo — that often we don’t even notice it. But AI is poised to become an even larger component of finance.

“Machine learning is the hot area of AI. New techniques, like deep learning, and exponential increases in our ability to collect, store, analyze and learn from massive data sets have set the stage for machine learning to be applied across human endeavours,” Fedoruk says.

Being data driven, he says, has huge opportunities for AI and machine learning.

“Our global financial system is so complex that humans really don’t have the capacity to understand it in its entirety. If we could, governments would have no trouble setting the economy to rights. But as our systems learn more and more, they can help us in ways that we have not yet considered. Fraud detection and sub-second trading are only the start. Maybe AI will be able to predict economic volatility so that it can be avoided or minimized.”

AI is already managing funds to get better returns. Wealthsimple is a robo-adviser geared to younger investors, while Man Group is a large asset management firm with a variety of funds that include an AI fund managed with algorithms.

“At some point there is some human interface, but it’s not the day-to-day management and there’s individual investors who are buying into this and it’s growing,” Roy-Heaton says. “I don’t see it replacing all asset managers by any stretch, but certainly there’s a market and a demand there by investors looking for a fund that operates on logic as opposed to human analysis and human assessment.”

In fact, another hot topic in finance these days is behavioural finance, where researchers look at how to remove biases and beliefs from investing, making managers more analytical and process oriented — some might say more like computers.

Computing business

Computer education and research, meanwhile, continue to find their way into business schools, and vice versa, part of a wider trend of meshing computer education with what it is used for.

“More and more, we are realizing that computing is done in a context,” Fedoruk says. “When I studied computer science in the 1980s, it was just that, computing, programming, theory, mathematics. Once I graduated and got a job, the first thing I had to do was learn about the business I found myself in.”

The Bachelor of Computer Information Systems (BCIS) program and the applied degree in computer information systems and business at Mount Royal offered before are ahead of the curve, Fedoruk says.

“Students gain strong technical knowledge and skills, but also a breadth and depth in business. There are great opportunities for the Bissett School of Business and the Faculty of Science and Technology to work together to provide skills in the data science arena, a natural enhancement to the BCIS.”

Fedoruk says that blockchain especially has the potential to be a game-changer when it comes to AI. His research area is in multi-agent systems (MAS), which are a collection of programs and agents that work together to solve problems. MAS research has proven to be fruitful with many applications, he says, but one of the main stumbling blocks is that, just as in larger human systems like finance, some form of central control is still needed.

“Blockchain provides the means to have trusted systems in place with no central control. This can change everything.”

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