Commentaries and insightful analyses on the world of finance, technology and IT.

« January 2016 | Main | April 2016 »

March 30, 2016

David Fintechs vs. Goliath Banks

-by Kiran Kalmadi and Durga Prasad Balmuri

How many of us know that 'Minions' which released in 2015 is a prequel to the 'Despicable Me' which released in 2010? Likewise, how many of us know that this blog "David Fintechs Vs Goliath Banks" is a prequel to the blog Robo-advisers: Terminator or Transformer? We are just not stopping here, and likewise the trend of sequels, we have our sequels lined up too. Keep watching this space for more!

It's a battle out there. The financial services industry is witnessing an on-going battle between David fintechs and Goliath banks. Fintechs are building new business models and generating new revenue opportunities by leveraging technology, thereby compelling banks to rethink their business models. Mobility, big data, cloud, personalization, convenience, security, etc., are just some of the weapons in the fintech armory that are giving them the competitive advantage. And that is why banks are getting restless and anxious to compete across various business segments; be it lending, payments, or wealth management. To add to the woes of banks, fintechs are simultaneously investing in many other areas including - but not limited to - credit scoring, personal financial management, biometrics, risk solutions, etc., and the list only keeps growing with every passing day.

Does this signify the end of the road for Goliath banks? After all, these institutions face many challenges, such as regulatory restraints, dismal innovation culture, long development cycles, legacy problems, etc. Thankfully, all is not lost. To stay relevant and competent, banks must leverage cutting-edge technologies to innovate and meet the never-ending, constantly changing demands of the customer, in addition to reducing costs and improving effectiveness - all of which fintech firms are already doing at a faster clip, thanks to their nimbleness.

In fact, many of the traditional banks are taking concerted efforts to take on the competition from fintechs through a collaborative route. They are increasingly investing in start-ups (for instance, Goldman Sachs invested in the likes of Square, Circle, Motif Investing, Bluefin, and many more), setting up innovation labs (UBS, Citigroup, Commonwealth Bank, etc.), launching start-up accelerator programs (Barclays, Nordea Bank, Wells Fargo, etc.), and organizing competitions (American Express, RBS, etc.). Banks have woken up to the fact that they need to innovate and respond as fast as fintechs do. Bill Gates in the '90s said, "We need banking, but we don't need banks anymore." If the Goliath Banks do not take the challenges posed by the David fintech firms seriously, Bill Gates' words could become prophetic in the years to come.

March 14, 2016

Quantum computing - Enabling a quantum leap in financial technology

by Mayur Bansal and Sweenie Dabas

"There are only 10 to the 80th power atoms in the universe and a quantum computer can cycle through 10 to the 154th power potential answers to a problem." This statement from Vern Brownell, CEO of D-Wave Systems, the world's earliest quantum computing firm shows the immense potential of a quantum computer. D-Wave provided a glimpse of this huge power in 2013 when its quantum computer outperformed a conventional high-end desktop computer by performing a complex calculation 3600 times faster. This capability has wide ranging implications - not the least in financial services wherein it can be used for portfolio optimization, Monte Carlo simulation, fraud / risk analytics, exploiting minute differences in market prices and pricing of complex derivative structures.

So what makes quantum computers the superheroes in the world of ordinary computers? Quantum computers work on the principles of quantum physics and quantum mechanics (laws that govern the realm of sub-atomic particles) as opposed to the familiar physics that governs "conventional" computers. Simply put, present-day processors store bits of information in one state (0 or 1) at a time. Quantum computers, on the other hand, process information as 'qubits' (quantum bits) that can be a 0, 1 or both 0 and 1 at the same time. This enables them to assess an exponentially larger number of combinations in parallel and compute much faster than what is possible with the current computer hardware capabilities. This ability had made cryptography as one of the key application areas for quantum computing. However, anything that requires large amount of data analysis is a potential use case - simulation of natural scenarios, machine learning algorithms, and search engine optimization.

Leading financial firms have been exploring this potential for some time. Goldman Sachs has been an investor in D-Wave Systems for long. In fact, CEO of D-Wave, Vern Brownell, is a former CTO of Goldman Sachs. Apart from D-Wave, 1QBit Information Technologies, a Canadian software firm has CME Group as an investor and is working with a few financial institutions such as Royal Bank of Scotland for developing software for quantum computers. And recently, quantum computing is gaining more traction. A quantum computing-based fintech startup, QxBranch, was launched in Hong Kong in 2014 and is working with global investment banks and hedge funds. In last December, Commonwealth Bank of Australia pledged an additional AU$10 million in funding to support University of NSW's research effort to build the first silicon-based quantum computer. Another research effort led by Guggenheim and Morgan Stanley demonstrated utility of quantum computers to produce an optimized portfolio with the best risk-adjusted return.

For all the interest and investment it has generated, the technology remains extremely complicated and very expensive, its actual power remains debatable and it will take some time to go mainstream. However, with some of the biggest names - from Microsoft, Google, IBM, Intel to Amazon and Alibaba to NASA and NSA - leading the research efforts, quantum computing is all set to revolutionize the world of information technology.

Now it's only a question of when and how.