ICOs and cryptocurrencies had a bigger than expected role in FinTech and alternative finance in 2017. We haven’t yet seen a big disruption in the finance ecosystem and value chains as a whole, but the technology and components to create one are a reality. What can we expect in FinTech in 2018? Do we finally see cryptocurrencies finding real uses? Will we get rid of banks, distribute finance data, and see data replacing form-filling in lending processes?
Here are my five main predictions for FinTech in 2018.
1. Tech companies will really begin their attack on finance in the B2C and B2B frontiers
Traditional finance companies have significant challenges to adapt to FinTech. As examples in other industries demonstrate – such as retail, e-commerce and media – software and tech companies are in a strong position to challenge the incumbent players. Tech companies can design new services for customer needs from scratch and they have better competence to utilize the latest technologies. This offensive will happen on many frontiers, from simple consumer services like payments and money transfers to core back-office and transaction handling services. And this will be done by a number of companies, from plentiful startups to a few tech giants. Companies like Google, Oracle, Microsoft and Amazon will bring their own consumer and back-office services to the market, and also acquire startups.
2. Distributed ledger and finance solutions will start to come to the mainstream, but (proof of work) blockchain will see real competition from other distributed solutions
Distributed solutions will become important – not only for Bitcoin and other cryptocurrencies, but also for many other finance solutions to handle smart agreements, authorize transactions and store data. But there will be a race regarding which kinds of technologies will be used for these purposes. Most probably it will be different solutions for different situations – cryptocurrencies have their own needs, but the amount of data is very limited; data management solutions with a lot of data need more effective storage solutions and high capacity payment solutions of their own. 2018 will provide more ideas about which solutions are going to dominate and where.
3. Data, data analytics and AI will be the big change-makers in finance services
Almost everything that is being called ‘AI’ in marketing presentations and business plans is not really AI, but some kind of use of data and data analytics. Anyway, data is starting to play a very central role in finance services. It really is the component to enable more automation and better decisions. Lending and debt markets are areas where data and analytics (and eventually proper AI) can make a big difference. Lending is one of the most significant businesses in finance, and it is still very old fashioned in areas such as loan application processes, decision-making and secondary markets. This will change – and when it does, it will change the whole market.
4. The ICO boom will calm down, but tokenization will spread to more established asset classes
People must start to investigate tokens and underlining assets or services behind ICOs more. Perhaps right now it is exciting to participate in an ICO, but it is not enough in the long run. Projects, services, and startups are currently very difficult ‘asset classes’ to invest in. We can assume we’ll see more tokenization of other assets, like real estate, loans and later-phase companies. Those assets have much more data and transparency to the actual investments, and they will become much more prominent in the market.
5, The value of Bitcoin and other leading cryptocurrencies will remain volatile and unpredictable
Bitcoin and some other leading cryptocurrencies will stay in the headlines. But please be very skeptical of people that claim they know something about the future value of them. Typically in investments, you can select one of two strategies: (1) luck, and (2) build a well-diversified portfolio. This applies also for cryptocurrencies. If you choose Strategy 1, then timing is everything. With Strategy 2, cryptocurrencies are only a part of your total portfolio, and depending on your risk assessment, you adjust the size of that part. Empirical finance research backs a diversified portfolio theory.
Timing is often the most difficult to predict with new emerging technologies and businesses. This is certainly true of FinTech. I believe all of the things described above will happen. But it is hard to say how much will happen in 2018. In any case, I would assume we will see changes. The emergence of FinTech will accelerate in 2018. All companies really must build their positions to prepare for the big FinTech race.