The financial industry is facing massive disruption from fintech—an emerging industry that uses innovative technology to revolutionize and enhance traditional financial services. As fintech rethinks everything from lending processes to currency itself, what will the future look like?
USC Marshall and the Institute for Outlier Research in Business (iORB) are already delving into that question.
An Aug. 8 Fintech Conference brought together Marshall faculty and Ph.D. candidates and industry executives to explore what’s happening in this space, what challenges are arising, and, key to a business school, where research should be heading at this critical time.
Fintech as a topic generated so much enthusiasm that academic leaders and industry executives were able to bring the half-day conference together rapidly.
The idea came up in conversations between Marshall Dean and iORB Director Gareth James and K.Y. Cheng, chairman of Lexant Advisors, a corporate finance advisory firm providing M&A and capital-raising advisory services to banks and fintech firms. Lexant Advisors and global consulting firm Berkeley Research Group (BRG) signed on as corporate organizers, along with academic organizers James and Professor of Finance and Business Economics Gerard Hoberg.
Dean James, who is also E. Morgan Stanley Chair in Business Administration and professor of data sciences and operations, has been iORB director since the institute was launched in 2016. “One of our goals with that institute was to motivate and incentivize our faculty to participate in what we call outlier research,” he said. “Outlier research is research that’s risky. It may well not pay off, but if it does work out, it has the potential for a very high impact on society.”
“Outlier research is research that’s risky. It may well not pay off, but if it does work out, it has the potential for a very high impact on society.” —Interim Dean Gareth James
Hoberg explained the vision behind the conference. “We are outstanding at selecting projects that can be published, have impact and move the dial,” Hoberg said of the Marshall faculty, who rank fifth in research productivity worldwide. “With events like this, we can actually move fast to some of the most important research questions.
“The finance industry is one of oldest and most established, profitable and influential in the world, and it’s going through massive disruption,” Hoberg said. “To be in this room and hear about this environment will actually put us in position to do things that are cutting edge, to be there first.”
Participating companies included startups, fast-growing firms and firms with novel data they are willing to share with researchers from all Marshall disciplines. A powerhouse group of scholars from Marshall was in attendance as well.
The conference covered a great deal of ground, including security, privacy, cryptocurrency and AI, among other topics.
Disrupting and Rethinking
BRG’s Walt Mix started the day’s presentations with a talk emphasizing the importance of strategy and risk management for firms in the financial services sector. “This is a huge, huge opportunity for banks to enter the space,” he said, “and to create consortia, to share info, to share data analytics across the platform.”
Upstart Finance, founded by Jeff Keltner and other ex-Googlers, is a major disruptor in fintech, proposing to redefine what it means to be credit worthy.
“We saw a very large opportunity in the credit market,” Keltner said. “We did a study with TransUnion that said that of people who had taken out personal credit obligations, about 83 percent have never defaulted. Yet only about 45 percent of the American population actually has access to bank-loan credit.”
His startup, he said, aims to “enable effortless credit based on true risk.” Whereas banks use a limited number of variables such as FICO scores and income, Upstart uses 2,000 data points, including such factors as education, to assess the credit-worthiness of customers seeking a loan.
Spring Labs’ Daniel Mason talked about how his company is rethinking how data is transferred in the financial services sector. Spring Labs provides decentralized infrastructure for credit and identity data.
“Now is a really interesting time in this whole space,” said Mason, spotlighting the availability of technology, major security concerns (the Equifax hack, the Cambridge Analytica scandal) and consumer privacy legislation. Spring Labs’ solutions include “re-architecting how security works in this space and designing systems that are security first” and “building economic incentives to sharing of data.”
“Within the next three to five years, 82 percent of the 5,500 [regional] banks will have to do some kind of strategic alliance with the fintech companies.”
Juan Suarez of Coinbase shared opportunities and challenges arising with cryptocurrency and directions for future research. A panel provided an in-depth look at the use of artificial intelligence and machine learning models for security services and dispute technology.
Cheng, a former banker with Wells Fargo and East West Bank, tied everything together in his discussion of the convergence of banks and fintech. According to a report from the Independent Community Banks Association published at the end of last year, he said, “within the next three to five years, 82 percent of the 5,500 [regional] banks will have to do some kind of strategic alliance with the fintech companies.”
“Most of the regional banks right now are challenged by one very key ratio: loan to deposit. A lot of banks are running at close to 100 percent loan to deposit, and that is not a good sign,” Cheng said. “If they can use a fintech platform to expand their lending opportunities, where for the credit risk they rely on AI and machine learning to do the processing, fintech lenders can grow by leaps and bounds, but the banks can also enjoy the deposit opportunity and other collateral business.”
A final roundtable brought together Hoberg, Cheng and Mix with Noor Menai, CTBC Bank president and CEO, Fred V. Keenan Chair in Finance and Professor of Finance and Business Economics Larry Harris, McAlister Associate Professor in Business Administration and Professor of Data Sciences and Operations Jinchi Lv and Associate Professor of Finance and Business Economics Rodney Ramcharan. Many questions were raised.
Harris, a former SEC chief economist, encouraged researchers to think about ideas first and then figure out how to find the data. “We know that we’re moving from a manual world into an electronic world, yet there are certain problems that are going to be there no matter what,” Harris said, enumerating issues such as national infrastructure security.
“The research question is: Given the existence of these problems, how do we see the translation of the solution from a manual system to an electronic system?” he said. “Any one of the these problems could be the source of five different dissertations.”