If one is looking for a hot asset class, few can match fintech, a class of companies and services that is disrupting traditional finance. One of the close observers of the fintech revolution is Will Cong, who teaches finance and management in the SC Johnson College of Business at Cornell University.

What impact has fintech had on traditional finance thus far?

Payment innovations is probably the most disruptive force fintech has. Alipay, WeChat Pay, QR code payment and facial recognition payments have taken over the consumption scene in China, both online and offline. Related to payment innovations, cryptocurrencies have not only become their own asset class, they have also challenged fiat money and central banks. Central banks in Canada, China, Singapore, etc. have all taken measures to develop their own digital currencies and introduce regulatory sandboxes. The banking and loan industry is also disrupted in the sense that not only are there marketplace lending platforms that potentially attract customers away from traditional banks, but peer-to-peer lending and crowdfunding increasingly utilize alternative data such as pictures, texts and mobile footprints to develop better algorithms for lending and funding decisions.

There is also increasing applications of AI and machine learning tools in the investment industry. Some help generate superior fund performance, some help with investment customization and automation. Finally, fintech enables inclusive finance that traditional finance lacks. The introduction of low-cost ETFs as opposed to mutual funds is one example. Trading apps such as Robinhood and various robo-advising startups enable retail investors to access a larger set of investable assets with low costs. Startups such as Findora build digital infrastructure that allows the traditionally excluded groups to access financial services with lower costs.

What are some of the financials that underscore the growth of fintech?

The total amount of venture investments and coin offerings is a good indicator of how investors, either centralized or decentralized, either institutional or retail-oriented, view fintech startups; the user base for fintech platforms offer another good indicator of economic activities because these platforms typically entail network externality (my benefit on the platform increases when there are more users on the platform); one can also use textual analysis on news and patent filings to identify the most important topics in fintech, this also gives a metric on how fintech has quickly become the center of innovation.

Have traditional financial companies developed their own fintech products?

Yes. Examples include J.P. Morgan’s machine learning research group and Goldman Sachs’ Marcus lending project. That being said, traditional tech firms such as Alibaba, JD.com and Facebook have played a more active role in responding to innovations and startups in the fintech space compared with traditional financial service providers. They are not pure-play fintech companies either. Pure-play fintech companies can utilize tools such as token offerings for financing, and can build upon existing platforms such as Ethereum. But they also face tremendous disadvantages when it comes to customer acquisition. There is fierce competition in the fintech space and customers rely on the network effect and the service provider’s reputation. In this sense, traditional financial service providers do have an advantage. But many are too entrenched with a comfortable market power to innovate at the same pace.

Is regulation a threat?

Regulation is difficult and needs to be carefully done. The SEC uses rather coarse categorization of cryptocurrencies.  In several studies I show that tokens really have finer classifications based on the nature of their usage and the source of valuation. How they should be regulated also depends on whether the tokens are issued on pre-launching and post-launching a platform, etc. China’s regulation on peer-to-peer lending and cryptocurrency has abrupt swings that would not be healthy for the industry’s long-term development either. Regulators would benefit from working with experts toward an adaptive policy.

That said, regulation is not a threat, but a necessity. In a study on crypto exchanges, my co-authors and I show that statistical and behavioral tools can be used to detect fake trading. We find unregulated exchanges systematically fake transaction volume for over 70 percent of the total volume on average, amounting to over $1 trillion per month. Regulated exchanges are much more compliant, without these manipulations that distort prices and reduce the efficiency of financial markets.

What innovations are coming?

Decentralized finance (DeFi) applications enable anyone with an internet connection to gain access to basic financial services. Blockchain protocols and secure multi-party computation would all help DeFi revolutionize finance. Another wave that’s coming is the application of AI and big data. Finally, digital platforms such as Amazon.com, JD.com and Alibaba will continue fintech innovations.