THE INTERNET OF MONEY – A DIGITAL REVOLUTION IN FINANCE

By Nikhita Kalibhat

Edited by Prof. Madhu Veeraraghavan

Introduction

Finance has evolved from usuries to being executed through established banking systems. Over the years, innovation in this space has enabled financial integration, economic growth and risk-sharing by diversification. Businesses now function among sophisticated investors, suppliers and customers who are well-equipped with accurate, real-time information. Mobile commerce platforms and online credit evaluation systems have changed the way financial transactions are managed. Finance education now includes exposure to technology such as Bloomberg. Wall Street aspirants learn how to access timely, accurate and relevant information. This digital revolution calls for a collaboration among practitioners, researchers, technologists, educators, and students, for innovations that might change the way we make, spend and save money.

1. Practice of Finance

Businesses today are spread across geographies and transact with clients across regions in various currencies. Technology architecture is designed to mimic the company’s organization structure and accommodate accounting and legal norms across the world. Technology innovations that impact financial services attempt to fix the existing gaps in accessibility, regulations and customer experience. There are six facets of financial relevance that have attracted disruptive innovation in technology (“Future of Financial Services 2015” World Economic Forum, 2015):

1.1 Capital Raising

We live in the era of innovative ideas, growth and excellence – the era of start-ups. The number of opportunities for investors has seen a marked increase. Small enterprises and start-ups need an increased exposure and access to investors. Alternative investments markets, such as GREX in India, act as exchanges creating an ecosystem of market participants thus providing opportunities for investors and visibility and accessibility for the companies. Smart contracts are used to secure financial transaction made on virtual exchanges, making digital avenues for raising capital simple and attractive.

In 2003, Brian Camelio launched ArtistShare where struggling artists could raise funds for their performances and production of their albums. Since then, the crowdfunding trend has grown exponentially resulting in collaborated software applications and products in the field of real estate, food and medicine. Crowdfunding platforms such as Indiegogo and EquityNet have created a community of angel investors, venture capitalists and business supporters who view business plans and projects, and reach out to entrepreneurs.

Alternative investments such as hedge funds, pension funds and private equity funds are now gaining prominence. Due to the high failure rate of hedge funds, investors not only consider fund performance but also focus on operational effectiveness. Post 2008, operational due diligence has become a standardized process (“Operational Due Diligence 3.0” Castle Hall Alternatives, Oct 2015). The advent of technology services such as Report Central by Great Lakes Fund. Solutions has facilitated better verification and scrutiny.

1.2 Investment Management

Information influences investments. Reliability, accuracy, timely access to news and data is of great significance to investors. Social trading platforms such as FXJunction connect traders of all experience levels across the globe to discuss strategies, analyze past performance and follow their trades.

Financial management information systems such as Bloomberg provide access to real-time, accurate, global data across all asset classes. Bloomberg allows investors, analysts and researchers to access news, download financial data, implement algorithms, build a professional network and execute trading strategies.

Brokerage houses are now collaborating with technology providers to enable algorithmic trading. Exchanges across the globe are competing to provide faster trade processing, higher consistency and risk mitigation.

Today’s world of integrated business brings together people, data and process with the help of technology. Enterprise Resource Planning has resulted in a seamless transfer of data across the value chain of a business. Cloud computing has revolutionized the way data is stored, accessed and shared. Companies are now restructuring into networks completely integrated with technology with increased accessibility of information to investors, suppliers and customers (“The Impact of Cloud” The Economic Intelligence Unit, June 2014).

1.3 Payments

According to a McKinsey report in November, transaction revenues are expected to grow at a CAGR of 7% by 2019 (Bansal Sukriti, Bruno Phil, Hou Grace, Istace Florent, and Niederkorn Marc, “How the Payments Industry is Being Disrupted” McKinsey and Company, November 2015). We are already beginning to see digitization of transaction banking, efficient international payment systems and infrastructure upgrades in banks and payment systems. Digital wallets are quite popular on e-commerce websites; with a better system for user authentication, and internet connectivity, this service can soon reach local retail shops in rural India. Globally, sophisticated smart contracts and blockchain technologies provide authentication, compliance checks and storage of electronic money.

Today, we have 46 Bitcoin exchanges, with a volume for more than 180,000 BTC in 24 hours. Cryptocurrencies are encrypted digital currencies that can be used worldwide, cannot be misused, does not need a bank account and can be traded on a virtual exchange (Greenberg Andy, “Crypto Currency” Forbes, April 2011). There is some ambiguity in the worth and validity of these currencies. Unfortunately, there is no way to monitor what is being purchased with these cryptocurrencies. This advancement calls for regulation by governments and central banks.

1.4 Insurance

A report by Bloomberg Intelligence states that auto, home and health insurance companies are heavily investing in Internet of Things (IoT) devices. Insurers are establishing strategic partnerships to develop home smart devices such as Nest,fitness trackers such as FitBit, smart glasses and vehicle crash avoidance systems (Greenough John, “From fitness trackers to drones, how the Internet of Things is transforming the insurance industry” Business Insider, July 2015). IoT is expected to disrupt the traditional insurance model to keep insurers and customers constantly connected.

The AirBnBs and Ubers of the world are creating grey areas for insurers –can they cover private property being used for commercial purposes? Insurance companies are forming alliances with sharing economy companies to develop solutions such as pooled insurance premiums.

1.5 Deposits and Lending

The most popular technology innovation is peer-to-peer lending platforms that bring borrowers and lenders together. In an exclusive report on online marketplace lending, PwC has stated that this industry could reach $150 billion by 2025 (“Peer Pressure” Pricewaterhouse Cooper, February 2015). US lending platforms have grown at 84% over the last 10 years and have ventured into other asset classes. These platforms cater to banks, institutional investors and individual investors pairing borrowers with interested lenders. There have been significant advances in the technology used on P2P lending platforms for underwriting and credit modelling. Online lending marketplaces such as Lendbox in India, are achieving a turnaround time of 2-5 days for loan applications, making them an attractive choice for borrowers and lenders.

2 Study of Finance

      Education was text-book based up until the early 90s. Since then, we have seen a gradual increase in the involvement of technology in learning. In finance education, we have transitioned from teaching portfolio theory to actually constructing mock portfolios, generating efficient frontiers and managing virtual investments. Top schools around the world are increasingly focussing on making their students industry ready. This involves a significant investment in infrastructure to procure licenses for software tools and building state of the art trading labs.

2.1 Financial Literacy

Financial education is now a necessity not just for investors but for any individual. Financial markets are becoming more aggressive and sophisticated. It has now become essential for every individual to learn how to manage wealth, choose interest rates for bank loans, select mutual funds and pension funds, weigh market risk and invest through the right financial instruments (“The Importance of Financial Education” Organization for Economic Co-operation and Development, July 2006).

Governments, banks and exchanges across nations are setting up websites, apps and portals to gain information on the basics of capital markets , credit and borrowing, personal finance and budgeting. Hands on Banking, a website sponsored by Wells Fargo Bank, offers online courses on financial management. JumpStart, a non-profit organization in Washington, has an online library to educate children on the importance of financial management right from pre-school through college. ClearPoint Credit Counseling Solutions has been providing their customers with online advice on debt, housing and budgeting for over 50 years. Financial literacy is aimed at achieving higher and sophisticated market participation in the coming years.

2.2 Pedagogy for Finance Education

Top schools around the world are increasingly using technology to explain finance concepts. Live market data, financial statements, economics data and historical performance data is being downloaded through various sources and used in classroom learning as well as in assignments.

Financial econometrics and portfolio management is taught exclusively on software tools such as Stata, EViews, R and Microsoft Excel. What used to take hours to calculate a few decades ago, can be displayed on-screen in almost no time. Normalized graphs, efficient frontiers, box plots, candle charts and Bollinger bands can be generated on various tools using real-time and historical data. This makes for an engaging classroom environment.

Among all the software tools and websites designed for finance education, Bloomberg and Thomson Reuters are the leading financial information management systems. Bloomberg provides real-time and historical data, news, in-built complex calculators and tools for analysis, communication network with industry experts and simulation trade execution. It becomes the perfect learning platform for aspiring analysts to pick and review stocks, create portfolios, manage risk and monitor market events.

2.3 Finance at TAPMI

The Bloomberg Championship Program at TAPMI is aimed at integrating Finance curriculum with Bloomberg through classroom teaching, assignments projects and simulation games. Almost 60-80% of the finance courses at TAPMI use Bloomberg to support course content. All Finance majors in the institute are Bloomberg certified and trained on various functionalities on Bloomberg Equity, Commodities, Foreign Exchange and Fixed Income. The Banking and Financial Services (BKFS) students undergo a special primer course dedicated to learning on Bloomberg. Students of finance at TAPMI are encouraged to use Bloomberg data for sector analysis, peer evaluation, technical analysis and portfolio management.

TAPMI Finance Lab is the largest Bloomberg lab in India with 16 terminals. The lab is home to the Finance Forum’s flagship event “Finomenal” – an annual finance conclave, TAPMI Bloomberg Olympiad – a battle among Bloomberg Champions on use and application of Bloomberg, and Samnidhy – a student managed investment fund consisting of more than 60 analysts investing in the equity market. TAPMI also runs a special course for a select group of high-performing students called the Student Managed Investment Course (SMIC). This 4 credit course requires students to form investment teams and manage real money in real markets. Bloomberg is extensively used for analysis, tracking market events and portfolio management.

TAPMI is innovating every day to achieve a complete integration of Finance with technology. Students’ familiarity with the functionalities and application of Bloomberg makes TAPMI the preferred destination for recruitment in the finance industry.
The continuously innovating world of technology is disrupting traditional finance practices. Banks, financial institutions, exchanges, regulators and businesses are evolving rapidly. The flow of information is becoming seamless and otherwise distinct functionalities are being integrated. Finance is indeed undergoing a revolution, backed by education, technology, policy and creativity.