Fintech includes four areas, all of which are changing the financial industry in different ways.

These include peer-to-peer financing, robo-advising or systematic asset management, decentralized finance and machine learning and artificial intelligence, said Campbell Harvey, professor of finance at Duke University’s Fuqua School of Business, during a panel at the Northern Finance Association’s conference in Vancouver in September.

Systematic asset management is using advanced algorithms to drive the investments of large portfolios, he said. “And indeed, I believe it will be a large shakeout in the investment management industry because the barriers to entry are enormous right now for the systematic asset management. You need a team that’s expert on machine learning. You need a room of [graphics processing units]. You need expensive data. And many of these firms that exist today just can’t compete, so they will be absorbed by the larger firms.”

Of the various forms of fintech, Harvey said decentralized finance will be the most important.

“One could envision decentralized finance impacting the financial world the same way that open-source software has changed software products. This includes basically the world of blockchain, which is a pretty substantial innovation, and transaction costs effectively go very low — close to zero.”

This is simple technology, yet it’s very powerful and holds the possibility of transforming almost everything in finance, he noted. “Think of anything: any stock, bond, option. . . . Any asset can be tokenized. The exchanges are decentralized. One of the hot areas is so-called DEX — decentralized exchanges. All of the research that we’ve done on all of the issues in terms of market micro-structure, well, there’s going to be a new wave of research dealing with these decentralized environments.”

As an example, Harvey referred to private equity and how it can be democratized through tokenization.

As fintech and machine learning grows, it’s also important to be cautious, he said. “We don’t want to be in a world [where] there’s some data and we just let the machine deal with it. Basically, even with k-fold validation there [can] be overfitting.”

So it’s important to look inside the black box, said Harvey.

And finance researchers can use their economic knowledge to guide their empirical research. “Part of what we do that makes us special, I think, is that we’ve got economic foundations and many [other] fields don’t have the sort of foundations that we have, where we can look at some output of some model and know that it doesn’t make any sense because [it’s not consistent with our economic theory].”

Two paradigms exist in fintech: a traditional and a transformational paradigm, said Michael King, an associate professor and the Lansdowne Chair in Finance at the University of Victoria, who also sat on the panel.

“The traditional paradigm is simply taking the financial services and finding a better, cheaper, easier way to deliver [them] in the same way that it was done before, such as providing a loan to a customer or providing wealth management advice to a customer digitally rather than through a person,” he said. “And there’s nothing particularly new or exciting about this. It’s just more cost-effective and you can have a better platform and they can have a better experience.”

What’s novel about the traditional paradigm is that retail customers can now access what was once only available to institutional customers, noted King.

There’s also a transformation underway, where fintech companies are looking to replace the traditional financial intermediaries by re-imagining the whole customer experience, he added.

Some big technology companies are moving in this direction, such as Amazon.com Inc., Apple Inc., Facebook Inc. and Google, said King, which are moving into financial services through payments, lending, wealth management and insurance.

“And in this world, [in] the future, maybe 10 years away, we’re not going to be talking about banks and insurance companies and pension funds. . . . We’re not going to think about them because we’re going to have it on our phone and we’re going to be worried about travel, savings and retirement.”