Recent years have seen a dramatic increase in fintech investment and fintech startups all around the world. The disruptive impact of fintech has been felt across a wide range of industries in B2B, B2C and C2C, tremendously changing the way financial services operate as well as customer expectations.
This June, Professor Hui CHEN from MIT Sloan School of Management delivered a course on Financial Innovation for the Fudan International MBA students of Class of 2022. This is one of the two electives provided by MIT Sloan this year for the Fudan IMBA students, representing a whole new level of collaboration between the two leading business schools. In 1996, the Fudan International MBA Program was launched through the collaboration between Fudan University School of Management and MIT Sloan School of Management. During the past 26 years, the close cooperation is embodied in the curriculum development, action learning projects, second degree, faculty training and alumni networks.
Through the course, Professor CHEN guided the students to understand the technology and the economic forces behind fintech innovations, and more importantly, to examine the vital roles that modern analytical tools are playing in these innovations, as well as their limitations. Now that the course is over, we invited Professor CHEN and our IMBA students to share their views on fintech innovation.
Professor CHEN expected this course to help open up the black boxes in the fintech field for the students, in hope that they can be more confident in taking part in this fintech revolution.
This course has been very popular among the Fudan IMBA students. Graduated with a master degree from Tsinghua University, the former senior decision analyst of Discovery Financial Services, Qiuhui TONG found all the four topics in this course rather engaging. As a cofounder of a consulting company, the IMBA student Jian ZHUANG had been paying much attention to the fintech startups in China, and he showed great interest to the fintech innovations happening in the U.S. Different from most of her classmates, Jialin CHEN used to be a scientific researcher in the pharmaceutical industry. She was drawn to this course of fintech innovation simply because the topics are too far away from her field of work, and she wanted to fill up her blind spots. To her surprise, she soon discovered that many principles of financial technology innovation are totally in accordance with those of biostatistics and clinical medicine.
Professor CHEN was on the Fudan campus when he gave a lecture to the IMBA students in 2019. Although he misses the in-person interactions back then, he is very happy to see the active discussions with the students. “This time I got to know the students better by delivering the course over a month. I found that they are incredibly inquisitive and interactive, both during the lectures and over discussions in the breakout rooms. That's something I didn't get to experience two years ago, when I only gave a lecture on a single day.”
Potentials of Blockchain, Smart Contracts and Machine Learning
When asked which fields of fintech innovation he personally cares about most, Professor CHEN expressed his excitement in technologies concerning blockchain and smart contracts. “That they may help establish a decentralized consensus, automate execution of contracts, and preserve the integrity of the system, is very exciting. We can potentially build on that to come up with a wide range of applications. I think we are only seeing a tip of the iceberg concerning what we can do with these technologies and how much they can change the economy and the society. And that’s something I'm very, very excited to find out.”
Previously worked in China Construction Bank, Fudan IMBA student Xiao LIU told us she gained a deeper insight of the financial industry through this elective, especially when the professor mentioned innovations closely connected to her former work experience. She really appreciates how much Professor CHEN has changed the way they see the financial industry.
Financial machine learning is another field that Professor CHEN cares about a lot. He has been researching the intersection of finance and machine learning. “These machine learning tools have shown great potential in changing the ways we do finance and economics – by that I don't just mean in terms of helping us predict credit default or stock returns better. What hasn't been exploited enough is people's incentives, the information constraints, their objectives, and their strategic interactions – these are what we have spent decades studying in economics and finance. I think economics actually has a lot of helpful things to say about how we build our machine learning models. For example, when we build a predictive machine learning model in finance, the prediction is only a means to an end – it will be eventually used to aid our economic decision-making. The objective of the economic problem should teach us something about the trade-offs that the machine learning model will be making. That’s why I'm quite excited to see how these two fields will interact in a way that makes machine learning tools serve the economics and the finance industry more effectively.”
The Dark Side of the Fintech
Speaking of the cryptocurrencies being mostly used for speculation and even criminal transactions, Professor CHEN pointed out that the main reason behind this phenomenon is the lack of scalability for it to be used as a means of payment. “The significant energy consumption of crypto mining, limited bandwidth for processing transactions, and huge price volatility, are hampering the ability of cryptocurrencies to be taken seriously as a means of payment. But like any innovation, I think it's clear that crypto is really in its infancy and has its positives and negative sides.” Professor CHEN hopes that regulators will stay open-minded and not stifle innovation at such an early stage.
Professor CHEN also believes it’s necessary to emphasize that blockchain technology and smart contracts are separate entities from the Bitcoin application of the blockchain technology: while the former two have huge potential of doing something really good for the society, regulators are rightfully alarmed with the illegal usage of the latter.
With previous work experience as a senior associate in PricewaterhouseCoopers Zhong Tian LLP, Chenyi ZHAO chose this course because she had been increasingly curious about crypto currencies like Bitcoin, DOGE, SHIB, etc. and she wanted to learn more about this craze from a professional angle. She told us the professor shared much insight towards the development of fintech not only in global market, but also in China. “China have this DCEP (Digital Currency Electronic Payment), which is the Chinese version of the central bank digital currency (or CBDC). Many other countries are trying to do the same thing as well. Obviously, these CBDCs can potentially replace, or at least largely complement with the existing payment system; and they will not be subject to the same concerns about the lack of monitoring of illegal activities. That could be a version of the future we'll be looking at.”
For Professor CHEN, there are controversial issues in other fields of fintech innovation as well, for example, in big data and machine learning based credit scoring. “Concerns come partly from the transparency and fairness of the algorithm. When we train these models based on big data and make very meaningful decisions with them, we need to be very mindful of the explicit and implicit biases. They typically are inherited from the data that we feed into the model, they can also be built in to fit the objectives we give to these models – this bias actually is something that, I would argue, we have limited understanding of right now. Since these algorithms may be used to make critical and consequential decisions for someone’s life, like whether to allow some small business owner to borrow money and keep their businesses afloat. If we don't understand the biases built into these algorithms and the unintended long-term consequences, that's clearly not an ideal situation. I think there is a lot of work to do there.”
Professor CHEN believes it's important to understand the fragilities of the fintech solutions. He reminded the Fudan IMBA students during the course that, the most dangerous thing is not so much about we don’t know what the models are capable of. Rather, it’s the false sense of confidence in the data, the model, or the technology. He took the example of credit scoring again. “People can adapt to the algorithms in credit card default prediction and respond in a strategic way, which could be quite dangerous from the business application perspective. So understanding the vulnerability of our technological solutions is also something pretty important.”
The Fudan IMBA students have benefitted significantly from these insights shared by Professor CHEN. Xiao LIU has learned more about the underlying logic and models of her previous daily work. “These are the foundation for anyone engaged in this highly innovative fintech industry,” she said. Qiuhui TONG said, “Professor CHEN’s course has provided new perspectives for me on so many issues, especially on data-driven financial decision making and risk management.” Jian ZHUANG believes he has gained more understanding of the credit scoring algorithms for the enterprises.
Next Generation of Cryptography Techniques
When asked about his opinion on whether the development of quantum computing will shake the foundation of crypto currency, Professor CHEN said that since quantum computing is a technology that is even earlier in the stage of development comparing to the blockchain technology, it is difficult for us to speculate what it is fully capable of. “Based on my reading of the literature,” he adds, “I think we definitely can’t dismiss the possibility of quantum hacking.”
This was also one of the topics discussed during Professor CHEN’s course with the Fudan IMBA students. While admitting that the pillar of the technology behind modern cryptography can fall apart, he pointed out that since this is a danger that the leading computer scientists and cryptographers of the world are well aware of, they have been working hard to develop the next generation of encryption techniques that would be “quantum-proof”. “We are not going to be sitting there and waiting for quantum hacking to become a real threat. I'm quite optimistic about that.”
At the end of the interview, Professor CHEN sent his sincere wishes for the Fudan IMBA students: “I want to thank all the students for being part of my class. I thoroughly enjoyed the last four weeks. I hope they can continue explore their interests and read more about the topics in the fintech area. I hope this course will plant the seed in their minds, which may help with their future careers and maybe even develop into their own fintech ventures.”
