Financial technology (Fintech) is used to describe new tech that seeks to improve and automate the delivery and use of financial services. At its core, fintech is utilized to help companies, business owners and consumers better manage their financial operations, processes, and lives by utilizing specialized software and algorithms that are used on computers and, increasingly, smartphones. Fintech, the word, is a combination of “financial technology”.
When fintech emerged in the 21st Century, the term was initially applied to the technology employed at the back-end systems of established financial institutions. Since then, however, there has been a shift to more consumer-oriented services and therefore a more consumer-oriented definition. Fintech now includes different sectors and industries such as education, retail banking, fundraising and nonprofit, and investment management to name a few.
A major part of 2020 was all about Covid-19 and how to tackle its growing menace. Almost all industrial sectors felt the pandemic’s impact. 2021 is here, but we are far from being safe from the clutches of the virus. Thankfully, many industries were swift to react to the changing dynamics and put effective measures to bounce back with enhanced resilience and fortitude. Fintech is one of these sectors that led the way in the adoption of pioneering technology to handle the challenge.
One good that came out of the pandemic, especially in the financial sector, was that it realized digital technology’s essence. Finance and technology have never been as synchronised as they are today. Be it the banking, cards or payments industry, all manner of financial institutions are acknowledging and embracing digital approaches to stay afloat and adapt.
In such a digitally active environment, the Fintech sector can look forward to many new ways and norms to rule the roost in 2021 and beyond. Here are a few of the top-slated ones expected to define the Fintech sector in the coming years.
1. Contactless payment is the new payment model
Taking a cue from the Covid-19 situation where social distancing was one way to avoid the virus, the banking and the payment sectors have geared up for Contactless Payments. The focus is on cashless payment. The industry is all set to integrate high-tech payments apps and systems to enable instant online payments vis-a-vis cash. Many companies are actively hiring dedicated web developers to integrate the digital payment system in their businesses.
As a result, one change that customers will notice in 2021 and beyond is how their banks and other financial institutions ease self-checkout facilities, ensuring smooth and instant payment. Many e-commerce stores, food integrators online, etc., stopped accepting cash payments and instead encouraged their customers to pay online during the Covid-19 situation last year. One great example of this is Amazon that came up with the ‘Go’ store that acted as the platform for online customers to pay for goods and services when the pandemic was at its peak.
Take the UK’s instance, where about 12% of the population, 6 million people, downloaded online banking apps for the first time in their lives during the lockdown. July 2020 saw as many as 1.5 billion transactions using debit cards which were 20.8% higher than the transaction value in June 2020.
Hence, one definite future of Fintech is cash payments becoming obsolete and digital payments becoming the new face of payments.
2. Embedded Finance will find many takers
Embedded Finance entails all banking services provided by non-bank companies. These services can incorporate transaction accounts, wallets, loans, and payments. Through Embedded Finance, companies aim to attract and retain customers, while providing them quicker, hassle-free financial services.
What is the role of Embedded Finance in FinTech?
FinTech is a comprehensive term that illustrates the integration of various physical and virtual technologies into financial services, for convenience and ease of delivery or service straight to the consumer. In recent years, payment services within the FinTech industry have attracted customers, companies, and investors alike, heralding the transition from traditional online bank transfer systems. It is estimated that in 2018 alone, the top 250 companies providing FinTech services managed to raise over $31.85 billion
Take the example of the biggies like Amazon and Uber. These are trendsetters in their core areas of operation and the way they have used embedded finance approaches to offer their customers delightful experiences are worth watching. From payments to loans, insurance to mortgages, companies today are offering embedded services, as if they can read the mind of their customers and offer them exactly what they need.
The embedded finance sector backed by the BaaS (Bank as a Service) system is set to cross $2 trillion in the next one decade – this is as per a report by 11:FS. The industry is growing phenomenally because of the impeccable customer experiences it offers. With many brands embracing the BaaS model, more and more brands are expected to leverage the model’s huge potential this year. Even traditional banks are now adopting the embedded finance cum BaaS model, setting expectations higher from the Fintech industry.
Generally, people consult financial planners and advisors for different investments and major financial decisions. However, financial advisors may offer biased or inaccurate advice and charge expensive consultation fees. Additionally, in today’s time and age, we prefer handling multiple tasks online. Hence, using robo-advisors for financial needs is also quite natural. Another group that can benefit from the advent of robo-advisors in fintech is the retirees from the generation of baby boomers. Compared to financial advisors, robo-advisors are inexpensive and more accurate in allocating assets, estate planning, and overall financial advice.
Robo-advisors help private investors in wealth management with the help of predefined algorithms and trends in the financial market. The utilization of robo-advisors in fintech is not a new phenomenon. Wealth managers have been using robo-advisors behind-the-scenes to gain additional information before offering their final recommendation to clients. As robo-advisors became more advanced, wealth managers were able to focus more on building client relationships and save time spent on data entry and investment management. Robo-advisors can be of three types:
Full-service robo-advisor: A full-service robo-advisor can help in all aspects of various investments. It can suggest an investment strategy, take over asset management, and rebalance investment structures. Half-service robo-advisor: A half-service robo-advisor can only suggest investment products to help in the development of investment strategies.
Self-service robo-advisor: A self-service robo-advisor only offers tips for financial investment to private investors.
Applications Of Robo-advisors In Fintech
- Customer Onboarding – Robo-advisors collect vital data such as personal information and investment goals through a detailed questionnaire to create a user portfolio.
- Asset Allocation – Robo-advisors utilize predefined algorithms to determine the type of asset allocation based on risk tolerance.
- Balance Projection – Robo-advisors in fin tech can estimate and predict how the portfolio balance of a customer would look like if they invest according to its strategies.
- Insurance – Robo-advisors can simplify insurance procedures like selecting insurance policies and processing insurance claims.
- Taxes – Robo-advisors can analyze personal income and the value of estate to suggest suitable investment strategies to reduce taxes.
- Retirement Planning – Robo-advisors can access user portfolios to get an accurate estimate of finances and suggest an approach to ensure maximum returns.
- Estate Planning – Robo-advisors can help i n developing wills, protecting assets, and planning for disabilities and terminal illnesses.
4. FinTech as an enabler for better financial services
IoT, AI, blockchain and cloud computing are some of the technologies driving change in how consumers interact with those they purchase from and how they manage their money. Although traditional financial services players may consider FinTech a disruptor of their industry, those that are embracing technology innovation are transforming the industry from the outside in, and succeeding in areas traditional players have failed in. FinTech companies are now leading the industry and are creating a wide range of new financial products and services, with the purpose of making money management easier and more effective.
Borrowing & lending money : Getting access to funds has become much more transparent and less centralised, and the traditional way of borrowing money from a bank via loans and mortgages is being joined by options like crowdfunding and peer-to-peer lending. These new, non-traditional methods of sharing money have allowed investors to flourish while giving those who may not qualify for a traditional loan access to the money they need through resources like Seedrs and others.
Financial markets : Originally built in a pre-digital world, financial markets are seeing a good deal of disruption and innovation. The use of artificial intelligence (AI) and machine learning is allowing algorithmic or automated trading in the stock exchanges. Prediction markets, like Augur, aggregate data through connections and network intelligence to predict possible future events. This new access gives individuals access to trading facilities that were once only available to corporate investors.
Asset management : Data processing and analysis tools and technologies have increased automation, specifically in asset rebalancing. Additionally, cloud-based, robo-advisory-enabled platforms are using algorithms to advise users about investment and asset management.
Regtech : With changes happening so fast, it is hard for many businesses to compete yet still remain within their industry’s regulatory frameworks. Using big data and machine-learning, regtech tools monitor transactions and identify outliers that may indicate fraudulent activity. By identifying potential threats in real time, risks are minimised, and data breaches can often be addressed or completely avoided.
Grandtech : While FinTech companies have long focused on Gen X and Millennials, some innovators in the market are creating protections to look after grandparents and great-grandparents who are considered financially vulnerable. Entrants like SilverBills in conjunction with Eversafe aim to make it easier to administer the fragmented process of managing senior citizens monthly bills. By linking all of the senior’s various financial accounts to the service, the app can learn their habits and send alerts when it spots something unusual, like 2:00 a.m. ATM visits.
5. Engaging Underserved Markets
In 2020, The World Bank has estimated there to be over 1.7 billion people in the world right now who aren’t part of the formal financial system. According to the same report, most of these people (60%) simply don’t have enough money for a bank account. Countries like Brazil, Peru, Colombia, and, especially, India are prime examples of these untapped markets.
According to reports from The Paypers, while 20% of India’s population remains unbanked, the country has embraced FinTech in recent years, with the emerging sector surging toward a $31 billion valuation in 2020. With a population of over 1.3 billion, it’s little surprise that outside investment is pouring into India. TechCrunch reports that the country has more than 100 million microfinance accounts, and a leading startup, Paytm, has over 300 million mobile wallet accounts.
The benefit for a startup entering a developing market is that it can operate with almost no competition and secure funding from investors to rapidly capture market share. Being the first service in a region could enable a new FinTech startup to quickly position itself as the preferred brand in the country.
After buying out the insurance firm, Raheja QBE, Paytm’s President, Amit Nayyar, explained that the company is “on a mission to drive the financial inclusion of over 500 million Indians, and our acquisition of Raheja QBE is a significant step towards this goal.”
6. Blockchain WIll Revolutionize FinTech
Blockchain is a powerful and secure technology that almost every industry wants to make use of, from banking and medicine to the government sector. The most desired domain of blockchain use is the banking sector because security is of utmost importance for the financial industry. For Fintech, Blockchain technology is set to change the way data is stored, managed and recovered. With its multidimensional uses, even traditional companies are trying to integrate Blockchain to ensure data integrity and engross advanced security measures. Since there is no need for a centralized authority, there is ample transparency and proper traceability. Data tampering, alteration and deletion, some of the major challenges of managing information daily are avoidable due to this technology’s invulnerable nature.
Although Blockchain does not exclusively concentrate on financial services, we’ll focus here on how fintech companies using this technology are enhancing their stack. Fintech is disrupting the financial industry by implying the integration of technological developments that change the way we approach ordinary processes. The speed and scale of this disturbance will depend mostly on users adopting this new economy. Fintech companies that are widely integrating blockchain technology into their work definitely have an advantage among their competitors.
Blockchain is a digital business transaction ledger that cannot be manipulated or altered. Digital currency markets have seen new emerging digital assets and trading platforms built on blockchain since the introduction of Bitcoin almost a decade ago. It is designed to record not only financial but all other activities with a set value. This technology enables the distribution and copying of digital data across different nodes. Any wrong change or modification will alter the hash connections, and it is easy to detect a failure. This is because of the complicated and intricate cryptography behind it. A decentralized peer-to-peer network with virtual currency sounds very appealing, especially now when cryptocurrency is being increasingly recognized as a useful asset.
Blockchain eliminates the inefficiencies that occur in the banking sector, mainly due to its complex network, and better satisfies the needs of modern corporate and private clients. It also improved by reducing fraud and cyber-attack rates in the financial sector, which are the issues that have been crumbling the system for years now. Blockchain assists in restraining data breaking and other comparable deceitful operations to enable fintech businesses to safely store and exchange data through a decentralized network, avoiding any potentially unpleasant situations.
Use Cases of Blockchain Technology in Fintech
The most popular domain of blockchain use is the Fintech sector because security is of utmost importance for the financial domain. Fintech surely relates to creating a seamless and comprehensive journey, which will also result in a reduction in costs and better user experience as opposed to the burden of bureaucracy that is still carried by traditional banks.
1. Payments, Especially Cross-Border Payments – Payments are the primary use case of any banking and financial system. In blockchain finance both central and commercial banks all over the world are now taking advantage of this new technology in terms of payment processing and potential issuing of their own digital currencies.
Blockchain has the capability of completely revolutionizing the current system of payments. The technology can make the payments processing more secure and also lowers down its cost.
2. Trade Finance – Blockchain also plays an important role in the trade finance sector, financial activities that are related to commerce and international trade (not stock exchange trading).The trade financing domain involves lots of wearisome paperwork and bureaucracy. Stock and share purchases have to pass through brokers, exchanges, clearing, and settlement. Each transaction is typically settled within three days. Yet transactions can be delayed when trading occurs over the weekends.
3. Digital Identity Verification – The number of fraudulent accounts has increased by 50 percent since the end of 2017, resulting in 900 million malicious transactions in the first quarter of 2018. Banks have to run rigorous KYC (Know Your Client) and AML (Anti-Money Laundering) checks on their new clients. These checks take 30 to 50 days to be completed, and thus can greatly delay a transaction.
4. Limiting the effects of cyber fraud – Financial markets such as stock exchanges, banks, and money transfer services are most vulnerable to fraudulent cases. The reason behind this is the use of a centralized database, which can be exploited to manipulate the whole database and steal important user’s data. Nowadays, Artificial Intelligence has also added to cyber security threats. And, once there is any access to a system, hackers can further get a key to yet another security breach, which leads to more security failure and loss.
5. Credit Reports for Businesses and Individuals – Blockchain finance can also help individuals and small businesses to quickly get loans based on their credit history. It may take a long time for lenders to review the borrower’s credit history. Traditional business credit reports provided by third-party credit bureaus are not available for small business owners. However, blockchain can provide tools that will allow borrowers to make their credit reports more accurate, transparent, and securely shareable.
6. Peer to Peer (P2P) Transfers – Sending money abroad involves high transaction fees from both individual consumers and small and medium-sized businesses. With P2P transfers, customers can transfer funds from their bank account or credit card to another person’s account via the Internet or mobile phone. The market is full of P2P transfer applications, but all of them have certain limitations. Besides, some of the P2P services charge large commissions for their services and are not secure enough to store sensitive data. In addition, cross-border transactions are often delayed.
The blockchain can efficiently resolve this problem, streamline remittances, and save costs during cross-border transactions.
While advancements in the area of FinTech have been happening at lightning speed, we have only just begun to scratch the surface of what is possible and likely to happen in the next few years. It is no exaggeration to say that FinTech is literally changing our lives and habits by making it easy to trade, bank, and exchange money without the need for physical human interaction.
However, the financial sector has a few challenges to overcome, especially in the regulatory and data protection space, to win consumer trust and for FinTech to truly overtake the market. With big data, blockchain, AI and so many other tech advances already in use or on the horizon, business leaders are advised to seek opportunities and adopt FinTech applications in their own business models to win tomorrow’s consumers.
What is Fintech – https://www.investopedia.com/terms/f/fintech.asp
Contactless payment is the new payment model – https://inc42.com/resources/contactless-and-card-payments-are-redefining-the-future-of-digital-transactions/
Embedded Finance will find many takers – https://www.finextra.com/blogposting/20150/the-new-fintech-galaxy-and-role-of-embedded-finance
Robo-Advisors: the next phase of Fintech evolution – https://www.allerin.com/blog/robo-advisors-the-next-phase-of-fintech-evolution
FinTech as an enabler for better financial services – https://www.hlb.global/fintech-and-the-future-of-finance/
Engaging Underserved Markets – https://digitalmarketinginstitute.com/blog/7-fintech-trends-that-will-shape-the-future-of-banking
Blockchain WIll Revolutionize FinTech – https://www.businessbecause.com/news/insights/7534/blockchain-fintech?sponsored