Fintech Ecosystem – Demystified

@Fintech @Digital Banking @Digital Transformation @AI @Blockchain @Big Data

With the Digital Age firmly underway, the paper-pushing world is dying slowly. We are witnessing exponential growth on the Internet, digital adoption through the use of smart devices, working remotely, interacting and communicating online, and moving away from physical money. There are ongoing changes in everything we do, touch, consume and share.

Globally, the financial services sector is proving to be pivotal to the world's economies. Businesses and individuals rely significantly on the financial services industry from banking to insurance to healthcare coverage. The financial services industry as we know it today is relatively new, but certain parts of it, such as insurance coverage, go very far back in history. Insurance was officially born in 1680. However, banking has been in existence since the first currencies were minted and the wealthy realised, they needed a safe place to store their money. Ancient empires also needed a functioning financial system to facilitate trade, distribute wealth, and collect taxes. As a result, the concept of banking was established. Banking is necessary but are physical banks needed?

Financial technology?(better known as fintech) refers to the use of new technology that seeks to improve and automate the delivery and use of financial services. Fintech is utilised to help businesses and consumers better manage their financial operations, processes, and aspects of their everyday lives. Fintech uses developing digital technologies that replace, supplement or enhance existing financial services. Fintech has revolutionised finance over the years, particularly in the consumer space where access to financial services and payment methods has increased sharply.?The term “fintech company” describes any business that uses technology to modify, enhance, or automate financial services for businesses or consumers.

Insurance Technology or Insurtech refers to technology innovations designed to find cost savings and efficiency from the current?insurance?industry model. Insurtech is a combination of the words “insurance” and “technology,” inspired by the term fintech. It makes use of innovative technologies, such as artificial intelligence, big data analytics, blockchain and machine learning, to improve and automate the traditional insurance?industry. Insurtech aims to enhance customer experience, streamline operations, and create personalised insurance products through the application of cutting-edge digital solutions.

Regulatory technology (Regtech) is?an emerging technology that involves the implementation of digital tools and processes that improve the way organisations manage their increasing regulatory compliance commitments. RegTech is the answer to a driving need for regulatory compliance modernisation. RegTech is seen as a subset of FinTech.

With the key types described above, let us focus on how the Fintech ecosystem operates and its importance. A FinTech ecosystem is made up of?consumers, financial institutions, FinTech start-ups, investors, regulators and educational institutions.

For FinTechs to be successful in the FinTech ecosystems they need to incorporate the following four core attributes: Talent (Technical, functional, sector and entrepreneurial skills), Capital (Sufficient financial resources for startups and scale-ups) and knowledge and experience.

Today fintech comprises several different sectors that include, but are not limited to, retail banking, fundraising, and investment management. One of the most successful types of fintech is digital payment companies.?

Research has found?the total transaction value of digital payments increased from $4.1 trillion in 2019 to $5.2 trillion in 2020 alone. Fintech bank assets grew by 105% from 2013 to 2022, while traditional bank assets grew by 75%. 

Fintech companies acquired $210 billion in global investments in 2021.
        

The history of fintechs dates back to before the 21st century to as early as the 1950s when credit cards made their 1st appearance through the innovations of Frank McNamara, a businessman who forgot his wallet while out to dinner in New York. He and his business partner, Ralph Schneider, would soon invent the Diners Club card as a way to pay without carrying cash. This was how the Diners Club was born.

?From there, fintech evolved to include bank mainframes and online stock trading services. In 1998, PayPal was founded, representing one of the first fintech companies to operate primarily on the Internet — a breakthrough that has been further revolutionised by mobile technology, social media, and data encryption. This fintech revolution has led to the mobile payment apps, blockchain networks, and social media-housed payment options we regularly use today. Can we imagine a world today without mobile payments and the Internet?

FinTechs aim to simplify financial transactions for consumers or businesses, making them more accessible and generally more affordable. With newer technology, especially disruptive technologies like blockchain and AI, fintechs can apply these to facilitate highly secure transactions amongst an internal network. Fintechs strive to streamline the transaction process, eliminating potentially unnecessary steps for all involved parties In addition, fintechs are free of the ‘baggage’ of legacy systems and ‘bricks and mortar’ that are costly to conventional financial institutions.

Although the FinTech revolution truly began in the 20th century, the growth of Fintechs has taken place with the advent of disruptive technologies. Modern fintech is primarily driven by AI, big data, and blockchain technology. These disruptive technologies have completely redefined how companies transfer, store, and protect digital currency. The rise of Artificial Intelligence or AI can provide valuable insights into how consumer behaviour and spending habits are evolving and impacting businesses and economies as a whole. This facilitates a better understanding of customers and where growth areas are for existing and new products and services.

Big data analytics and predictive analytics are proving invaluable to businesses in understanding market behaviours which have a direct impact on the creation of new, data-driven business strategies. Blockchain technology allows for decentralised transactions without input from a third party. This technology has opened a completely new dimension in the world of finance and the evolution of new currencies; and cryptocurrencies.

Digital banking is easier to access than ever before. The Covid pandemic has served as a catalyst for the ramping up of the greater adoption of digital banking. Many consumers already manage their money, request and pay loans, and purchase insurance through digital-first banks.

You may ask yourself the question,

WHEN LAST HAVE I VISITED A BANK BRANCH PHYSICALLY?

Fintechs offer many advantages and present several disadvantages. Some of these advantages include making financial services more convenient and accessible for people at lower costs due to the lower overheads compared to conventional financial institutions. Fintechs have introduced competition which is positive to the market. conventional financial institutions now have to compete with fintech companies that offer better rates, fees, and customer service.

Fintechs employ the latest technology including data and analytics tools. This facilitates a better understanding of customers thereby allowing them to meet customer needs through the provision of personalised solutions. Using the benefits of newer technologies, fintechs can offer faster financial transactions more efficiently.

On the downside, fintechs do have challenges that need to be addressed and overcome. Some of the key ones include. With fintechs having a high reliance on technology, they are more vulnerable to cyber-attacks, fraud and other security risks than conventional financial institutions. If their systems are compromised, it could result in a breach of sensitive information.?

Fintechs are technology-orientated and driven. With the lack of human reliance and interaction (or very little thereof), some consumers are not comfortable dealing with a technology-orientated interface and not human beings. Fintechs do not offer the same broad range of products as conventional financial institutions. The limited product or service offerings require consumers to split their support and loyalty across service providers sometimes to the detriment of the Fintech.?

Fintech is a relatively new industry that has brought new challenges to regulatory bodies. Regulations are still catching up. This means there may be regulatory issues that fintech companies need to navigate, which can be time-consuming and costly.

Fintech startups that receive large funding can overtake traditional financial institutions by being more agile, appealing to underserved markets, or providing superior service. Without the burden of archaic systems, processes and products, Fintechs can respond to market and consumer needs quickly.

Digital banking is changing the way banking and financial institutions are rapidly evolving. Fintechs offer many advantages bringing along a new way to how the future of financial services may advance. With progress there are drawbacks. Fintech has its challenges but it is here to stay. As technology advances, fintechs will become more integrated into our everyday lives.

Consumers are becoming more tech-savvy, more connected and more knowledgeable resulting in them making more informed decisions. This is changing the consumer landscape. Fintechs need to continue to innovate and improve their product and service offerings to ensure that they meet the changing needs of consumers, while also ensuring that they maintain high standards of security and reliability and comply with changing regulations.

Sources:

• Gartner
• PwC
• Global Finance
• Digital Adoption