How fin-tech industry is developing?

Over the past few years, financial technological sector has grown rapidly, enhancing and increasing productivity wherever it is used. The awareness of fin-tech is also extremely high. Few factors that have caused the development of fin-tech over the past years are:

1. Fin-tech focusing on underserved areas of banking

Incumbent and highly competent players in the finance industry have traditionally been focusing only on high-margin business, while lower-margin businesses are often de-emphasized and overlooked. A lot of banks have scaled down their retail banking business to focus on more profitable commercial and investment banking businesses. Even within the commercial banking business, many of them have focused almost exclusively on large corporations, underserved small and medium enterprises. The significant amount of reduction of retail banking and underserved of small and medium enterprises have aided the rise of fin-tech players focused in these areas. Financial providers should not look solely at current profitability numbers or highly profitable areas only and fail to look at the big picture. Instead, they should think strategically by considering the long-term impact and growth potential of the various businesses within the ecosystem.

2. Fin-tech’s sharp focus

Fintech players have three major advantages over incumbent players: Focus, focus and focus.

·      Fin-tech players generally focus only on one product or service. As they are, in most cases, smaller and nimbler, they generally have lower operating costs. This translates to the capability to concentrate more on customer experience by providing their product or service cheaper and more resourcefully than banks.

·   Secondly, Fin-tech players always have a crystal clear focus on the customer. Without cumbersome legacy systems operated by incumbent and highly competent players, they can better focus on solving customer problems and enhancing their customer experiences. The dwindling pool of legacy system specialists moreover exacerbates the problem as it is hard and often expensive to find people with the coding skills which are necessary to maintain and fix legacy systems.

·      Thirdly, fin-tech players focus on new and latest technology that gives them an edge. One example of the same is the use of artificial intelligence technology in traditional and obsolete processes, like price forecasting, fraud prevention, risk management and customer service. Another example is the utilization of block chain technology in traditional processes, which provides greater transparency, increased efficiency, better security and improved traceability. The scalpel-like focus of fin-tech companies has helped them to respond more quickly to the changing needs and preferences of customers. The lesson here is not to lose but maintain focus on our core mission objectives as we continue to grow and expand. We should never forget why the company was created and established in the first place. While some incumbent players may be a bit late to respond to the rise of fin-tech, others highly competent players are starting to create their own services or partnering with established fin-tech players. The effects of fin-tech are reaching widely across the global finance industry.

3. Consumerism

With everything being online, people all around the world are much more aware of the highly successful and accomplished global brands. And being aware of their founders and executives behind them, they appreciate and are grateful for being able to play a significant part in the success of brands they believe in and support as consumers. Additionally, as a result of increasing social consumerism, in a lot of aspects, there’s a high level of competition and even elitism in being an ‘investor’. Being financially successful and independent is ‘cool’ for the younger and upcoming generations. It is a part of why crowd funding platforms are doing so well and fin-tech industry is constantly on the rise. 

4. Financial uncertainty

Recent crisis developments across many countries have increased the level of financial uncertainty. Keeping in mind that the majority of today’s Generation Z and Millennials, have lived through recession. It implies that they were raised in market conditions which were thoroughly marked by financial anxiety, financial uncertainty and a lack of trust in traditional financial institutions like different banks. As a result, younger generations are now realizing the importance of investing, including investing in stock markets. It has proved to be the only way to achieve financial security and wealth. But at the same time, they are also more eager to put their trust in modern fin-tech companies offering them with better user experiences and value than traditional institutions, and finally helping them to reach their financial objectives and goals.

5. Cost awareness

The greater the accessibility and increasing popularity of cross border money flow is translating itself into young people’s increasing and higher cost consciousness. People now-a-days don’t want their returns to be diluted by high fees imposed by banking institutions or traditional stock brokers anymore. And thanks to the increasing utilization of technology, start-ups are able to provide solutions that are much leaner and cost effective than those offered by established banking and other financial institutions. In today’s world where everyone is highly conscious about saving money or increasing their income, low fee or commission free really works for any investment platform because consumer’s final decision maker among similar products and services will always be the same cost.

The industry is widely composed of companies that provide services such as money transfers, payment processing, and crypto-currency, peer-to-peer lending, and stock and trading platforms. Similarly, processes comprising of these services, once done by back office personnel, are now being done by Artificial Intelligence (AI).

How fin-tech industry is changing the world?

Fin-tech has effectively changed the way people think about money and value money exchange in real time. In the digital world, the term ‘cashless’ business are propping around everywhere, thereby forcing reluctant customers to adapt the habit of digital transactions even in their day to day life. It is now requiring customers to pay for goods and services electronically via various available means.

Over the time, the increasing use of fin-tech technology has brought various changes in how the world functions. Fin-tech companies are now the leading industries and are now creating and providing wide range of financial products and services with the main purpose of making money management easier, convenient and better. Some of these are:

1. Online payments

Online and real-time payments have revolutionized and brought some major changes in how people manage their account balances and cash flow. In today’s world of automation and use of highly advanced technology, consumers are now seeking ease of use and convenience in everything they do—from online shopping to banking services and performing all their financial transactions online form anywhere and at anytime. Everyone knows that financial institutions are lagging behind when it comes to simplicity in providing their services to the consumers. This is the reason why fin-tech has gained its foothold in online payment.

2. Easily borrowing and lending money

Having access to funds has become much more transparent and less centralized, and the traditional and obsolete way of borrowing and lending money from a bank via loans and mortgages is being joined by options like crowd funding and peer-to-peer lending. These new, non-traditional and updates 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 various other resources.

3. Financial markets

Traditionally, built in a pre-digital world, financial markets are seeing a great deal of disruption, creativity and innovation. The utilization of artificial intelligence (AI) and machine learning is now enabling algorithmic or automated trading in the stock exchanges. Prediction markets, like Augur, aggregate data via different connections and network intelligence to predict possible and foreseeable future events. This new access has given individuals access to various convenient trading facilities that were once only available to corporate investors.

4. Asset management

Data processing and analysis tools and technologies have resulted in increase of automation, specifically in asset rebalancing. Additionally, cloud-based, robo-advisory-enabled platforms are now using algorithms to advise users about their investment and asset management.

5. Regulation technology

With changes occurring so quickly, it is becoming difficult for many businesses to compete against one another yet they still remain within their industry’s regulatory frameworks. Efficiently utilizing big data and machine-learning, regular technological tools monitor transactions and recognize outliers that may indicate fraudulent activities. By recognizing potential threats in real time, risks are dropped down to their minimal capacity, and data breaches can often be addressed or completely avoided to maintain safety and security.

6. Great tool of leverage

Technology is an excellent equalizer tool that allows new fin-tech companies to compete side by side with bigger and more established companies. You can now also see how the smaller community banks increase their market share by utilizing artificial intelligence and seamless operational processes that make it easy for their clients.

7. Artificial intelligence (AI)

Artificial intelligence is helping customers to get the best service possible. It helps the companies to improve their existing products while making it faster and more reliable to process, schedule, and facilitate payments, and many other services that takes a long time back when fin-tech was still unheard of and people were still unaware of it.

8. Improving the experience

Online shoppers have felt a surge in getting the best shopping experience as payment and information about new products is spontaneously available. Advancement in technology has also made shopping experience more satisfying by providing security and safety measures to its customers.

9. Payments

One of the major roles played by banks is to facilitate the transfer of funds between two or more parties. Banks have been rumored to make at least $4 billion annually just from fees obtained during funds transfers between two or more parties. Fin-Techs are dedicatedly working towards filling this space and providing better terms when it comes to transferring funds between users, while keeping the commission rate low. Most notable and significant developments are in the areas of local and international payments. Several companies such as Pay-pal, Transfer Wise, and Stripe are working hard every day to make transfers and paying merchants much easier than it is now. The innovation of services such as M-Pesa the most popular mobile banking solution to making domestic payments has changed how people save money and how people make payments easily and conveniently. As a customer you can also determine which service will be best for you by using services like Wire Compare.

10. Improving the online shopping experience

As the retail business continues to suffer and shrink day by day, online stores are continuously expanding and getting new clients by the day. As such, customers want to feel safe and secure while buying goods online too. This is exactly why customers are seeking shopping experiences that are not only quick but are also safe and secure to use. As people are more educated and informed when it comes to online frauds and increasing rate of cyber crimes, people are looking for ways where they can buy and sell their goods without the possibility of being scammed or losing money. Since the online market place is only growing as more people get online, companies such as Stripe and PayPal are making it easier and more convenient for people to make purchases without fear of losing their hard earned money. Services such as Flint and We Pay accommodate payments from the retail sector.

Fin-tech is also enabling financial services providers to explore new and latest markets and allowing consumers in areas where options were less to access services which were previously unavailable, through the use of mobile devices. Having accessibility to under-banked and un-banked consumers is allowing Fin-Tech companies to reach and capitalize effectively on markets that have been underserved to date till now.

While advancements and constant evolution in the area of Fin-Tech have been happening at a lightning speed, we have only just started to scratch the surface of what is possible and likely to happen in the next few years or the foreseeable future. It is no dramatization to say that Fin-Tech is literally changing our lives and habits by making it easy to trade, bank, and exchange money without any need for physical human interaction among one another. However, the financial sector has a few challenges to overcome, specifically in the regulatory and data protection space, to win consumer trust and for Fin-Tech to truly and completely overtake the market. With big data, block chain, Artificial intelligence and so many other tech advances already in use or on the horizon, business leaders are advised to seek opportunities and adopt Fin-Tech applications in their own business models to win tomorrow’s consumers.

Opportunities and risks emerging from fin-tech

The term fin-tech refers to the synergy between finance and technology. It is mainly used to enhance and improve business operations and delivery of financial services. Fin-tech is highly versatile and can take the form of software, a service or a business that provides technologically advanced ways to make financial processes more efficient and productive by disrupting the traditional methods and upgrading them to the latest ones. Some of the most prominent applications of fin-tech are automated investment apps, mobile payments, crypto currency, online lending business and various other crowd-funding platforms. Technology has been a driver of innovative ideas since forever, so it is no surprise this has changed the way finance is dealt and experienced by consumers all over the world.

Opportunities emerging from fin-tech are:

1. Enhanced banking service

Fin-tech has enables banks to effectively enhance the services provided by them. This includes provision of mobile banking services and smart chips such ATM cards. Today, most of the banks have a mobile application with a user-friendly interface. Banks have also come up with mobile apps that recognize the fingerprints and face id of the user. The application performs this function without any biometric app or hardware. A mobile application offers quick access to their funds. With a mobile application, the user can also perform several banking functions such as quick bill pays, check deposit, account balance, statements, and many more. Fin-Tech financial services is now transforming the entire banking system from a branch-specific process to various digital channels such as online, social, and mobile. It is also reduces the bank’s dependency on its brick and mortar branches to function. Mobile banking is a huge and essential part of the now increasing fin-tech industry. In the world of personal finance, consumers have increasingly demanded easy digital access to their bank accounts, especially on their mobile device. Most major banks now offer some kind of mobile banking feature to make the banking transactions easy and convenient.

 2. Financial Inclusion

Fin-tech face many challenges like lack of trust due to safety and security concerns, non-availability of physical branches, almost negligible or zero awareness of financial products and lack of proper infrastructure. Nevertheless, with the transformation in regulations to offer more support to NBFCs and highly competent and incumbent fin-tech players, disruptive innovation and increasing funding, Fin-techs are becoming a key catalyst in the expansion and widening of financial inclusion. Below mentioned are few models of financial services which can have a significant impact on financial inclusion:

·      Initiation of no-frills account

·      Instant money transfer facilities

·      Incorporation of e-KYC or video KYC for faster financial processes

·      Electronic benefit transfer schemes

3. Improved the banking process

Smart chip ATM cards have notably helped in minimizing the financial loss that occurs in the case of mishaps. It comes with EMV technology that is embedded in the chip itself. This technology uses a one-time password for each transaction knows as OTP. This increases the safety and security since the code is valid only for one transaction; so, even if somebody steals it, he won’t be able to do anything or steal any of your data. Bank officials usually advise their customers to memorize their pin to avoid unnecessary hassles and troubles. Bankers are constantly looking for ways to combat thefts and frauds by providing top-notch security to its customers. As compared to smart chip, the magnetic stripe technology uses the same pin for all the transactions, thus making it more susceptible to frauds. All of this has become possible due to the rise of fin-tech technology which has increased its use among customers and led banks to adopt it as well.

4. Inferior transaction costs and high speed banking services

Rapidly changing and evolving technology such as smart phones is giving a green light to Fin-tech innovation. Internet access 24/7 allows and enables us to connect and get services, usually enhanced by machine learning, everywhere and anytime. Thanks to technological developments, transferring money across borders within a few clicks has become possible, convenient and a lot cheaper, lending has become way less time consuming and accessible and trading and capital raising has become even more global and easier. Consumers and customers are now enjoying decreased management and product fees as well as streamline and targeted professional advice. Investment professionals are also empowered by more effective portfolio management software and the development of new products and services (e.g. crowd sourced ETFs and managed marketplace loans).

5. Potential improvement of financial services

Digital finance or fin-tech has the potential to provide affordable, convenient and secure banking service to poor individuals in developing countries (CGAP). Recent improvement in the accessibility and affordability of digital financial services around the world can now provide help to millions of poor customers to move from cash-based transactions to formal digital financial transactions on secured digital platforms (CGAP). With key talent and investors pouring into the Fin-Tech space, traditional financial institutions have to act fast. Complex banking institutions all over the world have been working hard for quite a while to simplify their businesses and lower their reliance on traditional infrastructure of banking system. This, however, is a difficult task due to heavy regulation imposed on them. Banks realize that they are not as fast to change and adapt as Fin-techs, and therefore most banks have started looking to fund Fin-tech startups that create products to be added to bank products to improve user experience, allowing Fin-tech industry to empower banks to create and offer better services for the end-user.

6. Regulation technologies

With changes occurring so quickly, it is becoming increasingly difficult for a lot of businesses to compete against one another yet they still remain within their industry’s regulatory frameworks. Efficiently utilizing big data and machine-learning, regular technological tools monitor transactions and recognize outliers that may indicate fraudulent activities. By recognizing and identifying potential threats in real time, risks are dropped down to their minimal capacity, and data breaches can often be addressed or completely avoided to maintain safety and security.

7. Crypto-currency and block chain

Moving parallel to the fin-tech industry is the birth of crypto-currency and block chain. Though both of them are different technologies considered outside the realm of fin-tech industry, there are complimentary applications in which all three can work together to deliver new kinds of financial services.

8. Investments and savings

Fin-tech industry has caused and led to an explosion in the number of investing and savings apps in recent years. More than ever, the barriers to investing are being broken down by huge companies and well established business organizations like Robin hood, Stash and Acorns. While these apps differ in their approach, each one of them uses a combination of savings and easy, small dollar investing to introduce consumers to the markets.  

9. Machine learning and trading

Being able to predict where markets are headed is the Holy Grail of the finance industry. With billions of dollars to be made, it's not a surprise machine learning has played an increasingly important role in ever rising fin-tech industry. The power of this Artificial intelligence -subset lies in its ability and power to run massive amounts of data through algorithms designed to spot trends and risks. 

10. Lending

Fin-tech industry is now also overhauling credit by streamlining risk assessment, speeding up approval processes and making access easier. Billions of people all around the world can now apply for a loan on their mobile devices, and new data points and better risk modeling is expanding credit to underserved populations. Additionally, consumers can also request their credit reports multiple times a year without dinging their score, making the entire backend of the lending world more transparent for everyone. Credit companies worth noting include Tala, Petal and Credit Karma.

11. Insurance

While insur-tech is now quickly becoming its own industry, it still falls under the umbrella of fin-tech industry. Insurance is a somewhat slow adopter of technology than the rest, and many fin-tech startups are partnering with traditional insurance companies to help automate processes and expand coverage. From mobile car insurance to various wear-ables for health insurance, the industry is staring down tons of innovation. Some insur-tech companies to keep an eye on include Oscar Health, Root Insurance and Policy Genius.

Risks emerging from fin-tech technologies:

1. Professional liability

Negligent advice and failings in client services are common and major risks for any company providing and offering financial services to their customers, especially Fin-Techs who specialize in offering new financial products through new distribution models. Fin-Techs can also have a reliance on third-party contractors, which further adds an extra liability risk due to third-party negligence.

2. Regulatory environment

New and latest technology, new and trendy products and new and efficient distribution brings a wealth of opportunities, but also new regulatory exposures. Fin-Tech companies will need to make sure that they keep on top of the implementation of suitable and satisfactory risk management systems. As the Fin-Tech market continue to evolve, so will the regulatory environment, and a major risk for Fin-Techs will be keeping pace with the regulators’ latest updates. Fin-Techs will also have to take into consideration the differing and varying regulations in multiple territories should they operate internationally.

3. Theft of funds

The majority of Fin-Tech companies deal with a high frequency of funds movement. High volumes of payments, transactions and customer accounts, as well as the fast growth and implementation of new technology leaves them vulnerable to theft and other money losing risks. These thefts could be by an employee or by an external party as well.

4. Cyber event

Given the nature of their operations, Fin-Tech companies are prime and major targets for cyber criminals such as hackers to steal useful data and perform fraudulent activities. Network security, data breaches or even a denial-of-service attack - as well as damage and rectification costs following these incidents - should be a major concern for Fin-Tech companies.

5. Technology failure

Innovative technology is essentially necessary for Fin-Tech companies - it is how they have disrupted traditional financial services - but this heavy reliance on technology infrastructure means firms can be vulnerable too. Technology failure can mean customers are unable to access services resulting in lost income or lost customers.

Fin-Tech businesses will now need a dedicated policy to manage their evolving risks in order to continue being a popular part of their consumer’s life. A Fin-Tech policy should also offer coverage for both liability arising from financial services and technology services, as well as management liability, theft of funds and cyber coverage. 

The advent of cutting-edge technologies merged with customer’s demands and increasing preferences for safe and more user-friendly banking experience has led the banks and financial services to readily adopt Fin-Tech finance technology. Today Fin-Tech is bigger than ever as it comprises everything that we just mentioned in this blog. In coming years, it is all set to become ever bigger with retail banking software, financial core banking software, and many other components coming under it. Only time will tell how big of an impact will Fin-Tech have all over the world.

You may ask what does the future of Fin-tech hold, especially since 2016 has been announced to be pivotal year for Fin-tech. As Fin-tech in Europe is dynamic and is growing rapidly, we can only expect that responsiveness for businesses will become crucial to keep up with the growth. The competition will get even fiercer than it currently is. Winners and losers will come more frequently’ as companies’ growth cycles shorten and therefore fewer companies will be able to remain at the top for long. Over the next year – a year and a half we will likely get better insights into which new business models are overvalued, poised to grow into their valuations over time or prepped for mass-market disruption. Even though that may seem as negative notation after pinpointing such a number of growth factors influencing Fin-tech industry, the future of Fin-tech in Europe is bright and 2016 will definitely be a pivotal year to watch how the Fin-tech revolution evolves.

Conclusion

In conclusion, digital finance is expected to improve the welfare of individuals and businesses that have formal bank accounts and have funds in their bank accounts to complete multiple financial transactions globally. However, the expected benefits of digital finance can only be fully realized and absolutely come true if the cost of providing digital financial services is negligible or zero.

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