Like all sectors, finance is witnessing a great revolution. Lots of new technologies are being embraced to improve finance and accounting.
The growth of technology and its application in financial services has given rise to a unique sector that combines the best of both worlds - finance and technology. Popularly referred to as ‘FinTech’, this upheaval has brought along both synergy and disruption.
What is FinTech?
FinTech, short for Financial Technology, refers to firms whose financial services are primarily based on digital technology to improve products and perform business services more efficiently.
FinTech is emerging as a new kind of financial services that are trying to transform the way transactions were done traditionally. Using modern and effective methods, FinTech firms are deploying advanced devices in financial sectors to enable money transfers, mobile payments, funding, loans, and wealth management.
“Some instances of the technology being used in the financial transactions include peer-to-peer (P2P) lending, peer-to-peer payment, mobile banking, blockchain, digital wallets, which bring additional benefits and efficiency for the transactions besides reducing costs for customers.” - Investopedia.
While some FinTech companies are entering into strategic partnerships with financial organizations, others are engaging them as investors.
McKinsey Panorama reports that nearly 80 percent of financial organizations have partnered with Fintech start-ups.
Globally, venture capital (VC) investment in the Fintech sector has reached $30.8 billion in 2018. The investment is growing at twice the speed in Asia due to a large number of mega-deals. However, the overall investment figures contradict a more detailed analysis of developments.
Types of FinTech Firms and Their Functioning
A report by ResearchandMarkets shows that the heavy use of technology-based solutions and smart devices has pushed the demand for banking and financial services, which are accessible through personal devices. The banks and other companies are making significant investments in technology-based services to compete with FinTech companies. This competition is driving the global FinTech market, which is expected to touch USD 305.7 billion by 2023.
Insights from service segment
The FinTech sector provides various services including regtech, payment, insurance, money transfer, real estate, lending, wealth management, capital market, remittance, and mortgage. The payment services segment is likely to emerge as a key growth driver in the international market, generating a revenue of USD 207.11 Bn in the next five years. The factors contributing to this growth are contactless smart cards and the rise of retail-centric FinTech firms looking forward to taking this functionality to every branch of commerce. Payment apps like Amazon Pay, Cayan, GoUrl, and Stripe are quite popular amongst retailers and customers. Regtech is another segment that is likely to grow at a CAGR of 22.05%g. New regulations related to FinTech are the key drivers in this segment.
Insights from the technology segment
The FinTech sector involves crucial technologies such as AI (artificial intelligence), RPA (robotic process automation), identity management and biometrics, blockchain, cryptography, and cyber-security. Major growth will be seen in AI and blockchain, which will attract significant investments during 2018-2023. AI and chatbots have improved customer service. Their popularity will expand the AI-focused FinTech market at a CAGR of 21.72% during the next five years, followed by blockchain companies.
Insights from different regions
North America tops the global Fintech market and is likely to touch USD 80.85 Bn by 2023. The Asia-Pacific (APAC) market is growly rapidly at a CAGR of 43.34% and is expected to emerge as the leader during 2018-2023. The growing number of start-ups in the financial segment, including insurance, banking, insurance and wealth management is driving the popularity in Japan, China, India, South Korea, and Australia. Latin America is also showing prominent FinTech development, mainly attributed to projects in Brazil and Mexico.
FinTechs Firms include four distinct models, each functioning in different areas with different objectives:
1. The first comprises start-ups, new players, and attackers seeking to enter financial services with their innovative technology such as automated accounting software. These companies look to develop economic models just like the banks have, by targeting a niche audience or product. The key challenge for this model of FinTechs is customer acquisition cost.
2. The second includes incumbent financial organizations that are investing heavily in technology to perform better, tackle competitive threats, and seize partnership and investment opportunities.
3. The third group covers networks devised by big companies that provide financial services to improve the current business as well as make money from existing user data or relations. Having a high level of engagement with the users offers a huge customer acquisition cost-benefit to these big companies over other firms.
4. As infrastructure providers, FinTechs offer services to financial organizations to help them improve customer experience and risk management by digitizing their technology stacks.
These different types of FinTechs will experience different benefits and challenges depending on factors like their technical capabilities, customer acquisition costs, etc.
The incumbent financial organizations are challenged with the biggest hurdle that relates to management and skills such as company-wide investment in technology. Even the big financial firms find it difficult to change traditional approaches and existing models to provide a digital experience that a start-up can deliver.
Top Growing Areas in FinTech World
FinTech has contributed to developing a new space for the financial sector globally. It has offered several solutions to solve the challenges and problems that people often face during financial transactions.
Cutting through the noise that douses the excitement of FinTechs, let’s take a look at growing zones in the FinTech world:
Zone #1: Artificial Intelligence (AI)
FinTech firms are adapting themselves to the varying needs of the market and artificial intelligence presents a great way to keep up with these modern technological changes.
AI holds immense potential for the finance sector and is being successfully used as a smart tool. The evolution in AI technology has produced intelligent chatbots that can answer customer queries or offer 24/7 assistance without human intervention.
Features like a personal assistant and automated cloud accounting software are being efficiently used for data and statements, freeing up several man-hours and mitigating errors. Through predictive and data analysis, AI is helping companies to improve their customer handling and marketing processes.
The companies are using technologies like Predictive Intelligence and Big Data to offer more personalized services to their customers. Big Data helps in examining data and making important decisions. It is also being used in the trading of bonds and securities. Moreover, the services that earlier took days are now being delivered in a few hours.
AI has been deployed in various financial services such as fully-automated financial trading and automated fraud detection programs to detect anti-money laundering activities, etc.
The innovative technology also guides customers in choosing the right products/services. It keeps personal details of clients safe and secures financial assets of Fintech companies.
Internet of Things (IoT) is a novel technology that connects mobile devices and helps in sending and receiving data. It is extremely helpful in examining demands, feedback, inefficient services, etc.
Zone #2: Biometric Security
This is the greatest security feature that FinTech companies and renowned banking firms are relying on. The first step of biometric security procedure is digital identification with fingerprints. The next step of this security procedure is using facial recognition and voice recognition to beef up cybersecurity in smart devices. Another alternative is iris scanning that biometric scanning start-ups are betting on. Considering the steep increase in data thefts and cybercrimes in the past 2 years, two-factor authentication and passwords are not enough to keep financial data secure. The government agencies, as well as all responsible companies, are shifting towards biometric security, a trend that is expected to grow further.
Zone #3: Trading and Investing
New wealth management services and Robo-advisors have started influencing the industry. Startups are using complex programs to change trading and investing in a completely automated online experience.
These startups offer huge savings and financial planning services to users that were previously available to wealthy investors only. They help novice investors to start investing with small amounts of capital. The automation can bring about huge disruption in trading and investment area, potentially substituting traditional advisors and brokers with more efficient, smarter, and cheaper algorithms.
Zone #4: Blockchain
Blockchain is arguably the most ground-breaking of all the technologies. It can strongly disrupt finance as well as other industries that depend on mediators.
Blockchain technology enables a decentralized electronic public log of transactions that is unforgettable, anonymous, and incorruptible. There is no need for a bank, broker or any other mediator to maintain your account records or transfer money as blockchain makes all records public.
If programmed well, this digital ledger records all types of financial transactions.
Blockchain has become indispensable for financial services as it has simplified transactions, reporting, and customer engagements.
People no longer want to transfer and store their money and confidential data on centralized systems that are run by powerful institutions. Instead, they prefer decentralized systems and blockchain tech that is secure and unchangeable.
Besides, serving as a means of file-sharing in the software development world, blockchain has produced a new form of currency, known as cryptocurrency. With blockchain slowly becoming a reality in the finance sector, companies are set to improve transparency, save costs, and ensure security with cryptocurrency.
About 3400 cryptocurrency or blockchain start-ups are currently listed on AngelList.
Zone #5: Payments
New technologies in the payment space are transforming the way people pay money for goods/services. Smart devices, contactless NFC (near-field communication) technology and the growing number of digital transactions are pushing quicker payments and turning the cashless systems into reality. The majority of people today, no longer carry a wallet stuffed with cash or credit /debit cards instead they use their mobile phones to make a payment.
FinTech payment platforms are at the forefront of modernization and have changed the way of money management. It also enables making transactions through online payment and trading service instead of physically going to the bank.
Zone #6: Banking
The banking sector is shifting from traditional balance sheet activity to the data monetization as its major source of revenue. Money is now stored as 0’s and 1's in servers and business is managed entirely through technology. Earlier, data was only used for recording purposes but today, it is seen as a vital asset. However, just obtaining data in an accessible form can be difficult.
Most of the leading banks existing today are an outcome of multiple mergers. They need new technology and centralized relationships for wholesale banking to cater to much more complex client needs. On the other hand, FinTech startups offering increased transparency right from the very beginning are giving traditional banks a run for their money.
Zone #7: Personal Finance
Thanks to the new kind of companies that are trying to modernize personal finance, the services are now becoming more affordable and more transparent. Online platforms and mobile apps are helping companies and individuals create a budget, get a loan, file tax returns and invest.
Besides, technology is helping people to monitor daily expenditures and review their financial status in real-time to increase financial safety and improve financial literacy. Some of the leading FinTech companies operating in the area of personal finance include nerdwallet, Acorns, Feex, etc.
Zone #8: Lending
Lots of innovation is happening in the alternative credit space as well. The P2P (Peer to Peer) lending model has completely transformed the traditional lending space. This form of P2P lending guided by technology offers an alternative source of financing.
Peer to peer financing platforms uses machine learning technologies and solutions that save individuals and companies’ money & time and help them access a line of credit. This allows P2P lending platforms to provide borrowers a quick, easy, and affordable service that banks fail to match.
Zone #9: Foreign Exchange & Remittances
Sending and receiving money globally is considered as a difficult and costly process. However, the new-age forex and remittance companies are taking the pain out of this process. These companies have developed innovative platforms that make money transfer much easier, faster, and affordable. From P2P foreign exchanges that cut the cost of money exchange to smartphone-based money transfer, foreign exchange and remittance platforms provide cost-effective solutions to send or receive money overseas. Some of the leading platforms include mPesa, Xoom, World Remit, We Swap, etc.
Zone #10: Funding
Gone are the days when entrepreneurs made a beeline outside banks and financing companies seeking loans or funds to start a business. Enter FinTech companies and multiple crowdfunding platforms that provide other sources of investment for people looking to launch their business.
Online crowdfunding and equity platforms gather money from dozens of individuals who jointly fund projects that fail to obtain funding from banks and venture capital firms.
Zone #11: Insurance
While FinTech companies are yet to make a big entry in the insurance sector, there are a few of them that are making strides. With over $1 trillion insurance coverage is paid by customers every year in the US alone, the insurance space presents a great opportunity for FinTech companies.
Zone #12: Regtech (Regulatory Technology)
Regtech, as it is popularly called, has attracted significant attention in the past few years and will continue to grow in 2020. Irrespective of the size and location, every business spends loads of money to comply with government policies effective in that location.
With the financial industry expanding on a global scale, companies are demanding software that can assist them in abiding by government regulations and laws. The FinTechs engaged in regulatory technology have reduced the regulatory overheads of companies. By adopting RegTech, financial organizations can keep themselves secure from regular systems updates to adhere to changing laws.
Zone #13: Real Estate
This is a vast market with lots of risks and inefficiency. However, FinTech startups offer real estate solutions that will likely increase transparency and reduce transaction costs in this sector.
Regulatory challenges can be a hurdle for traditional technology giants foraying into the FinTech ecosystem. With the “move fast and break things” era coming to an end in the advertising industry where it created a major disruption, it is unlikely that the same approach can be allowed in financial services. Apprehensions regarding monopolistic behavior can prevent tech giants in the West from developing integrated financial services offered in other countries like China.
Zone #14: E-commerce
This is another vast area where FinTech has grown remarkably. A variety of online stores allows customers to buy from a wide assortment of products available on the website and instantly make the payments via a secure network. Moreover, customers can also create their trading market where they can sell their products at great prices. These online stores are considered a key driver in the FinTech sector in this digital age.
FinTech has taken the global financial market and existing banks by surprise. It has successfully attained the extraordinary growth and garnered several achievements in just a few years.
FinTech has rapidly penetrated in the financial market by closing the loopholes left by the traditional financial organizations and significantly improved the customer experience.
Deploying automated cloud accounting software is the first step in moving towards tech innovations. The ever-changing tech disruptions are compelling organizations to adopt new tools and implement them successfully.
With benefits like improved customer service, reduced time and cost, innovation, etc., it is recommended that companies should adopt them without delay and lead the market.
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