Fintech, short for ‘Financial Technology’, is broadly defined as any technological innovation that seeks to automate and improve the use of financial services. Fintech helps companies, businesses, and consumers to better manage their financial operations and processes with the help of specialized software and algorithms that can be used on computers and mobile devices. Fintech also includes innovations that advance financial literacy and education as well as streamlining of wealth management, fundraising, lending and borrowing, funds transfer, and more.
The financial technology industry is thriving globally, and the trend is going to continue in the coming years. According to research, the investments in the global fintech industry increased steadily from $19.9 billion to $39.4 billion between the period 2014-18 at a compound annual growth rate (CAGR) of 18.5 percent. The EY’s Fintech Adoption Index also outlines how quickly the market is taking up financial technology products. It showed that a third of consumers around the world are using two or more fintech services. About 84 percent of customers say they are aware of fintech, which is a remarkable development (22 percent) from the previous year.
Having said this, many users still do not know what exactly fintech and its accompanying jargon mean. They are still unaware that the financial services applications they use count as ‘fintech’ or not. Here in this post, we discuss how fintech blends with blockchain and what other trends are driving this revolution in the financial industry.
Fintech and Blockchain – are the two synonymous?
In discussions related to fintech innovations, the first thing that comes to mind is blockchain technology. The tendency to synonymize the two technologies can be understood and justified, considering the dependence of one technology over the other. The World Economic Forum, in their 2016 report said that Blockchain technology would fundamentally change the manner in which financial institutions around the world operate.
While there is no denying that Blockchain technology is going to bring massive changes to the financial services landscape, it would be spurious to attach the concept of fintech exclusively to Blockchain. Despite the role that blockchain plays in Fintech innovations, it is still just a factor in the equation. Other technologies, such as artificial intelligence, automation and, big data also have the potential to change the financial services as we know them. Let’s look at other leading disruptors in the financial technology landscape.
To put it simply, artificial intelligence has to do with the development of computer systems that can efficiently perform the tasks that are usually carried out by humans. Financial services firms have been deploying AI for a number of decades to improve the way they do business. One example is the Automated Teller Machine (ATM), which came around in the 1960s, though it has become mainstream now. Before the introduction of ATMs, the entire process was manual. This example indicates that artificial intelligence in the financial sector isn’t something new. It has been around for quite some time; however, the advancement of artificial intelligence has increased the pace of disruption lately. Here is how the two ways in which disruption in the financial space is taking place.
- Deep learning: The concept of deep learning is quite tricky; however, we can simply think of it as a concept wherein a computer system looks into datasets to learn some patterns and gradually learn to take, or avoid an action. It provides insights into particular situations based on those patterns.
Currently, the portfolio management space utilizes deep learning to obtain real-time transaction analysis for stronger portfolio management. Financial institutions have been employing deep learning to manage risks and detect fraud through the analysis of large and contrasting kinds of data.
Additionally, hedge funds have also been investing in deep learning to enable computers to imitate traders and perform trading tasks more efficiently than human beings. The insurance industry has also been trying to streamline customer experience, underwriting and claims processing through deep learning.
- Machine learning: Another way in which artificial intelligence is disrupting the financial services space is machine learning. It is employed in the insurance and banking industries, with important applications in wealth management space. Here it is utilized to build robo-advisors to help retail investors manage their portfolio.
Almost all major industries have been impacted by automation in one way or another. The fintech and banking industry is no exception. McKinsey predicts that in the next few years, a second wave of automation and artificial intelligence will emerge where up to 25 percent of bank work will be done by machines.
With simple processes being automated, the consumer can expect better bank experience and self-serve options while employees in the finance sector can focus on important tasks that require more human brain power. Reports suggest that this could add $512 billion in global revenues to the financial service industry by 2020.
Digital identity is the online equivalent to the real identity adopted or claimed by a person or entity in cyberspace. It has been a major hindrance in the complete digitization of the finance industry. Without establishing an identity of a user, the financial system can do almost nothing. This is a dilemma which most of the fintech innovators face, as identity challenges force them to employ physical channels for digital products. This breaks the digital flow and forces the innovators to look for a non-digital solution to address the challenges of identity.
If we are ever going to have completely digital offerings, there needs to be a simple and reliable way to determine the identity of a person in the digital space. Social media has been helpful in this regard so far, but it isn’t a secure mean since the information can be stolen or used by multiple individuals acting as one.
In an attempt to determine a foolproof digital identity, Samsung patented the vein identification sensor smartwatches, which would authenticate payments by reading a user’s vein structure.
With the Internet of Things playing an increasingly important role, the amount of data that will be continuously generated will be huge. This makes it necessary for the financial industry to develop AI framework when it comes to data collection and management. Big data provides predictive analytics to fintech companies which allows brands to set more financial terms.
The industry is also expected to focus on data breach prevention, data security and regulation of data to stay compliant and protected.
Blockchain is the technology of the 21st century that will likely disrupt every industry, but still, it can’t solve all the problems facing the financial services landscape. With other disruptors like artificial intelligence and automation, blockchain is only a part of fintech which needs to work together with different innovations in order to achieve greater results.