What is fintech?
"Fintech" describes the new technology integrated into various spheres to improve and automate all aspects of financial services provided to individuals and companies. Initially, this word was used for the tech behind the back-end systems of big banks and other organizations. And now it covers a wide specter of finance-related innovations in multiple industries, from education to crypto-currencies and investment management.
While traditional financial institutions offer a bundle of services, fintech focuses on streamlining individual offerings, making them affordable, often one-click experience for users. This impact can be described with the word "disruption" - and now, to be competitive, banks and other conventional establishments have no choice but to change entrenched practices through cooperation with fintech startups. A vivid example is Visa's partnership with Ingo Money to accelerate the process of digital payments. Despite the slowdown related to the Covid-19 epidemic, the fintech industry will recover momentum and continue to change the finance world's face.
Fintech users fall into four main categories. Such trends as mobile banking, big data, and unbundling of financial services will create an opportunity for all of them to interact in novel ways:
- 1. B2B - banks and their business clients
- 2. B2C - small enterprises and individual consumers
The main target group for consumer-oriented fintech is millennials - young, ready to embrace digital transformation, and accumulating wealth.
What needs do they have? According to the Credit Carma survey, 85% of millennials in the USA suffer from burnout syndrome and have no energy to think about managing their personal finances. Therefore, any apps that automate and streamline these processes have a good chance to become popular. They need an affordable personal financial assistant that can do the following 24/7:
- Analyze spending behaviors, recurrent payments, bills, debts
- Present an overview of their current financial situation
- Provide coaching and improve financial literacy
What they expect to achieve:
- Stop overspending (avoid late bills, do smart shopping with price comparison, cancel unnecessary subscriptions, etc.)
- Develop saving habits, get better organized
- Invest money (analyze deposit conditions in different banks, form an investment portfolio, etc.)
Fintech industry offers many solutions that can meet all these goals - not only on an individual but also on a national scale. However, in many countries, there is still a high percentage of unbanked people - not having any form of a bank account. According to the World Bank report, this number was 1.7 billion people in 2017. Mistrust to new technologies, poverty, and financial illiteracy are the obstacles for this group to tap into the huge potential of fintech. Therefore, businesses and governments must direct the inclusion efforts towards this audience as all stakeholders will benefit from it. Apparently, affordable and easy-to-get fintech services customized for this huge group of first-time users will be a big trend in the future.
Big Data, AI, ML in fintech
According to an Accenture report, AI integration will boost corporate profits in many industries, including fintech, by almost 40% by 2035, which equals staggering $14 trillion. Without a doubt, Big Data technologies, such as Streaming Analytics, In-memory computing, Artificial Intelligence, and Machine Learning, will be the powerhouse behind numerous business objectives banks, credit unions, and other institutions strive to achieve:
- Aggregate and interpret massive amounts of structured and unstructured data in real-time.
- With the help of predictive analytics, make accurate future forecasts, identify potential problems (e.g., credit scoring, investment risks)
- Build optimal strategies based on analytical reports
- Facilitate decision-making
- Segment clients for more personalized offers and thus increase retention.
- Detect suspicious behavior, prevent identity fraud and other types of cybercrime, make transactions more secure with such technologies as face and voice recognition.
- Find and extend new borrower pools among the no-file/thin-file segment, widely represented by Gen Z (the successors of millennials), who lack or have a short credit history.
- Automate low-value tasks (e.g., such back-office operations as internal technical requests)
- Cut operational expenses by streamlining processes (e.g., image recognition algorithms for scanning, parsing documents, and taking further actions based on regulations) and reducing man-hours.
- Considerably improve client experience with conversational user interfaces, available 24/7, and capable of resolving any issues instantly. Conversational banking is used by many big banks worldwide; some companies integrate financial chatbots for processing payments in social media.
Digital or internet-only banks do not have brick-and-mortar branches and operate exclusively online. The word neobank became widely used in 2017 and referred to two types of app-based institutions - those that provided financial services with their own banking license and those partnering with traditional banks. Wasting time in lines and paperwork - this inconvenience is the reason why bank visits are predicted to fall to just four visits a year by 2022. Neobanks, e.g., Revolut, Digibank, FirstDirect, offer a wide range of services - global payments and P2P transfers, virtual cards for contactless transactions, operations with cryptocurrencies, etc., and the fees are lower than with traditional banks. Clients get support through in-app chat. Among the challenges associated with digital banking are higher susceptibility to fraud and lower trustworthiness due to the lack of physical address. In the US, the development of neobanks faced regulatory obstacles. However, the situation is changing for the better.
A smart contract is software that allows automatic execution and control of agreements between buyers and sellers. How does it work? If two parties want to agree on a transaction, they no longer need a paper document and a lawyer. They sign the agreement with cryptographic keys digitally. The document itself is encoded in a tamper-proof manner. The role of witnesses is performed by a decentralized blockchain network of computing devices that receive copies of the contract, and the code guarantees the fulfillment of its provisions, with all transactions transparent, trackable, and irreversible. This sky-high level of reliability and security make any fintech operation possible in any spot of the world, any time. The parties to the contract can be anonymous, and there is no need for other authorities to regulate or enforce its implementation.
Open banking is a system that allows third parties to access bank and non-bank financial institutions data through APIs (application programming interfaces) to create a network. Third-party service providers, such as tech startups, upon user consent, aggregate these data through apps and apply them to identify, for instance, the best financial products, such as savings account with the highest interest rate. Networked accounts will allow banks to accurately calculate mortgage risks and offer the best terms to low-risks clients. Open banking will also help small companies save time with online accounting and will play an important role in fraud detection. Services like Mint require users to provide credentials for each account, although such practice has security risks, and data processing is not always accurate. ÀPIs are a better option as they allow direct data sharing without accessing login and password. Consumer security is still compromised, and this is one of the main reasons why the open banking trend hasn't taken off yet. Many banks worldwide cannot provide open APIs of sufficient quality to meet existing regulatory standards. There are still a lot of blind spots, including those related to technology. However, open banking is a promising trend. The Accenture report offers many interesting insights.
Blockchain and cryptocurrencies
The distributed ledger technology - Blockchain, which is the basis of many cryptocurrencies, will continue to transform the face of global finance, with the US and China being global adoption leaders. The most valuable feature of a blockchain database is that data cannot be altered or deleted once it has been written. This high level of security makes it perfect for big data apps across various sectors, including healthcare, insurance, energy, banking, etc., especially those dealing with confidential information. Although the technology is still in the early stages of its development and will eventually become more suited to the needs of fintech, there are already Blockchain-based innovative solutions both from giants, like Microsoft and IBM, and numerous startups. The philosophy of decentralized finance has already given rise to a variety of peer to peer financing platforms and will be the source of new cryptocurrencies, perhaps even national ones. Blockchain considerably accelerates transactions between banks through secure servers, and banks use it to build smart contracts. The technology is also growing in popularity with consumers. Since 2009, when Bitcoin was created, the number of Blockchain wallet users has reached 52 million. A wallet is a layer of security known as "tokenization"- payment information is sent to vendors as tokens to associate the transaction with the right account.
Regtech or regulation technology is represented by a group of companies, e.g., IdentityMind Global, Suade, Passfort, Fund Recs, providing AI-based SaaS solutions to help businesses comply with regulatory processes. These companies process complex financial data and combine them with information on previous regulatory failures to detect potential risks and design powerful analytical tools. Finance is a conservative industry, heavily regulated by the government. As the number of technology companies providing financial services is increasing, problems associated with compliance with such regulations also multiply. For instance, processes automation makes fintech systems vulnerable to hacker attacks, which can cause serious damage. Responsibility for such security breaches and misuse of sensitive data, prevention of money laundering, and fraud are the main issues that concern state institutions, service providers, and consumers. There will be over 2.6 billion biometric users of payment systems by 2023, so the regtech application area is huge.
In the EU, PSD2 and SCA aim to regulate payments and their providers. Although these legal acts create some regulatory obstacles for fintech innovations, the European Commission also proposes a series of alleviating changes, for instance, taking off the table paper documents for consumers. In the US, fintech companies must comply with outdated financial legislation. The silver lining is the new FedNow service for instantaneous payments, which is likely to be launched in 2023–2024 and provides a ready public infrastructure.
The insurance industry, like many others, needs streamlining to be more efficient and cost-effective and meet the demand of time. Insurtech companies are exploring new possibilities, such as ultra-customization of policies, behavior-based dynamic premium pricing, based on data from Internet-enabled devices, such as GPS navigators and fitness activity trackers, AI brokerages, on-demand insurance for micro-events, etc., through a new generation of smart apps. As we mentioned before, the insurance business is also subject to strict government regulations, and it requires close cooperation of traditional insurers and startups to make a breakthrough that will benefit everyone.
Fintech solutions with Blackthorn vision
Even knowing the current trends, it is hard to predict where the fintech industry will be in 10 years' time. Without a doubt, its further development will boost many other spheres, like eCommerce, and create numerous opportunities for all market players. Traditional banking is declining, one of the reasons being the Covid-19 epidemic, which boosts the demand for financial apps with a contactless, transparent, and seamless experience. Software that will help users master various aspects of finance effortlessly, engage new audiences, ruin borders, and create additional value for all stakeholders is what the market needs now. Do you want to be in the vanguard of fintech innovation? Our professional team will bring into life any idea, following the best tech and security practices, for your business to grow and thrive. Contact us now to get comprehensive information on cost and implementation terms.