As science and technology evolves, our life has been bestowed with mind-blowing discoveries, superior facilities and better luxuries. Internet or mobile devices have transformed our daily lives and revolutionized every area of business virtually. However, banking and financial industry has been relatively slow in accepting technological changes due to the complex regulatory environment and a conservative approach from the government authorities. However, over the past years, we have witnessed a paradigm shift in these perspectives. In fact, it seems that banking and finance sector have realized the untapped potential of digital technologies. That is why technology-driven applications have been adopted by banking industry for digitizing core business processes, responding to customer needs and reassessing organizational structures. Furthermore, the industry has been keen on transforming their business models and technologies to gain an edge to forge ahead in the competitive landscape. And the most recent and significant disruptor affecting the banking and financial services industry is FinTech
- a portmanteau of Financial Technology. What is Fintech?
FinTech or Financial Technology is a dynamic segment where finance and technology merges to disrupt traditional financial sector, business models and banking structures. It is a movement that brings transformative innovations to financial services through the application of emerging technologies such as blockchain, artificial intelligence, big data and more. Gaining significant momentum in the recent years, this disruptive technology has opened up many doors of opportunities that enable convenience, personalization, and flexibility. Last year, FinTech sector raised $36.6 of venture capital investments across 2,304 deals globally.
In this blog post, we are going to shed light into the potential applications of FinTech in banking and finance industry. 1. Peer to Peer lending
Also known as “Marketplace lending or Crowdsourcing”, peer-to-peer lending (P2P lending) has been gaining immense popularity in recent years. According to the research findings published by Morgan Stanley, P2P lending companies could raise up to $480 billion in loans by 2020. Driven by technology, modern P2P lending is a business innovation that connect borrowers and lenders directly, making the returns effectively much higher. P2P companies operate online and provide a platform to offer identity verification, loan approval, loan servicing and legal compliances. Since these financial technology companies
manage the funds coming in from many disparate sources, it cuts out the middleman and overhead fees, thereby improving the economic efficiency of lending and investments.
The applications of peer-to-peer lending goes beyond personal or commercial loans as the specialty markets include crowd-investing (equity crowdfunding) and peer to peer fundraising. When it comes to people with low or no credit, P2P lending offers a better alternative to traditional banking systems. Since individual lenders doesn’t need to follow any regulations or criteria, they may choose to take up the risk by helping out an individual get out from their debt or achieve their lifelong business dream. This new fintech innovation provides a wide array of benefits to lenders and borrowers such as faster approvals and funding, transparency, distributed load, lower risks, security assurance and higher gains. 2. Smart solutions
Emergence of FinTech has paved the way for highly effective solutions for banks and finance industry so that it improves and simplify operations. Financial tech companies focus on developing customer-oriented solutions by leveraging the most advanced technologies. Some of the key technologies that are already being used by the financial technology companies include big data, robotics, blockchain, cloud computing, artificial intelligence and cybersecurity.
Big data is used by banks and financial services organizations for risk assessment, analysing financial stability, gaining consumer analytics, predicting customer churn and more. An innovative business process automation technology, termed as Robotic Process Automation (RPA) is enabling organizations to infuse efficiency and intelligence to their banking and financial operations. Customer service, accounts payable, credit card processing, Know Your Customer (KYC) process, fraud detection, and several other processes within a bank can be benefited from RPA technology.
Several leading banks in the US, Germany, Japan and other countries have been leveraging Artificial Intelligence (AI) and Machine Learning (ML) algorithms to predict and prevent fraud. Adoption of such key technological solutions allow the banking industry to enhance customer experience and gain an edge over the competitors.
Besides the utilization of latest technologies, FinTech payment companies also take advantage of social media platforms and mobile applications to connect, engage, inform and understand customers. Furthermore, chatbots have been launched to streamline customer-facing interactions, which in turn, reduces the overall time and costs. Value-added applications developed by the financial technology companies facilitate in extracting greater customer insights and deploying digital delivery. 3. Omni-channel banking
Activities that were once conducted only in bank branches are accessible at our fingertips now. Bank operations and financial services has been permeating all the digital channels - mobile, social media, online and more. As the world becomes even more digital, implementing an effective omnichannel strategy proves to be the most powerful tool for engaging customers and boosting customer retention. Banks and finance service organizations need to build omni-channel experiences for its customers so that they can boost engagement across digital and physical environments. Real-time data synchronization across the channels helps in meeting scalability, latency, and security requirements.
Self-service tools have becoming popular with every passing day and banks have the opportunity to analyze customer’s online behaviour and gain branch-level insights. Having an omnichannel banking suite helps to deliver enhanced customer experiences, meet the demands of increased efficiency and facilitate rapid expansion. Streamlining the operational efficiencies and introducing consistent interactions across various touch points, omnichannel approach creates new revenue streams and value propositions. 4. Blockchain
Considered as the most disruptive technology after the invention of Internet, blockchain technology is set to transform banking and finance service industry with its incredible attributes. Financial technology companies have been developing blockchain-enabled platforms to address the critical challenges faced by the banking sector. Cryptocurrencies (Bitcoin, Ethereum etc), the digital currencies that are serving as a viable alternative to the traditional monetary and banking system is the most popular application of blockchain.
Cryptographically secure decentralized architecture of blockchain allows consensus mechanism so that it serves as a public ledger that stores details about all the records and transactions. Immutability and transparency of blockchain
allows faster and secure transactions, which makes it a perfect choice for clearing and settlement sectors of banking. There is also “smart contracts” that has the ability to be self-executing and self-maintaining, thereby eliminating the need of intermediaries. One of the leading market operators, Australian Securities Exchange, has disclosed its plans to utilize blockchain platforms for clearing and settlements by 2021.
Distributed ledger system of blockchain offers three main benefits over conventional banking system - transparency, quicker transactions and reduced costs. Some of the blockchain financial services use cases include digital payments, client identification system, insurance, loans and credits. 5. Regulation and financial stability
Banking and finance industry are under constant pressure to stay in compliance with the changing rules and regulations. A new wave of technology is helping firms to address these expected and unexpected changes in regulations. Regulatory technology (RegTech) - a subset of FinTech, can be defined as “ a set of technologies that may facilitate the delivery of regulatory requirements more efficiently and effectively than existing capabilities.” This revolutionary approach focuses on exploiting the data being requested by regulators in a smarter way by creating a transition from “know your customer” (KYC) to “know your data” (KYD) procedures. Data centric nature of RegTech has the potential to prompt a shift from digitization of money to monetization of data.
Banking industry has placed keen interest in regtech as it automates complex tasks and ensure substantial savings and efficiencies. On the other hand, RegTech is also aimed at helping policymakers monitor those they are regulating. 6. Insurance Technology
Insurance Technology or InsurTech is another subset of FinTech that addresses the existing challenges and opportunities of insurance industry. Providing coverage to a digitally savvy customer base, insurtech enhances customer experience, creates cost savings, ensures great convenience, saves time and boosts process efficiency. Some of the insurance product innovations include microinsurance, usage-based insurance and peer-to-peer insurance. Insurtech is in its infancy stage where emerging technologies have been used to solve real business problems. Big Data, Artificial Intelligence
, remote sensors, mobile phone delivery and Internet of Things (IoT) are the major technologies utilized by InsurTech and has been gaining major investments and undergoing research. Conclusion
In the wake of increased security risks and compliance burdens, banking and finance service industry need to partner with FinTech companies
and make strategic investments in innovative technologies. After all, the future of banking industry will depend on its potential to create stronger profitable propositions for its customers whilst impacting their own top and bottom line growth.