The pace of change in the banking and financial services (FS) field is faster than ever and it is fascinating to imagine what the next generation of banks and payments systems will look like. They will not transform overnight, however. Instead, a series of small, incremental changes will eventually lead to their transformation and fintech is sure to be at the very centre of their reinvention. One of the most significant changes has been the launch of new modifications of fintech products and services developed for specific functions within the financial ecosystem, such as robo-advising, insurtech, and regtech. There seems to be no doubt that fintech innovation will change FS; the only question is, which startups and companies will take the lead?
It seems inevitable that the mixture of future financial technologies, rigorous regulations, investor capital, technological advances, and the globalisation of financial services will lead to even more trendsetting developments in the future. But what exciting development can we expect over the next decade? This feature looks at seven movements in the fintech industry that everyone should be aware of.
- Providing access to the unbanked
According to the World Bank report about 1.7 billion adults remain unbanked globally, i.e. they do not have an account through a mobile money provider or at a financial institution. Almost all unbanked adults live in the developing world because account ownership is nearly universal in high-income economies. In fact, nearly half of them live in China, Bangladesh, India, Indonesia, Nigeria, Mexico and Pakistan. When the unbanked have a mobile phone, it can provide access to mobile money accounts and various other financial services. The market is vast. About 1.1 billion unbanked adults worldwide own a mobile phone. Mobile phones and access to the internet provide huge opportunities to increase financial inclusion and provide new financial services that are tailored to the unbanked, first-time users of financial services, women, poor people, and other disadvantaged groups who can have low numeracy and literacy skills. Such technologies are key as they could help to overcome the barriers that prevent unbanked people from accessing financial services. People would no longer need to travel far to a financial institution, digital technology could increase the service affordability by driving down the cost of receiving and sending payments. During a five-month relief programme in Niger, people saved an average of 20 hours in travel and waiting time to collect their payments by making the switch from cash to mobile payments for government social benefits.
One of the core goals of any bank or financial institution, is to extend its services to the largest potential audience possible, and tapping into the unbanked opportunity will continue to be a big trend in the upcoming years.
2. Digital-only banks
A digital-only bank, also known as a neobank, is an app-based bank that has no need for physical branches. Automated processes and real-time updates are used for numerous services and customers are offered support via in-app chat. The unbanked in developing nations prefer to interact with app-only digital banks, as do many millennials in developed countries. Both want a cheaper, more convenient service than what is available to them at the moment.
Neobanks are redefining the future of banking around the world. In some countries, such as the US, their development has been weakened due to regulatory barriers, but the recent loosening of regulations suggest that digital-only banks in US are ready to take off. The new financial reality is that we will soon have online global transfers, mobile wallets and AI financial assistance available to us with no need for physical branches..
Business Insider Intelligence reported that 48% of banking executives believe new technologies like blockchain and artificial intelligence (AI) will have the greatest impact on banking through 2020. Blockchain promises to bring about a global makeover of financial systems. It not only offers new technology but also a new philosophy of decentralised finance that is focused on eliminating centralised processes. Blockchain ideology has so far inspired the creation of various online P2P (peer to peer) financing platforms that enable monetary interactions to take place in a more decentralised way. This distributed ledger technology (blockchain) is able to enhance existing systems and processes and is the birthplace of cryptocurrencies.
There has been talk about a crypto revolution for over ten years and new cryptocurrencies are expected in the future. Already some nations are working on making their own national cryptocurrencies and so there could be a gradual shift from fiat to crypto. As coin stability is achieved and regulatory frameworks around crypto are tightened, digital money payments will become more common. Banks are already exploring blockchain technology in the hope of cutting costs and improving internal processes.
4. Artificial Intelligence (AI)
More than $1 trillion of our financial services cost structure could be replaced by AI and machine learning (ML) algorithms. AI creates change in every area of the financial services industry, including the front, middle and back office. Consumers can already see AI being used by most banks through chatbots in the front office. Love them or hate them, chatbots are here to stay. Conversational banking is now used by Morgan Stanley, the Bank of America, JPMorgan, HSBC, to name but a few. Integrating financial data and account action with software agents which can hold a conversation with customers is the most promising front office AI application, with the smart virtual assistant market expected to reach up to $19B globally within five years. With complex regulations and processes moving towards real-time, know-your-customer (KYC) systems, AI oversight and risk-management could become very valuable in the middle office. On the other hand in the back office, machine learning can automatically power simple credit underwriting models. Insurance underwriting can also use machine learning on applicant data in order to price policies, while insurance companies can utilise machine vision to assess claims, including flood damage and accident damage to a car.
If you are considering either launching a business or changing your career, then AI is the smart choice. More than 51 percent of UK and US companies lack the specialists to put new AI strategies into practice. Companies will be forced to invest in developing in-house AI experts because more than 133 million roles are to be created within two years, with the work being divided between algorithms, machines and people.
The financial sector is a very regulated industry and the fintech revolution requires a parallel development of regtech. This refers to new technological solutions that improve and streamline regulatory processes. Real-time tracking of airliners’ locations and monitoring corporations’ compliance with environmental regulations are just a couple of examples of how technology could improve the regulated industry. Regtech has emerged in response to the top-down institutional demand that has arisen from the huge growth of compliance costs. Legislators, technology companies, and reputed financial actors, will work together closely to launch new regulatory innovations, but these frequently need time to mature. As did the application of biometric authentication or fingerprint scanning for financial transactions, which created a buzz after the data theft in 2015. Recent research, however, reveals that the market size is growing, and over 2.6 billion biometric users will be in the payments market by 2023.
6. The cloud
It is clear that the public cloud will eventually become the dominant infrastructure model, as cloud-based computing is only just getting started. Many financial institutions use cloud-based software-as-a-service (SaaS) applications for their business processes, which might be seen as non-core, such as CRM, HR, and financial accounting. They also turn to SaaS for ‘point solutions’, including KYC verification and security analytics. However, as application offerings improve and CIOs and both COOs become comfortable with these arrangements, this technology is becoming the main way that core activity is processed. Core service infrastructures in areas like credit scoring, consumer payments, and statements and billings for asset managers’ basic current account functions are on their way to becoming utilities.
Most fintechs launching now are cloud-native. As a result, teams achieve better scalability and agility as they don’t have to spend time managing the data centres and infrastructure. Meanwhile, IBM has announced it is collaborating with Bank of America in the creation of a fintech public cloud with due allowance for regulatory compliance, security and resiliency. The core of the financial revolution is fintech firms that innovate speedily and offer customer-centred services, which require cloud computing technologies. So migration to the cloud is now inevitable.
The industry’s digitisation is a long-term fintech banking trend, and implicates a particular vulnerability to identity theft, fraud, espionage and money laundering. Cyber-threats have had a big impact on the financial services industry. It was revealed in the 2016 global CEO survey that 69% of CEOs in the financial services industry felt somewhat or extremely concerned about cyberthreats, compared to 61% of CEOs across all the other sectors, and this unlikely to change anytime soon. Data breaches and IT crashes have become increasingly common in banks and prove very costly. TSB’s crash in April 2018 led to a £107 million loss, and challenger bank Monzo asked 480,000 customers to change their PIN numbers in 2019 due to a bug in their security system. When a cyberattack hits a financial institution’s online banking services, the average costs are $1.8 million. Significantly, the biggest losses have been distributed among smaller companies, due to less investment in IT security.
Despite security concerns about fintech, which about 71 percent of adopters currently have, they still prefer digital financial products. This is great news for the industry but places extra responsibility on fintech firms and their tech departments. As a result, financial institutions will remain committed to investing in cybersecurity methods and strategies now and in the future.
At She Leads Company we believe that the world needs more female leaders in fintech, investors and more female-led startups. Our mission is to close the gender gap in business and access to finance for women. By working with investors, VC funds, banks, startups and corporates we strive to bring more investment, more recognition, and more support to all women. If you are a woman working in fin-tech and would like to share your knowledge and inspire other women to choose fintech you can join our platform and offer your mentoring and consulting services at www.sheleadscompany.co.uk