Fintech

The union of financial services and information technology, or Fintech for short, is one of the most exciting – and fastest-growing – areas in global business today. Although people out there say that the emergence of the “Fourth Industrial Revolution” is relatively recent, if we go deeper into the relationship of financial services and technology, we can easily figure out that they “got entangled” in the distant past. The novel definition we use in the 21st century relates to a pretty old relationship.

Financial technology is a new way of delivering financial services to consumers and businesses. It includes technologies such as mobile banking applications on smartphones, the ability to transfer money on social media networks, and even customer service chatbots. Financial technology (FinTech) companies are developing new methods of payment such as QR codes or digital wallets that offer faster service at lower costs than cash or credit cards. 

Financial Technology (Fintech) is the use of software and computational power to conduct financial and business transactions and activities. Fintech companies use both old and new methods to provide financial services including banking, investing, payments, risk management, digital currencies such as Bitcoin or Ethereum.

The term “Financial Technology” is a neutral description of a wide variety of new products that are contributing to the further development and expansion of financial services. Those new products that fall into this category are generally referred to as Financial Technologies. Some functions of Financial technologies overlap with computer science and IT-related skills, but most can be learned through an intensive study involving exposure to best practices from existing financial services firms.

Types of Fintech

In general, there are three types of FinTechs: 

1. Trust and Identity: The trust and identity layer mainly includes biometrics and authentication technologies such as facial recognition, fingerprint readers, smart cards, and mobile devices.
2. Payment Experience: The payment experience layer involves services used to facilitate transactions related to cash, debit cards, credit cards, and online payment methods.
3. Intermediation: The intermediation layer consists of products that help users to access financial networks or transfer money between individuals or institutions through the use of smartphone apps, ATMs, websites, and other communication channels.

Methods for Fintech Solutions Classification

There are two methods for classifying Fintech solutions: by application and by purpose. 

Fintech technology can be applied to one of four areas:

1) cash transfer; 2) payments; 3) investing, or 4) data exchange.

The goal is to offer more rapid service with higher efficiency. Money transfers are often the first area where Fintech companies will make an impact because of the need to quickly move funds to recipients. Payments technology has grown dramatically in recent years, but major providers like Visa and MasterCard are traditionally slow to adapt to changes like cryptocurrencies like bitcoin, which can cause delays in processing payments.

Main Obstacles

A wide range of obstacles is preventing Financial Technologies from becoming major players in the current market. Some of them are described next :

•  Lack of regulation surrounding the industry;  The legal structure in most existence r is not ready for the awesome power it can have in the real-time financial services sector. This is causing a huge level of distrust, especially because of the lack of regulation regarding data protection.
• The financial services industry is not adapting quickly enough to the new technology;  Over the past few years, technology has changed at a rate that causes financial services industries to struggle to keep up.
• Lack of human resources; Because this sector does not offer high salary increases and also there are not many job opportunities for specialists in this field, attracting new employees can create problems.
• Limited consumer understanding concerning financial products;  A lot of consumers think that they need complete financial education before they can make decisions on their own about money matters. This is not true, and financial literacy can be achieved through a few simple steps:
• Lack of financial and legal support; As the industry is accelerating at a very high speed, we do not have many institutions that can help us to understand this change and how we can benefit from it.
•  Lack of trust between institutions and citizens;  As mentioned above, there is a lack of legal structure around Financial technologies making it difficult to depict them in the right light without having people thinking that they will be victims of Fintech companies. These companies should be regulated for their good work not to be ruined by a lack of security and honesty.

Fintech Version/Time Period

According to research, the evolution of Fintech can be divided into 4 key periods.

• Fintech 1.0

The period from 1866 to 1967 was the earliest stage of finance-technology marriage; it was characterized by the invention of the telegraph, steamships, canals, railroads, and other such technologies. All this enabled financial globalization, as it became possible to maintain the speedy transfer of financial information and transaction worldwide. In 1920, John Maynard Keynes (a pretty famous British economist) gave a pretty clear and detailed description of the processes happening during the 1st age of economic globalization, writing about the ability of every Londoner to order “various products of the whole earth upon their doorstep, while sipping morning tea in bed”.

While the speedy development of financial services was suspended for some time during the post-war period, information technology and communication sectors were being rapidly developed. Texas Instruments developed the first handheld financial calculator. IBM brought code-breaking tools to the market, Xerox Corporation produced the first fax machine, and finally, the USA’s citizens were introduced with the first credit cards.

• Fintech 2.0

The second period of finance-technology interlinkage starts in 1967 by introducing the first “Automated Teller Machine or in short ATM”. It gives commencement for the digitization of financial services. In 1970, CHIPS (Clearing House Interbank Payment System), the United States private clearinghouse for large-value transactions, took place. It was followed by establishing the Society of Worldwide Interbank Financial Telecommunications (SWIFT) in Brussels in 1973 that aimed at the interconnection of domestic payments systems across borders.

During this period, financial institutions started replacing paper-based mechanisms with computerization and risk management technology. One of the most well-known examples of that era would be designing in-house computer systems by Michael Bloomberg that were in ever-enlarging usage in financial institutions.

The interconnectedness of Fintech was perfectly illustrated, and its effectiveness was perfectly proved in the year 1987. While decades later, the causes of the global, sudden, severe, and largely unexpected stock market crash are still disputable, it is widely believed that it was the impact of computerized trading systems that bought and sold automatically, as based on pre-set price levels.

However, financial services had become predominantly digitized by the end of the 1980s, the advent of the Internet had thoroughly changed the banking technology future. At least 1 million people became online customers of 8 US banks, setting the stage for developing similar systems worldwide.

• Fintech 3.0

You all remember the 2008 global financial crisis, sure you do. It acted as a turning point in the union of financial services and information technology; it changed traditional banks’ main focus to Fintech banking. With the advent of new banking channels, the outdated conception of old banking branches has been completely wiped out. Instead, we are presented with a new reality of 24/7 reachable digital banking. Organizations that previously stayed away from investing in Fintech innovation faced a new reality in the twenty-first century; they understood the explosive need to innovate and meet the customers’ demands and expectations. A reason why the share of investment in Fintech has grown from five percent to almost twenty percent, which is approximately equal to the GDP (Gross Domestic Product) of the financial industry.

Technologies that might have seemed somewhat unachievable ten years ago are a reality today in delivering financial products. Online banking applications, pay-down services, automatic savings are some of the examples. Fintech companies started actively integrating voice technologies to complete various banking tasks; today, one cannot imagine a daily banking routine without chatbots‘ eminent presence.

According to TechCrunch, by the end of 2019, ninety percent of mobile users had paid online, while thirty-six percent of them used a payment application.

With that all said, now let’s get down to the real question.

Future of Fintech

Financial technologies offer great opportunities for new business models and revenue streams and the industry has the potential to transform financial services. We believe that the future is bright for the Financial Technologies sector with a huge increase of job opportunities in this sector. 

To become a part of this future trend, there is an urgent need for governments and regulators to create a favorable environment for innovation so that innovators can develop products and services that address various market needs. In addition, we think that Financial technologies have an opportunity to provide countries with a solution they have been looking for for many years – financial inclusion – which can lead poor people into a new digital, mobile, and smart world.

If you listen to the experts, they think that this year will bring a humongous change in the Fintech industry’s future. Goldman Sachs predicts that the worldwide Fintech pie will reckon up over four trillion dollars by the end of this year. Let me give you a brief overview of the four main trends in Fintech banking that will disrupt the industry and drive immense growth.

• Solely-digital banking

The age of traditional banking is fastly approaching its expiry date and will soon be replaced by totally digital banking. Most of the existing banks already offer global payments and transfers virtually, and those who don’t yet will soon join the bandwagon. The ability to trade currencies and cryptocurrencies online will come daily. According to the forecasts, it will lead to a drop in physical bank visits by thirty-six percent by the end of this year.

• Blockchain will get going

Unless you were living under a rock, you must have heard the term ‘Blockchain’, as it was one of the widely discussed topics last year. When compared to other spheres, blockchain’s embodiment into financial services was relatively slower. The future of Fintech is intimately tied to blockchain technology, and the primary reasons behind it are the transparency and trust it guarantees, significantly decreasing the time needed for transactions, and improving the cash flow.

• The advance of monolith services

Many Fintech companies divided their application logic into small independent services to reduce their costs connected with delivering particular services. Unfortunately, it turned out that their architecture is not so endurable, and managing them takes more resources (both time and money) than it was previously expected.

So, in 2020 Fintech companies are likely to go for monolith services instead, where numerous microservices will be held together and managed concurrently.

• Artificial Intelligence

The technologies have already come to active usage while developing financial products and services. According to research conducted by the National Business Research Institute and Narrative Science, thirty-two percent of providers have already been using AI technologies like voice recognition, predictive analytics, logical reasoning, and others.

Such statistics are predicted to increase in 2020 and beyond, encouraging more investment in robots and AI solutions.

Uses of FinTech

Financial Technologies are contributing to the development of new financial services products. Most of them are based on mobile technologies, allowing users to access their bank accounts wherever they are, without the need for a physical presence at a branch. Alongside digital wallets, these products are being used to reduce friction in the customer experience and make traditional banking more convenient for everyone. On Sundays when there is no one in the branch, customers can open an app and have money in their account when they get home again. In many countries, there is growing demand to access financial services from mobile devices when people do not have an internet connection or to pay a bill in a theater. 

Final Words…

The fintech industry, without any doubt, is one of the most densely regulated industries, almost every other day, we experience headlines connected with financial products cybercrimes. As the industry expands, so will the security risks. Thus the governments will have to develop new regulations and legislation on the national level to counter them. With that said, thank you for reading.