Financial technology, popularly known as Fintech, is a BFSI (Banking, Financial Services and Insurance) industry term used by the organisations that utilise the latest technology to make financial services more efficient.
Fintech is a term collectively used for new applications, procedures, products or service plans in the BFSI industry, comprising of one or more complementary financial services that are delivered as an end-to-end process using technology applications.
FinTech is fast gathering steam and is a game changer for efficiencies of scale and scope for BFSI companies. Increasingly, different financial industries are moving towards online platforms — Mobile payments methods are accepted on almost all e-commerce platforms, and most financial activities, like trading, personal finance and currency exchanges, can be done easily on mobile apps.
Key drivers of FinTech
Emergence of multiple technologies: Quick pace of technological advancement coupled with ever increasing innovations leading to reduction in service costs.
Customer Pull: Increasingly, tech savvy customers are more inclined towards online or digital services. They seek the power of anytime, anywhere convenience of transacting business without human interventions.
Government Support: Government also understands that the emergence of Fintech will irrevocably change the face of financial sector. Such technologies also give government a better handle on putting regulatory compliances in place (such as KYC and AML)
Availability of Funds: Many VC funds, PE funds and Angel Investments are flowing in Fintech startups leading to diminishing cost of innovation and passing of cost benefits to customer.
Five Technologies with Impact Potential on Financial Services
1. Digital Wallets
A digital wallet is a framework that securely stores users’ payment information and passwords for many payment methods and websites. By using a digital wallet, users can complete purchases easily and quickly with near-field communications (NFC) technology.
Digital wallets can be used in conjunction with mobile payment systems, which allow customers to pay for purchases with their smart phones. A digital wallet can also be used to store loyalty card information and digital coupons.
Technologies used by digital wallets
- NFC: Near-field communication (NFC) is a set of communication rules which enables two different devices to connect to each other when we bring them within 4 cm range. This technology is used in digital wallets and debit or credit cards.
- Unified Payment Interface: Unified Payment Interface (UPI) is developed by National Payment Corporation of India for transferring funds instantly from one bank account to another bank account. This services is available 24*7 and across public holidays.
Unlike other mobile wallets, which stores money in their own account before transferring to other account, UPI withdraws fund and directly deposit it to the recipient’s bank account when transaction is requested.
2. Artificial Intelligence
Artificial Intelligence (AI) is a branch of computer science that intends to make machines intelligent. AI has turned into the building block for cyber-physical system that are increasingly eliminating human interventions in BFSI sector. AI has slowly but surely become an integral part of FinTech. Some of its applications are as follows:-
– Wealth Management
AI is being used to predict investment pattern and analysis which many wealth management companies started using for their clients. Traditional algorithm trading was used to find different opportunities in the stock markets whereas the new generation of algorithms using AI, work day and night as an independent trader in the market to find best investment opportunities for clients.
Due to the deep learning algorithms embedded in AI systems, it is difficult for a normal human to match its accuracy.
AI can read billions of data points which can also spot trends better than humans. It can help the investors to predict future prices accurately without the effect of emotions.
– Game-changing insights and Predictive Analysis
One of the biggest use of AI in Fintech is to generate insights that can predict customer behaviour accurately. Already AI systems are in existence that can learn customers’ past behaviour and make accurate investment recommendations based on customers’ credit-worthiness.
Increasingly, most machine learning algorithms today are being coupled with predictive analytics to provide a rationale as to how a decision was arrived.
Predictive analytics would be widely adopted by enterprises either as best practice requirement.
– Early detection and prevention of cyber-security threats
Security is a big issue, especially when it comes to online transactions. Using Generative Adversarial Networks (GANs), Fintech companies can build robust security systems into their solutions.
The GAN works with two opposing networks, one generator and one discriminator. The generator network creates fake data that looks exactly like the real data set.
The discriminator network analyses both fake data and real data. Each network learns from the other and gets better over time. This system can be especially useful in detecting fraudulent behaviour and suspicious transactions. This leads to an early detection and prevention of cyber security threats.
– Visual identification and verification
Using techniques built through ‘capsule neural networks’ to visually identify customers and documents could provide a huge leap in streamlining functions like account creation, loan and insurance origination and documentation. An AI implementation could visually verify if the documents fed to it are authentic, and whether a customer trying to apply for a loan is the person who he or she claims to be. Coupled with a credit administration software that handles loan documentation for all parties (lawyers, evaluators, bankers), AI could provide degrees of automation that was previously thought impossible.
– Chat-bots that are more “human”
Also, paired with a customer engagement platform, an AI tool could power next generation chat-bots that can intelligently answer customer queries, effectively reducing load from customer services department.
Chat bots can be integrated with social networking sites, and accept requests for application and orders directly from social media channels.
According to a prediction by 2018 more than 2 billion people will be regularly using conversational AI to interact with virtual customer assistants on smartphones and connected devices.
3. Block chain
In recent times, Block chain technology has become increasingly popular in Fintech sector. The financials companies are adopting block chain solutions in their activities to enhance the security. This makes block chain a critical apparatus in building trust amongst customers and business.
It is becoming increasingly clear that block chain technology will be in a great demand among financial industry in the years to come.
– Blockchain for Digital Identity
The need for a single centralized source of truth about identities is becoming a necessity in every community and corporation. Imagine a decentralized digital identity system, a source of truth where every single data element, such as user attributes and credentials, are included in the system only by distributed consensus.
This model is the focus of many enterprises leading to the fact that users get more control over their identity as they can share it only with trusted parties. No single centralized entity can tamper with user identities or data.
For users, this model improves accessibility, privacy of their data and control over their personal data. For enterprises, this model reduces identity management cost, eases the monitoring process, and improves customer service and efficiency.
– Cross Boarder Payments
Block chain technology can improve many processes within the financial sector, such as cross-border payments. The transfer of value has always been an expensive and slow process. This is particularly true for cross-border payments. For instance, if a person wants to transfer money from Europe to their family in the Philippines, who have an account with a local bank, it takes a number of banks (and currencies) before the money can be collected. Using services like Western Union for the same transaction is faster but very expensive.
When regulation has been implemented, block chain technology will also be an interesting option for corporate cross-border payments. It is hard for an individual clients to lose money when the counter party either becomes bankrupt or rogue. It is problematic for corporates transferring large amounts of money through cross-border payments, in the eventuality of products and services not delivered in lieu thereof.
With the proper regulation, banks will be able to offer their corporate clients interesting propositions based on block chain technology. Increasingly several technology providers are already building their understanding of application of block chain technology to resolve and secure such cross border financial transactions.
– Smart Contracts
Smart contracts (which are one of the most highly anticipated applications of block chain technology) are computer programs that facilitate, verify, or enforce the negotiation or execution of an agreement. Smart contracts often emulate the logic of regular contractual clauses. Therefore, many kinds of contractual clauses can be made partially or fully self-executing, self-enforcing, or both.
The benefits of block chain technology are obvious as it leads to smart contracts that can be more secure than traditional contracts. Also, they can reduce a number of transaction costs associated with contracting, since block chain technology cuts out any middlemen. However, the fact remains that the quality of the output depends on the quality of the input.
Smart contracts are by no means magical constructs that understand user intent and are always flawless.
If there is an oversight in the text, the result might be even more dramatic than in a traditional contract, because the rules of the smart contract are recorded in computer code and cannot be freely interpreted according to ‘the intent of the contract’, but only according to literal meaning.
4. Big Data
Big Data, too has played a major role in the pervasiveness of FinTech.
One of the main sectors that has been positively impacted with Big Data is lending and credit scoring. Traditionally, the credit scores were based on basic financial transaction and these scores were referred to for all credit activities in the financial sector. With the advent of Big Data, the scope has been expanded to consider factors such as willingness, ability and behaviour.
BFSI companies are heavily leveraging big data and using digital channels for customer acquisition. Data analytics help financial services firms in offering contextual and personalized engagements and increasing the opportunities of cross-selling and upselling.
In fact, use of AI and Big Data together helps financial institutions to get insights from social media and thereby improving customer engagement. This leads to better customer experience as they are benefited with better advice on their investments.
Other applications of Big Data in BFSI sector
– Providing better value to customer
All BFSI companies are using Big Data to offer better customer service. However, many customers have expressed concerns about companies having access to their data. Accordingly to some survey, customers have stated that they are willing to give financial institutions access to their data if it leads to better service, especially if they are seeking loan facilities.
– Meeting Compliance Standards More Consistently
Regulators around the world have adopted stricter standards in the aftermath of the financial crisis. Big data helps in conduct of better internal audits, which reduces the risk for companies to get penalized from financial regulators. Many firms believe that Big Data has completely changed the auditing process.
5. Virtual Reality
In Fintech world, usage of VR technology means truly experiencing a financial service or product in a virtual store for financial products that will help a customer make a purchase decision from the comfort of their house using a handheld device.
These virtual or augmented spaces will be able to simulate real-life scenarios that can enable you to have a superior understanding of a financial product or service.
The real-time user experiences (UX) provided by this technology has the potential to build new market dynamics. Though these are still early days for VR and AR, BFSI companies are already able to see the potential of wider engagement and adoption that is about to happen.
Fintech is all about UX and customer engagement that is what differentiates a Fintech enabled company from traditional financial company. This trend can only accelerate as a result of reactive frameworks, standard data formats, and immersive experiences.
– Data Visualization Utilizing VR/AR
Financial markets and trading are heavily dependent on automatic processes and algorithms. However, with emergence of too much data it is becoming impossible for humans to understand the outcomes of analytics. This is where VR can come in and create an opportunity with data visualization products.
Use data visualization to analyses large clusters of data can help decision makers understand complicated concepts and identify new patterns visually. Utilizing data visualization tools, the end user can access a broad picture or dive in deeper into highly specific areas easily and quickly.
– Disrupt The Client-Service Approach To Banking
Innovative companies are demonstrating a VR enabled wealth management prototype that can merge wearables, algorithms, and human relations that can make banking experience truly enjoyable.
– New VR/AR Payment Opportunities
VR/AR technology will also bring about new payment options that will enable customers to make payments virtually.
In a prototype application, Master Card has demonstrated an experience where by a customer can make a purchase without exiting the virtual world.
As of now, VR/AR and associated technologies are in their initial stages. But soon, they about to explode and make a huge impact on all segments of BFSI.
For now, some of the technologies are in its initial stages. As as evident, they are on inflection point and sooner than later, their impact would be seen in the Financial sector. Currently, hundreds of entrepreneurial startups are working on new applications and solutions for financial sectors to take Fintech on another plane.
About the author: Dr Parag Diwan is a high technology enthusiast and an established ‘Eduprenuer’ who has built some of the finest Institutions. Currently, he is fascinated with Industry 4.0 and how it is being shaped by emerging technologies.
FinTech: Transforming the BFSI sector was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.