Financial technology, or FinTech, is a term that encompasses all technology-driven concepts, processes, products, applications, devices, and business models that seek to innovate, modernise, and revolutionise the world of financial services.
Credit cards, ATMs, and mobile banking are just a few examples of this exciting area. Digital innovation has already offered a range of financial solutions, such as faster transactions and better customer service. At the same time, FinTech has ushered in a number of radical concepts, from P2P (peer to peer) lending platforms and cryptocurrency to DeFi (Decentralised Finance), which may threaten traditional financial institutions.
FinTech offers solutions that cut across borders and seek to provide fast, global services at a fraction of the cost. Furthermore, this sector is set to go from strength to strength in the future, with the global FinTech market predicted to grow to $309.98 billion by 2022. Let’s examine just how dramatically FinTech is transforming the future of finance.
The Future of Finance
Over the last few years, FinTech has had an undeniable impact on the finance industry. Here are the key FinTech solutions that are transforming the financial world.
AI (Artificial Intelligence) & ML (Machine Learning)
AI and ML have already transformed the way the financial sector seeks to prevent fraud. With the help of these technologies, any suspicious transaction or intrusion is detected in real-time. This allows financial institutions to take immediate action, helping to protect their clients.
Banks use AI-driven bots to provide better customer service through automated responses to queries and are now even automating some banking operations. This considerably reduces human error, saving time and money.
Some AI bots, known as Robo Advisors, can also provide investment advice to customers with little or no human intervention, using their past transaction history to better manage their finances.
Insurtech is all about using advanced technology to improve insurance services, to eliminate issues associated with traditional insurance services and provide more benefits to insurance providers and beneficiaries alike. These technologies make use of AI, data analytics, advanced digital communication methods, IoT (Internet of Things), and more to meet these objectives.
One example of this is the use of GPS-based tracking software for vehicle insurance. However, the full potential of this will only be realized when the sector finds solutions to several existing challenges, including regulatory issues and cooperation from the traditional insurance industry.
Cryptocurrency and Blockchain
While Bitcoin kicked off the era of cryptocurrency, today there is a huge number of different cryptocurrencies available. Cryptocurrency is a digital currency that can be used for direct transactions without the interference of any controlling intermediary like banks, financial institutions, or even governments. This facilitates faster and much cheaper transactions across the world. Besides being highly liquid, cryptocurrencies provide users with the highest levels of privacy and security, thanks to the blockchain technology which makes cryptocurrency possible.
Blockchain is an open, distributed ledger where all cryptocurrency transactions are recorded. Each transaction is recorded as a piece of digital information in a separate block, which is time-stamped and sealed. This means that no one can change it later, including the owner of the associated asset. The subsequent transaction will be recorded in a different block which is tied to the first transaction’s block. This chain of secure blocks of information is what gives blockchain its name, and has revolutionised the banking industry.
P2P (Peer to Peer) Lending
Peer-to-peer lending is a FinTech service which is highly advantageous for both borrowers and lenders. In this system, a digital platform connects borrowers with lenders, giving borrowers access to a large number of lenders. The platform is responsible for verifying and pre-approving borrowers so that the lenders can securely offer loans and charge a fee for the service.
P2P lending is best for individuals who want to get a better return on their assets than they would in the traditional markets. P2P lending platforms are one of the most user-friendly lending options and are a win-win for lenders and borrowers alike. It is a FinTech solution that could easily take over the lending industry.
Crowdfunding is yet another successful FinTech concept made possible by the rise of the internet and social media. It helps new business ventures find investors quickly and easily. In crowdfunding, organisations can get the funds they need to start a new venture or project from dozens, hundreds, or even thousands of people across the world.
Online crowdfunding platforms such as Kickstarter and GoFundMe bring individuals together across geographical and social boundaries, allowing businesses to attract large sums of money in a short period of time. This also breaks down economic boundaries, as people can contribute amounts as low as €10. The platform charges a percentage as fees from the collected amount.
DeFi (Decentralised Finance)
DeFi are digital financial trading platforms specifically designed for cryptocurrencies, thanks again to blockchain technology. Just like a traditional stock exchange, it is a comprehensive financial ecosystem, only trading mostly in cryptocurrencies, and peer-to-peer transactions dominate.
DeFi platforms also support other financial services such as borrowing, lending, and insurance. The word ‘Decentralised’ in DeFi means there is no central authority such as a government or stock exchange to control the transactions.
The Transforming Force of FinTech
FinTech is a double-edged sword for traditional banking and financial institutions. On one hand, it provides enormous benefits through state-of-the-art solutions to help financial institutions perform better and progress. However, FinTech is also giving traditional financial institutions a run for their money with progressive, effective, and advantageous solutions that make traditional business models look almost irrelevant.
As far as the future of finance is concerned, it is likely that traditional banking will gradually adapt itself to the new concepts and solutions, and traditional systems and models will gradually disappear. However, the road ahead for FinTech is not completely smooth, with challenges such as regulatory issues being potential roadblocks. Nevertheless, given the enormous benefits of FinTech, these issues will surely be resolved over time.