The field of financial technology (fintech in short) comprises a bundle of emerging technologies driving inventions and innovations in the financial instruments, breaking new grounds in business models, products, services, applications, processes, management, and governance. It refers to a new breed of financial products or improvements in the existing ones by combining the strength of innovative concepts and cutting-edge technologies. Fintech is no longer a buzzword, rather it has become a new normal for the financial industry.
The fintech phenomenon is mainly riding on the wave of rapid developments in technologies including blockchain, smart contracts, big data, predictive analytics, machine learning, deep learning, artificial intelligence (AI), and fifth generation of telecommunication network (5G). Quantum computing is also expected to become mainstream sooner than later (see figure 1). These tech advancements have pushed the boundaries of current outreach and capacity of the traditional financial industry to new highs by introducing new mindset, markets, and clientele.
Objectives and Coverage of Fintech:
Fintech addresses the issues within the financial sector and solve them by improving access and convenience without the need of expensive infrastructure. It has evolved the systems to bring in ease, accessibility, simplicity, efficiency, and speed, while decreasing cost and required resources through automation and digitalization. Moreover, it has widened the spectrum of access to the financially underserved population.
The umbrella of Fintech has been constantly evolving in terms of its scope. Initially focused on banking, it also now covers insurance (insurtech), regulations (regtech), payment and remittances (paytech), wealth management (wealthtech), and many other areas of finance (see figure 2).
Current Growth And Industry Progress:
According to KPMG, the global investments in the fintech companies were recorded to be US $24.7 billion across 1076 deals in 2016. Garrick and Rauchs from the Cambridge Centre for alternative finance indicated that the cryptocurrency market capitalization observed a boost of about 3 times since early 2016, reaching US $25 billion in March 2017. In addition, PWC estimated that in mature markets where data is readily available, artificial intelligence would automate a considerable amount of underwriting by 2020. Furthermore, it is estimated by CitiGroup that the European and US banks would cut another 1.8 million jobs in the upcoming decade with the rise of Fintech.
There are various applications of fintech that may increase the business value. These applications can be further classified into major operational business processes which may include payments, advisory services, financing, and compliance. Considering the payments aspects, cashless payment is the most important trend. The demand for cashless payments from customers has grown and many organizations now focus upon providing such payment solutions to the clients. This allows better performance through ease access, usability, reputation, and security. In terms of payment, blockchain technology has been brought to interest widely. It is an ingenious way of transferring information in an automated and safe manner. The information is recorded on the block and each block is linked with each other using cryptography. It is resistant to the modification of data and hence avoids fraud and speculations. It is a decentralized distributed ledger and is considered secure by design. Smart contracts can be placed on the blockchain which can automatically execute when predetermined terms and conditions are met. They facilitate the performance of a contract digitally. This enables efficiency, speed, security, and better time management for the businesses as well as individuals.
Fintech Adoption By Industries And Sectors
According to PWC, 88% of legacy banking companies fear losing profits to fintech firms. Continuous risk about losing profits to fintech companies is faced by the banks and similar businesses. 24% of all revenue is currently at risk as per the fintech consumer adoption statistics. Moreover, the collaboration with fintech companies is set to increase by about 82% as traditional financial companies plan to collaborate to avoid the risk of losing revenue. The increase in partnerships with the fintech companies has increased from 32% in 2016 to 45% in 2017. People no longer feel the necessity to visit the physical locations due to the improvements in the banking services online. According to Singularity University, 46% of customers use digital channels for personal banking exclusively.
The projections for the fintech industry are extra-ordinary. More than 69 million people used proximity mobile payment in 2020. In 2018, there were about 58.7 million people who used mobile payment services however this figure rose to 69.4 million in the year 2020, showing an increase of about 22%. According to business insider, in-store mobile payments for the US are set to hit $128 billion in 2021. The future trends show that mobile payments are expected to rise significantly. The global use of mobile payments is set to see an increase of 28% in 2022, surpassing the use of cash and credit cards.
In advisory services, fintech has been considered as a disruptive technology for the advisory service sector. Robo-advisors have now taken the place of the financial advisors and provide financial or asset management advice for the customers. These robots, by utilizing artificial intelligence, machine learning and big data, can facilitate customers in a better way by personalizing effectively. Existing applications of insurance services that involve using wearable computers may be used to collect data by the insurance companies and provide specific insurance packages.
In financing, traditionally the sources of financing include family, friends, bank borrowing, venture capital, stock markets, bonds, and others. However, the development of fintech has given a rise to other financing options which may include financing channels outside the traditional systems. These channels may include crowdfunding platforms. These platforms may allow businesses to raise funds at a lower cost effectively. Moreover, equity and social cohesion may be promoted with the help of fintech. Fintech start-ups offer businesses fast, flexible, and digitized factoring processes. To sum it up, fintech lowers transaction costs, enables innovative financial alternatives, and improves the information sharing process.
In compliance, the emerging direction may include artificial intelligence, big data, advanced algorithms, mobile devices, robots, and drones. From the business point of view, compliance does not directly add value to the business therefore businesses aim to reduce the related costs and improve the effectiveness of the compliance processes. To achieve these objectives, businesses may have to start using technologies to enhance regulatory processes.
Fintech is a disruptive phenomenon for the traditional financial industry, which is slowly and gradually increasing its market share in the economy. It also continues widening its scope and outreach. Furthermore, new concepts and use cases are becoming mainstream at a high pace. In fact, fintech should not be considered as a segment of finance, but it is indeed the future of finance.
Dr Farrukh Habib is an expert in Shariah (Islamic law), finance and economics. He is an advisor, consultant, trainer and researcher by profession with a strong educational background and vast global experience. He is involved in the Islamic fintech and halal digital economy, focusing on crowdfunding, micro-investments, blockchain, smart contracts, tokenized economy, application of artificial intelligence, internet-of-things (IoT), big data, predictive analytics and machine learning in the financial sector. He has contributed in several projects, researches, corporate trainings, workshops and consultation work. He has also developed his own proprietary shariah-screening criterion for crypto-assets.