The FinTech sector raised more than $16.6 billion in 2017 and this figure is expected to grow even more in the following years, not only in Europe and North America, but also in Latin America and South-East Asia.
The main accomplishment of FinTech as an industry is that it managed to provide modern loan and payment solutions to buyers and merchants in areas all across the globe, using innovative technologies to streamline processes that used to be time-consuming, unsecured and complicated. However, FinTech has also had a considerable impact on financial services as a whole, leading to a paradigm shift and pushing traditional banks to innovate. According to the PwC Global FinTech Report 2017, FinTech has had a massive influence on finance so far and will continue to in the next three to five years: more than 80% of incumbents plan on establishing partnerships with FinTech companies and 77% are interested in adopting blockchain technology by 2020.
When FinTech rose to power, the general perception was that it established itself as a direct competitor to traditional banking systems. Banks, which at the time were facing the aftermath of the economic crisis, could not yet provide modern users with the latest innovations, and FinTech quickly filled that gap. Now, it seems that banks and FinTech are competing less and less and a new trend is emerging: FinTech forces banks to innovate and keep up.
Banks are losing revenue to innovators
The modern individual has grown used to living in a world led by innovation, especially in tech. FinTech has brought these innovations closer, allowing for flexible payment systems and loan solutions, catering to the needs of small businesses or people who didn’t fit in the conventional banking infrastructure. This rapidly led to an increase in popularity and today 80% financial institutions are aware that innovators are costing them revenue and that they need to innovate as well in order to keep up with the increasing standards. How exactly are they going to do that? The report indicates that more than 80% of them are interested in establishing FinTech partnerships and even converging with them.
Emergent technologies that financial institutions will focus on
To bridge the innovation gap, financial institutions need to invest in the key emergent technologies that have made FinTech so popular, namely:
- Artificial intelligence (AI) – the implementation of AI in FinTech products has made these products more secure, allowing them to identify fraudulent behavior, suspicious transactions and potential future attacks. According to Contis, AI-based platforms not only have reduced processing times, but also lower risks of human error and duplicate expenses. The increased level of automation makes them perfect for small companies with staffing and budgeting issues, while at the same time providing a flawless user experience.
- Blockchain – 50% of the large FinTech companies interviewed identified blockchain as the most relevant to invest in over the course of the following year and 19% of large financial institutions interviewed shared this belief as well. Initially used exclusively in the FinTech sector, blockchain is now under the spotlight as more industries realize its potential.
- Biometrics and identity management – these are essential technologies that provide reinforced security to mobile devices and reduce the risk of fraudulent user authentication.
In addition to these emergent technologies, data analytics, cybersecurity, cloud infrastructure and process automation will remain as important as they are now.
Areas that will be most impacted by FinTech innovations
FinTech has already changed the way individuals and businesses interact with finance and make payments. In the following five years, FinTech will continue to have an impact on areas such as:
- Asset and wealth management. With the help of FinTech, businesses will be able to integrate digital solutions to improve financial operations, take better decisions based on accurate data and analytics, and provide bespoke customer support through digital experiences.
- Banking. One of the reasons why FinTech has gained so much funding in regions like South-East Asia and Latin America is because the population is underserved by the traditional banking infrastructure. New services will become available for this demographic, as FinTech companies apply nonconventional metrics to determine their eligibility.
- Insurance – new data models will allow insurance providers to better measure applicant risk and, from the client’s side, new technologies will enable them to compare and contrast various insurance options using state-of-the-art online calculators without leaving the comfort of their homes.
- Transactions and payments – as more and more people are using their phones to make financial transactions with friends and family, FinTech will continue to take advantage of existing technologies to deliver secure payment systems, proliferating mobile wallets and other digital payment options.
Attracting and retaining innovation
One of the biggest challenges in driving the growth of financial institutions remains that of attracting innovation and creating an environment to support this innovation. If more than half of financial institution representatives think that generating innovative ideas would not be a problem, only 40% believe in their ability to implement these ideas into actual products. Meanwhile, FinTech companies are by nature innovative business models that are very quick in adopting new trends and technologies.