While there is no wonder regarding the impact of technology over the financial industry, the rapidity with which non-traditional financial products are making their way towards consumers took the brick-and-mortar banks by surprise. But as mobile banking and wireless payments were quickly assimilated by the industry, terms like blockchain and cryptocurrency have yet to overcome the stigma that’s been put on them. But what exactly is financial technology and what do financial specialists expect to happen in the years to come?
What is Financial Technology?
Financial technology or Fintech, for short, represents all technology that seeks the improvement and automatization of financial services. While in the beginning, fintech was used more to describe the processes and technologies applied by financial institutions, it has since shifted its orientation more towards the customers. In essence, fintech is used to ease the customers’ access and management of financial products.
Along with the evolution of technology and smartphones, fintech has evolved to englobe any type of technological inventions utilized for financial purposes. From stock trading to money transfer and credit applications, everything can now be done online, with just a few clicks. Research shows that a little over 33% of consumers are constantly utilizing at least two fintech products and acknowledge the importance of those products in their everyday life.
Financial technology is considered to have disrupted the traditional financial system, by offering consumers easy access to financial products they would otherwise not qualify for, such as secured loans and mortgages. While banks use traditional lending models to extend loans to customers, fintech companies use new lending models that often focus on peer-to-peer transactions.
With the rapid evolution of technology, it is only expected for fintech products to continue revolutionizing the industry as we know it. Specialists predict that, although cryptocurrencies have conquered the media nowadays, other fintech products will soon take the spotlight and consolidate the idea that fintech is more than a passing phase.
Automation and Artificial Intelligence
With AI being the next trend in every developing industry, it was only a matter of time until it reached the financial domain. In the recent years, software that deals with money laundering, compliance and transaction monitoring have been intertwined with AI to facilitate data processing and product customization. In the near future, fintech companies will see an increment in ROI, as more and more products continue to flood the market.
Robotic process automation (RPA) programs will be used for repetitive tasks that are performed by humans, allowing the process to be faster and more precise, eliminates human errors and allowing employees to focus on other tasks. Although the initial costs of RPA software are quite big, revolving around $50,000 per robot, the annual maintenance and running costs are significantly lower than a human employee’s annual wage. Annual costs per robot unit can reach about $15,000, but companies are expected to see a return of investment between 40-100% in the first 3 to 8 months of implementation.
Recent studies reveal that the mobile banking and payment industry worldwide is processing over a billion dollars daily. The more economically disadvantaged areas, such as sub-Saharan Africa and Latin America, are the ones benefiting the most from these types of products, due to financial exclusion.
Traditional financial institutions typically have a more strict qualification criteria, driving individuals more and more towards mobile banking accounts. While in 2014, the number of individuals utilizing mobile money accounts in sub-Saharan Africa was a little over 10%, it has since then increased tremendously, reaching 21% in 2017. Based on these facts, financial experts predict the numbers will continue to increase at the rapid pace, especially in regions with low financial inclusion.
Blockchain solutions are also expected to be completely included in financial technology, providing a thicker security layer, which will prevent fraud and protect the customers’ personal data.
From Disruptors to Partners
In the near future, fintech companies are expected to transform from disruptive competitors to collaborators of traditional financial institutions. The main reason why fintech products have been perceived as disruptors by the financial industry is the hype revolving around cryptocurrency and blockchain. The industry is mainly trying to prevent fintech companies from operating outside the wall of regulations, which is how cryptocurrencies have been perceived.
But there is more to the fintech industry than cryptocurrencies, with applications including insurance technologies, regulatory technologies and smart contracts. This way, fintech companies are expected to partner up with traditional financial institutions and contribute to their evolution.
Online lending programs have experienced a massive increment over the last years, leading to the apparition of other products, such as LoanStar, which is a loan comparison website that helps individuals determine the best lending program that suits their needs. These types of programs can be easily modified to include traditional financial products.
Real-Estate and Smart Contracts
The way smart contracts work is they help individuals exchange money, products or property in a transparent way, replacing the services of an intermediary. To better understand how smart contracts work, let’s take the example of renting an apartment. The tenant pays the amount stipulated in the contract through a blockchain and the landlord will provide the tenant with a digital entry key by a set date. After that, the amount will be directed towards the landlord. If the key is not provided on time, the money, which is held in a virtual account, will be refunded to the tenant. This type of system can reduce money laundering and guarantee the legitimacy of the transaction. Smart contracts will completely dismiss intermediaries, which are believed to slow down transactions and will ease the communication between buyers and property owners.
Experts estimate that by 2020, over 20% of real estate transactions will be made utilizing smart contracts and by the end of 2019, the first tokenized real estate projects are expected to reach the market.
The inclusion of blockchain technology will benefit the underbanked or unbaked individuals, with their number expected to drop by under 1 billion, by the end of 2020, as opposed to over 1,7 billion, which is the current total. This way, people or businesses which have experienced trouble in financial products will now have the opportunity to take out loans or open bank accounts, contributing to the global movement of money.
With blockchain and cryptocurrency being the elements that brought fintech into the spotlight, it would only be natural for them to be the ones taking it to the next level.