Financial Technology, aka FinTech, in its modern moniker, has been a great disrupt or. The growth rate of this industry is not only massive but is also dynamic. With each passing day, the FinTech industry is witnessing a steady acceleration of positive change. However, there are still certain critical things that a common person is unaware of about FinTech.
Understanding the FinTech Concept
At its core, FinTech helps marketers, companies, and consumers better manage their day-to-day financial operations through advanced software and tools. Since its advent in the 21st century, it has rapidly become a buzzword in business and technology, and the hottest property for marketers to invest in. And it is only going to get bigger and bigger with time.
For many years, progressive thinkers in the financial sector wanted to bring some change in the way finances are handled and transactions made. These striving young entrepreneurs desired to build a more tech-oriented financial landscape, which could be a befitting response to the global financial crisis.
The FinTech Landscape
The concept of FinTech might be recent, but already it has included sectors and industries like retail baking, fundraising, non-profit organizations, and investment management. The global financial sector is projected to be worth $26.5 trillion in 2022 with a CAGR of 6%. And by end 2021, debit and credit cards, UPI payments, e-wallets, all put together are expected to surpass cash at all points of sale.
Some of the most significant areas where technology has had a major influence on the finance sector are:
- Cryptocurrency and digital wallet.
- Blockchain, including Ethereum, which is a distributed ledger technology. Blockchain has no central ledger, but maintains transactional records on a network of computers.
- Open Banking, which involves Blockchain.
- InsurTech, an amalgamation of Insurance and Tech, to simplify the insurance sector.
- Robo-advisors, that operate through algorithms to automate investment advice to investors. An example is Betterment.
- Cybersecurity, owing to the insurgence of cybercrime and decentralized data storage, the areas of cybersecurity and FinTech is now interconnected.
When the sudden pandemic outbreak hit the world, FinTech was one of the few businesses that boomed. COVID-19 caused a mass upward trend in this industry as several billion people started relying on contact-less payment methods. In Europe alone, there was a 72% rise in the use of FinTech apps.
Nonetheless, as per a recent report by StatInvestor, 63% of people in the US never heard about ‘FinTech’ and what it is all about. Some 23% could confirm they had heard the word but not the actual meaning of it. And only a mere 14% could give a legitimate definition. It is clear that there are still some sections of people unaware of how technology has fused with the financial industry and what its benefits are.
Today we will talk about those aspects of FinTech that were otherwise unknown to many. Let us dig in.
1. More and more downtrodden people are benefited with FinTech
This may sound surprising, but FinTech did upgrade the lives of the people who lagged behind. FinTech has made it extremely easy to access bank accounts, decreasing the need to go there physically. And this is all the more true in the impoverished regions of the world, where they never had any access to the funding sources. This allowed them to escape the poverty trap and have their own income.
One example in this instance is M-Pesa, a Smartphone-based money transfer service that was released in Kenya in 2007. This app transforms a Smartphone into a bank account, allowing the users to send and receive payments, make deposits, and many more. M-Pesa is known to have curtailed crimes related to monetary transactions, a great achievement of FinTech within an entirely cash-based society.
2. Surprisingly, FinTech permeates, and sometimes creates, unconventional sectors
As of now, FinTech is everywhere. This includes some unlikely sectors too.
For example, online crowdfunding platforms like GoFundMe, Kickstarter, Patreon, FundRazr – are primarily created by FinTech ingenuity. Insurance companies like Oscar, a US health insurance company, utilize IT, making medical claims simplified and easy. This is an instance of FinTech too.
FinTech is now an omnipresent concept, fairly inclusive of unconventional institutions. This is another aspect that many were unaware about FinTech until now.
3. A vital contributor to Loan Market disruption
Traditional banking institutions are deep drowned in compliance issues and bureaucracy. And therefore, a single loan application process takes a very long time. However, with the introduction of smart technology, users can now apply for a loan or make claims in a short time, thus saving their time and effort. One can now compare the loan prices, interest rates, and other specifications in a way that is impossible with traditional banks.
This includes peer to peer (P2P) lending platforms like Lending Club, Prosper, etc. Business loan sites like Lendio, Kiva, Fundera and Kabbage leverage FinTech to process loans.
Also, there are mortgage-focused FinTech companies, where traditional brokerage is out of the question, and the loan approval process is way faster.
4. Soon, FinTech would devalue the monopoly of Credit Ratings
Traditionally there is no denying that credit rating is the official holy grail of the overall loan process. The better one’s credit rating score is, the more credit-worthy one is in the eyes of financial institutions. If one’s credit rating falls, all opportunities shut off, and it becomes very difficult to build up the rating.
All that might soon change with FinTech being in the driving seat. FinTech is about to disrupt this monopoly on credit ratings. Already the world has seen the advent of FinTech lenders like Affirm, which offers loans regardless of credit ratings. It also helps individuals of build their credit ratings with time.
We also have Upstart, which scrutinizes alternative information while creating a credit trail, such as employment history, to evaluate credit-worthiness. This is a significant disruptor to the traditional credit ratings ecosystem.
5. FinTech is one of the most significant points of concern for traditional banks
Until now, traditional banks controlled everything related to money with an iron fist. They have been the big giants of anything monetary, who are seen as being far from innovative or competitive.
Thanks to digital technology, there are a slew of more agile players in the monetary game now. FinTech has been creatively disrupting the control banks have on the individuals and rearranging the whole process. Agencies who play the digital game right will win it all, and old-school bank managers are getting more fearful day by day.
6. FinTech is powered by growing innovative tech solutions
At its core, FinTech leverages the most cutting-edge technologies like Machine Learning and Artificial Intelligence, and are the biggest users of these tech solutions.
‘Robo Advisory’ is one of the most known implementations of AI and ML. Going by the name, it may sound like some sort of dystopian law enforcement agents. But, in reality, it implies a set of algorithms that automate investment advice as financial advisors, but at a much lower cost.
Innovative technologies that support FinTech also includes cybersecurity that combats online fraud. FinTech companies use AI in their cybersecurity features. There are AI-powered programs that raise a red flag whenever something is suspicious in the payment history or transactions. FinTech also utilizes chatbots that assist consumers in performing basic tasks, giving them solutions, thereby reducing staffing expenditure.
Predictive Behavior Analytics in FinTech enable automobile insurance apps like Root Insurance to leverage predictive analysis and analyze the driving skills of the drivers, tracking them meticulously.
What is more fascinating, the insurance premium to be paid is based on the driver’s performance behind the steering wheel. Behavioral finance is already used by digital lending solutions that give out loans based on the borrower’s credit history. Thereafter an individual plan is calculated to offer personal loan repayment options. Thereby, the risk of bad debt subsides to a great extent.
Lastly, Blockchain, which was specifically developed to record Bitcoin transactions and is closely connected with Crypto, has turned out to be a most critical area of FinTech, but that is a subject for a more thorough discussion.
7. Asia – biggest FinTech consumer. USA – biggest FinTech producer
As per a survey by Ernst and Young, India and China are the biggest users of FinTech, with a whopping 87% of people regularly using the technology. Given the size of the population in these countries, this is huge! South Africa takes the 3rd position with an 82% FinTech adoption rate.
As per statistics, the USA is the biggest producer of advanced financial technology solutions. Silicon Valley has the most active FinTech companies. After North America, Asia is the second-largest hub of FinTech, with Singapore being the biggest FinTech base in Asia.
8. FinTech can help you make right monetary decisions
It is an undeniable truth of the 21st century that by and large everyone has become a spendthrift, significantly more than the previous generation, thanks to the plastic money and digital wallets! Owing to this, often people do not have any idea where their money has gone, leading to individual budget crunches and financial woes.
However, with personal finance apps like Truebill, Spendee, Money Dashboard, Credit Karma, and many more, individuals can now make the right money decisions. A user can leverage budgeting functions on these apps, helping them plan their expenses and thus spend less.
There are several budgets and credit monitoring features that can help “financial novices” and “clueless millennials” get smart about their finances. These apps, powered by FinTech, also gamify their savings solutions, thus adding some fun and engagement. The gamification eventually simplifies certain saving practices, that are otherwise too boring and tedious. Research shows that these apps actually work and make the users feel satisfied about their spending decisions.
9. Investment in FinTech has skyrocketed
FinTech boasts of enormous investment figures. More than $300 billion has already been invested in financial technology in the past decade, and that graph is ever-growing. The FinTech industry has shot upwards in the past decades and several investment measures have been undertaken by the big shots of global finance.
As per Goldman Sachs’ records, the market value of all the FinTech firms worldwide amounts to $4.7 trillion! That is massive! This unnatural number is inclusive of the big investments made by tech giants like Apple and Google through ApplePay and Google Pay respectively, as well as the investments made by around 12000 FinTech startups globally.
10. Cybersecurity – a constant concern
Given the overwhelming reliance of FinTech on technology, it has some loopholes to deal with. One significant issue in this regard is the security quotient. FinTech companies usually contain a colossal amount of sensitive Big Data, making them prone to cyber-thefts. They often find themselves at risk of getting their data content pilfered.
Data from the last year shows around 27% of FinTech enterprises are facing cybersecurity infringement. Furthermore, 29% of them are unsure if any breach has happened.
This area of FinTech is still under constant development, which would hopefully be fortified in the coming years. Large amounts of investments are constantly made in the sector, which indicates that FinTech security will be given more priority.
The Expanding Horizon of FinTech
he conservative mindset about FinTech has changed all over the world, majorly as a result of the COVID-19 crisis. Whether we are heading towards a ‘New Normal’ or not, the future will inevitably be dominated by tech advances and economic realism.
As we stand at the juncture of Industry 4.0, automation and tech-driven smart machines are on the rise. We are now savvy with IoT and IIoT, which form the base of the fourth industrial revolution. It is safe to say that the future of digital financial services is quite bright, providing low-cost, secure, and contactless transactions.
These were some different facets that casual observers were unaware of about FinTech as of now. With each passing day, the global financial scenario is undergoing drastic changes. And as mentioned above, during and after the COVID crisis, the global market has undergone a vehement change. 82% of investors now plan to increase their investment in FinTech in the upcoming 3-4 years. And more than 88% of financial institutions fear that a part of their business might get lost to independent FinTech companies in the next 5-7 years.
It is safe to say that 2021 is all set to prove to be a milestone year driving path-breaking technological innovations in the field of the FinTech industry. If you wish to be a part of this FinTech revolution, Paramatrix can offer you custom solutions to build key solutions and scope out new ventures to earn a stake in the disruption game.
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