Fintech, a blend of two words Finance and Technology, represents the collision of two worlds that how technology is revolutionizing the finance world. This industry has significantly evolved over the past few years. According to The Fintech Ecosystems report, it has reached to a new height in 2018 hitting the market value of $32.6 billion.
The investors are already in the race of reaching to the top by overcoming the gap between technology, incumbents, and ever-growing customer expectations and demands. They are continuously launching new products and services to diversify technology scores, eventually earning tremendous investments. Several studies and researches are being conducted to analyze the upcoming potentials associated with financial technology and how it would reshape the landscape.
4 Segments of Fintech
Finance and technology are firmly gripping each other to come up with a strong market presence. The aggregate investment figures reported in 2018, encompasse different patterns of developments. The financial technology industry covers a range of industry models operating in different niches, segmented into four distinct variants.
As new Entrants
Financial technology start-ups look forward to adopting the latest technologies and approaches to enter financial services. Such firms target a particular niche or product with an intent to develop an economic model similar to banks’.
As Incumbent Financial Institutions
These institutes significantly invest in technology to improve their performance, user experience, and meeting hostile threats. Moreover, the aim of these institutions is to capture competitive partnership and investment opportunities.
Financial Technology as ecosystems systemized by developed and large-scale companies offer financial services not just to enhance the existing platforms but also to monetize current user data and relationships. For example, “AliPay” supports Alibaba’s e-commerce platform. Leveraging robust user-engagement, such financial technology organizations offer relatively less customer acquisition cost as compared to other firms.
As Infrastructure Providers
These institutes offer/sell services to other financial institutions for digitizing their technology stacks and risk management and improving customer experience.
Challenges for Fintech Variants
The future holds something big for these financial technology variants and of course, the hurdles are going to be there to reach their ultimate goals. For example, currently analyzing the market, the success of the infrastructure providers depends on the product and technical capabilities. Whereas, customer-oriented startups firmly focus on customer acquisition costs.
For Incumbents, the most challenging part is related to organizational skills and practice just like investing in technology. Convincing an employee, comfortable with traditional methods, to shift to digital can be agonizingly slow. The established technology businesses trying to enter the financial technology ecosystem may face regulatory challenges (KYC and AML compliance etc.). Unlike the advertising industries, the financial industries are quite timorous in adopting the “move fast and break things” approach. which makes them conscious about developing such integrated financial services.
Global Financial Technology Trends
Cloud-Based Solution to Settle the Fintech Market
Cloud computing is now helping financial institutions like banks to digitize their operations and become more accessible to customers, eventually reducing overhead costs. The main advantage is that it eliminates the need for specific and dedicated hardware and software and other resources required to maintain it, overcoming investment costs. As per the study, the cloud-based solutions are all set to lay foundations for how banks and other financial institutes are going to manage, conduct and grow their business in the future.
The organizations are now integrating and using cloud-based SaaS (software as a service) applications to enhance and innovate their non-core business processes e.g HR, CRM and accounting. Moreover, the cloud has paved its way into areas like KYC verification and AML screening for security analytics. In fact, according to digital trends 2018 report, the fast-paced financial institutions are three times more likely to invest in cloud-based solutions and technology. To say, cloud solutions are going to settle the financial technology market offering greater flexibility and efficiency won’t be an understatement.
Artificial Intelligence to Address Complex Issues
The buzz surrounding AI-powered applications and services in Financial Technology is intense. Traditional financial institutions are leveraging this advanced technology to enhance their operations. Approximately 20% of the organizations have already started utilizing AI, and more than 40% are looking forward to implementing it in the near future. Furthermore, up to 25% of the banking activities and operations are expected to be performed by AI-powered machines. One example of such a leading player is JPMorgan Chase. It is utilizing the COIN- Contract Intelligence machine learning program to automate the legal documentation reviews and reducing the human-effort and cost.
Similarly, other institutions are also using AI-based identity verification and KYC services to speed up the onboarding process and eliminating frauds. AI is certainly a great influence on the customer’s experience and potentially reducing the cost of certain operations. Financial technology industries will see more usage of advanced machine learning and modeling techniques in upcoming years to deal with more complex business processes.
Investors are becoming more Selective
With the financial technology boom gaining ground, investors are becoming cautious and selective. Though there is no impact on overall funding, however, the investments in early-stage startups have significantly decreased by more than half between 2014 and 2017. The technology investors are looking for more reliable, later-stage financial technology institutes that can promise substantial scale and profits. This will give a tough time to startups and companies with no defined path for monetization, to meet with the rising funding demands.
Some institutions are no doubt, successful in raising sums but still, they are facing hurdles in monetizing their products. The reason is customer adoption of innovative business models takes time. For instance, blockchain start-ups are attracting customers and venture capital because of new payment infrastructure. However, because of being in prototype mode and leap to revenue-generation, the incumbents are cautious about blockchain startups.
User Experience is not enough
The explosion of technology has pushed banks and financial institutes toward digitization. Looking back to the days of traditional banking, financial Technology captured the market by building a decent mobile application with great user experience (UX). But now it isn’t easy anymore since most organizations have transformed their user experience. Now every bank is offering a fully remote, mobile functionality with a classy design to win over customers.
Customers now want more reasons to switch to new financial technology offers rather than great user experience.
The partnership between Global Banks and Fintech expected to grow
As technology is rapidly advancing, the thin line between financial technology and financial institutions is blurring due to their increasing partnerships. The increasing trend of financial technology has raised an unknown fear in global financial institutions. They could lose a significant market share to financial technology innovators. To cope up with competitive pressure, global banks are looking for ways to invest in financial technology companies. In fact, with direct collaboration, the partnership between global banks and fintech is expected to grow in the upcoming years.
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