Technological innovation is taking the world of finance by storm. Financial technology has traversed a long journey, from the use of the humble pantelegraph in 1865 to verify signatures in banking transactions to the introduction of ATMs and cards in the 1960s, and the onset of online and mobile money transactions in the recent past. We are now at the cusp of a quantum leap as digital interfaces are fast replacing paper money and human interactions, and startups are making the financial services industry more efficient. Conventional banks will lose their utility by the year 2020 as the sharing economy, which began with cars, taxis, and hotel rooms, makes inroads into the financial services sector.
Fintech companies are introducing disruptive change at an astounding pace. For example, the US-based Credit Karma’s free personal finance platform gained 50 million users in a mere five years. Alibaba YueBao, the money market fund of Chinese e-commerce company Alibaba had assets under management exceeding USD 100 billion within a span of 2 years, making it one of the world’s largest funds. A plethora of technologies are orchestrating the shift in the financial services market.
According to a PEW Research Center study, two-thirds of Americans expect robots and computers to replace most human work within 50 years. Artificial intelligence (AI) and robotics are allowing financial companies to analyze unstructured data, including social media activities and employee communication, in order to arrive at proper decision making, cost reductions and risk mitigation. AI researchers are looking at replicating human capabilities such as social and emotional intelligence, natural language processing, logical reasoning, pattern recognition and self-learning.
Internet of Things (IOT)
Financial institutions are deploying Internet of Things (IoT) devices to promote a better understanding of customer behavior and provide more personalized services. Some automotive insurance companies are providing tracking devices that are installed in the cars to facilitate accurate insurance underwriting.
Financial institutions are using cloud-based software-as-a-service (SaaS) applications for non-core business processes such as CRM, HR and financial accounting. They are also turning to SaaS for security analytics and KYC verification.
Blockchain is a growing list of records or blocks that are linked and secured using cryptography. Each chain is an online database stored in a distributed and peer-to-peer manner. Blockchains present a huge opportunity for transparent financials in real-time as there is no scope for deletion, tampering and revision of the financial transactions. Bitcoin is a popular digital currency available on this platform.
Banks have traditionally acted as intermediaries between depositors and borrowers, and managed the associated transaction risks. Peer-to-peer (P2P lending platforms) is rapidly emerging as an alternative to traditional banks as it directly connects the transacting parties by funding simple personal loans as well as complex mortgage and commercial loans.
Fintechs are developing sophisticated asset management models by combining artificial intelligence (AI) and behavioral data, thereby eliminating the need for asset managers and analysts. AI re-allocates funds based on historical portfolio performance data, individual risk appetite and other market parameters pre-fed into the system. Some fintechs are rolling out vanilla product offerings such as current accounts connected to an all-purpose card, while others are betting on low fees and a user-friendly experience.
Banks perform an important role of transferring funds between parties and estimates suggest that they earn around 4 billion US dollars each year by way of fees. Fintechs are seeking to occupy this space, with the likes of TransferWise making international payments possible.
Robo advisers are working shoulder-to-shoulder with actual advisers – a hybrid mix between the human and robot features – to reach out to the customers. Such labor-saving automation is meant to boost bank margins and facilitate the delivery of better services to the customers. Many banks are also resorting to AI-based chat bots to enhance their customer experiences. An AI bot can study a customer’s spending habits by tracking and analyzing card transactions and use this data to provide personalized financial products to the customers.
Bracing for the Future
The advances in technology will disturb the status-quo in many ways and it is the responsibility of individual companies to rise up to the challenge. The wealth management companies will have to brace for the entry of new players as these will trigger commoditization, resulting in lower profitability and higher competition in specialized areas. Financial professionals will need to look beyond their conventional job roles to fields such as strategic management and data science as decision-makers of the future will utilize automated systems to make better data-driven decisions. Investment firms will have to reduce their dependence on young FinTech start-ups and third parties for risk modelling and data collection processes. Regulators will have to take recourse to data gathering and analytical tools to closely monitor institutions, systems and the industry as a whole, and adequately respond to the emerging trends. Companies have to be sensitive to the fast-growing millennial segment – their attitudes towards education, lifestyle and finance. Education is a primary concern of the millennial generation and financing college is a crucial step towards fulfilling this goal.
Disruptive Technologies can either be an opportunity or a threat, depending on how they are leveraged for the benefit of the organization and society as a whole.