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How Fintech is Transforming Finance: The Fintech Revolution
The financial service industry is currently experiencing intense market pressures from disruptors, complex legislation, digital users, and the aftermath of a global pandemic. In response, financial service companies must adopt technology not just as a competitive edge, but as a necessity for survival. This has placed fintech at the forefront of the industry, as the use of cloud computing, big data analytics, and emerging communication methods have transformed financial products and services to generate value for customers and firms.
How Did the Fintech Revolution Come About?
The fintech revolution has been in the making for some time, evolving from back-end tech systems in financial organizations to a sector of enterprises that utilize technology to boost the effectiveness of financial institutions. This includes established players such as Microsoft’s Industry Cloud for Financial Services, as well as scrappy startups, crypto developers, and automation solutions. Over the past 50 years, the banking industry has already benefited from technological improvements such as credit cards, ATMs, and e-commerce, but these technologies did not threaten the traditional banking system. However, fintech companies are now looking to completely replace banking services.
This revolution has been enabled by the 2008 financial crisis, which led to banks being bound by stricter regulations, pushing front-office talent towards the tech and startup sector. Breakthroughs such as blockchain and cloud computing have also helped fintech companies establish business models that sidestep the structural requirements of a bank while offering better and more efficient customer service.
Top Trends that Define the Fintech Revolution
The fintech revolution is a significant shift driven by seven key technologies that have transformed digitization from a mere tool to a fundamental aspect of banking and lending. These technologies are:
- Open banking, a backend architectural system that enables banks to share consumer data with fintech and non-financial organizations via APIs.
- Big data, which refers to vast amounts of structured and unstructured information that financial organizations use to predict customer behavior and develop strategies.
- Robotic process automation (RPA), used to automate back-office tasks such as client enrollment, security screening, credit card processing, and mortgage servicing.
- Artificial intelligence (AI) and machine learning (ML), which enable banks to process large volumes of data and generate insights, minimizing the duration and cost of financial processes while improving their outcomes.
- Blockchain, which is powered by cryptocurrencies and distributed ledger technologies and is crucial for preserving data, authenticating and identifying individuals, verifying transactions, signing agreements, and boosting traceability.
- Neobanks, digital-only institutions that have disrupted the traditional banking industry with lower costs and enhanced online customer experiences.
- Embedded finance, technology that allows non-financial platforms to include payments for loans, healthcare, card payments, and financial instruments, particularly advantageous for e-commerce businesses and their customers, as it facilitates complex transactions at an unprecedented pace.
The Fintech Revolution in Emerging Markets
The impact of technology on financial services is pervasive, but it is most acutely felt in emerging markets and developing economies due to the fintech revolution. According to the World Bank’s report in July 2022, over 1.4 billion people lack access to bank accounts globally, despite banking penetration increasing significantly over the past decade. The digitization of financial services has played a crucial role in expanding financial inclusion and diversifying the industry.
For instance, India’s Unified Payments Interface (UPI) has increased digital payments in the country by 50% annually over the last five years. Additionally, developing economies are leading in the adoption of digital currencies, with 10 of the top 20 nations according to the 2022 Global Crypto Adoption Index being lower-middle-income countries, and eight being higher-middle-income countries. Over 100 central bank digital currencies (CBDCs) were under development globally as of mid-2022, and alternative payment and credit systems are crucial to strengthen financial resilience, particularly for the informal sector in emerging markets.
The fintech revolution has also transformed remittances, a key source of income for many in emerging markets. While it remains to be seen whether fintech will replace conventional financial services entirely, these companies and enterprises are challenging the market by improving user experience, collecting more data, enhancing access, and reducing operating costs. Furthermore, the expansion of this technology beyond the financial industry is also intriguing, with blockchain offering secure and transparent exchanges for assets like automobile titles and gemstones.
The fintech revolution will undoubtedly continue to impact the daily lives of business leaders and ordinary users alike, offering numerous opportunities for growth and advancement.