Fintech stands for Financial Technology. When finance collaborate with technology for better products and efficient processes, the term Fintech is used in general sense. It is being used as a noun to address start up associated with Fintech and as a verb. There is no proper definition of Fintech since the term is evolving within its scope and has extended itself from banking to other activities like insurance, mutual funds and personal finance management.
Why so much hype around Fintech?
Rise and doom of any company or industry is based on simple rules of demand and supply. The demand factors associated with Fintech services are driven by the consumers. Supply factors have mainly been from banks earlier and technology giants, Fintech start-ups nowadays. Let’s understand the trigger points of these demands and newly generated supply of these services.
Demand trigger points
The younger generation today has grown up in the era of accelerated growth of technology. Early introduction and adoption of technology in life of today’s generation has created a different level of expectation from them. From shopping to banking, expectations of customers have reached to pinnacle which the traditional banking has not been able to cope up with. The need of fulfilling these expectations are imminent and traditional bankers take their own time before implementing anything new. The rise of Fintech and associated start-ups with it is actually somewhere hidden and wrapped in the customer’s expectations on service level and efficiency.
Changing Supply points
Traditional banking has been muddled with meeting regulatory requirement, dealing with legacy systems and coping up with the technology advancements. Within the technology space, traditional banking organizations have failed many times in prioritizing the innovation list. The focus of traditional banks often gets diluted on account of stringent regulatory requirements and short term profitability goals. Even when they want to project themselves as customer centric banks, it takes an entire hierarchy in a large bank to understand and implement any new thing which eventually kills innovation. I am not arguing that banking has not been innovative but just stating the fact related to structural difficulties associated with being innovative.
On the contrary, small set-up technology driven companies realize no limitation from either of regulatory or capital side. Good thing with technology in banking is the low entry barrier. All one need is innovation and the solution for existing gaps in the market. Bunch of people with innovative and vibrant ideas can create a self-sustained organization by simply placing the ideas in right direction and filling the gaps in service levels. The entire strategy remains around the technology usage and flexibility of changing the features in providing financial services which keeps them focused.
The major impacted area of Fintech innovation within the banking has been on the Payment and introduction of crypto-currencies. There are many more areas wherein Fintech can contribute. Few of the major areas including Payment and impact of technology are discussed as mentioned below –
Payment
Payment systems have evolved bringing ease, efficiency and speed. It has helped widening the access to underserved banking population. Real time payment has become a normal in many economies. Fintech companies have been redefining the capabilities in payment area driven by technology developments. Collaboration with traditional banks has increased and many banks have established their own innovative hubs to keep up the pace with changing technology. Retail payments have already witnessed and evolved in past few years while corporate side, lot of traction is visible. Developing countries are experimenting with mobile message based payments which do not require the internet access as well. The present of payment is already developed but the future looks even more promising.
Lending Business
Access to credit for all a dream project few years back when many did not have even a formal access to account with banks. Financial inclusion is no more a challenge for many developed economies but access to credit is. While banks have their own processes to deal with before lending to someone with no history, many marketplaces are being created to reach out to these left out customers. Peer to peer lending is getting lot of traction and many start-ups are facilitating credit scoring based on big data, machine learning and even social accounts.
Fraud Prevention & Cyber Security
Protecting organizations from frauds and Cyber-attaches require staying ahead of fraudsters and cyber-criminals. When the entire working is dependent on IT, it becomes the essential to not only identify but project the gaps in security and fill them before a single incident takes place. This requires constant testing and artificial environment creation with deep learning and machine learning at the back-end. Many start-ups have come forward in this area and already servicing the banks as extended partners or specialized vendors. Real time alerts on probable frauds based on the pre-defined rules, multiple level tracking and multiple level of authentication without hindering the efficiency are few of the examples wherein Fintech has contributed immensely.
Insurance
The efficiency and speed achieved using data analytics and app based consumer engagement products within insurance sector have increased the awareness, reach and product innovation activities to a new level. Though, we are yet to see the flourishing and resounding business models based solely on Fintech provided platforms, the integration of Fintech firms and insurance giants have already started. Understanding data and utilizing it for new product offering and risk mitigation are two of the major challenges wherein start-ups are helping insurance sector. Few of the start-ups are also working on blockchain based smart contracts which would make the claim process a transparent and free of unnecessary legal issues.
Remittances
Multiple regulatory regime and institutional legal environment make the remittances a very complex place to be in. Because of the same, it was very easy to spot the significant opportunity in this are for innovative disruption. Traditional banks have been the main conduit for years before the exclusive remittance agencies and money transfer agents were introduced. The higher transaction cost and time are the two pain points. Can an alternative remittance solution emerge which remain fully secure, cost effective and provide multi-currency settlement on real time basis? The answer of this question is being chased by many start-ups and we can hope for the best.
Similarly, there are many other areas like Micro-finance, Book-keeping of accounts and access of ledger on real time, Credit Ratings and Cash Management wherein Fintech based start-ups are contributing and redefining the rules. Introduction of crypto-currencies based on distributed ledger technology, popularly called as blockchain is one more space wherein the entire dynamics are being governed by Fintech.