FinTech stands for financial services + technology and at the moment it is one of the fastest-growing industries worldwide. Many of the newly developed solutions offered by FinTech companies, or FinTechs, disrupt traditional banking and introduce more convenient ways to make financial transactions, apply for a loan or invest online. The rapid growth of FinTechs has an impact on both small and medium enterprises (SMEs) and individual end-clients. Plus, during the pandemic, FinTechs were some of the few companies that thrived exactly because their services are based entirely on digital technologies and online distribution.
From my experience working in a bespoke software development company, I see the huge influence cutting edge technology has on financial services. Business payments are made easier and faster than ever, trust is built based on observable and transparent financial data, e.g. through blockchain technology and AI. And perhaps most importantly, SMEs can now optimize their success strategies and scale their businesses faster thanks to innovative FinTech solutions. Let’s find out some of the latest trends in the FinTech industry:
AI and RPA
Artificial Intelligence (AI) and Robotic Process Automation (RPA) are already huge trends and will continue to grow in 2023. With the help of AI, FinTech companies can extract more value from the huge amount of datasets, which is making the process more efficient and allows higher degrees of service personalization for end-consumers. Also, AI benefits FinTech businesses because it decreases the risk of man-made errors and is able to make accurate risk predictions to significantly improve service quality.
RPA is another powerful tool that helps boost efficiency and increase user satisfaction. Essentially, RPA makes use of software robots or digital assistants to automate human tasks which accelerate processes and lets companies shift their focus on core business tasks. As a result, financial services can offer much lower costs and simultaneously optimize product performance. The areas that RPA proves itself useful are back-end processes such as security checks, customer onboarding and communication, credit card processing, risk analysis etc.
Blockchain Technology
Blockchain technology is believed to play an essential role in transforming the banking sector. Blockchain is a special database type that stores information in small chunks called “blocks” and lines pieces of data to form a chain. It is especially suitable for transactions in the financial sector as it allows a shared ledger in a public database recording detailed transactions without any identifying information, leading to improved security. Once entered, the data can no longer be modified which significantly reduces the risk of hacking attempts like data leakage or identity fraud.
Blockchain technology takes care of one of the biggest concerns regarding FinTech startups - their trustworthiness. Also, from a business perspective, in the initial development stages, FinTechs might have access to limited financial resources required to build an end-to-end secure financial system. Banks on the other hand have a lot more cash reserves as well as an established inner ecosystem with secure networks for transactions. That is exactly the problem blockchain solves. Blockchain is cheap to build, relies on transparency and the highest security standards, which leads to efficient innovative financial solutions that make no compromise with security and speed.
Payroll FinTechs
Another promising trend in the FinTech industry is payroll. According to Forbes up to this the attention of FinTechs on consumer’s finances has been divided between the form of the spending account (e.g digital-only banks) or the transaction itself (e.g P2P or mobile payments). In 2024 this attention is expected to shift to payroll FinTech services. The main four types of payroll services to look forward to are a salary on-demand, salary in advance, early direct deposits and cryptocurrency payroll.
Salary on-demand relies on collaboration between FinTechs and bigger organizations or HR software providers for access to the necessary data needed for transactions. The option for salary in advance aims to offer short-term credit with low or zero interest rates for employees considering their main salary. An early direct deposit lets individual end-clients or SMEs receive paychecks up to two days in advance. Finally, crypto payroll encompasses wage payments with various cryptocurrencies instead of or in addition to money.
Traditional vs. New Banking
When the global health crisis changed the rules, many traditional businesses experienced difficulties to stay afloat. To continue offering relevant services is a lot harder when the whole world is going through unprecedented modern history’s health and economic crisis. Nevertheless, research findings show that FinTech is believed to have acted as a lifeline for many clients during national lockdowns. Statistics show that 59% of American account holders have switched to FinTech solutions and 73% are convinced this is the “new normal”. European data is similar with 72% increased usage of FinTech mobile apps and digital services.
Several years ago when FinTechs were brand new market players, there were serious doubts that they would be able to compete with, let alone surpass industry incumbents. Now, traditional financial institutions like banks and credit organizations have finally realized the importance of collaboration as a way to stay relevant. The biggest UK and European banks now share their APIs with third-party FinTechs and allow access to financial transactions of clients as a way to contribute to making digital financial operations fast and secure. Another new trend of digital-only banks is also emerging. These banks offer extremely low fees or even free of charge P2P transfers and are popular for their flexibility as physical contact and paperwork are eliminated.
FinTech Regulations Take Place
FinTechs disrupt traditional financial institutions and are here to stay. Though to assure secure payments, transparency and overall high quality of services, governments, and regulators need to take action. From a regulatory perspective, FinTechs are subject to supervision and the same requirements apply to them as well as to already established institutes. For example, BaFin (Bundesanstalt für Finanzdienstleistungsaufsicht) in Germany regulates who can be licensed as an eligible FinTech provider.
There are also existing or planned FinTech regulations in countries like the UK and Switzerland, e.g. with the so-called "Sandboxes" that help FinTech startups test newly developed technologies and their market efficiency. A sandbox plays the role of an additional layer between banks and innovation initiatives and facilitates smooth collaboration between FinTech and incumbents in the financial sector. Policymakers worldwide are making steps towards adopting such regulatory sandboxes as a tool for spurring innovation in the financial sector while keeping alert to emerging risks. Already established organizations that also serve as FinTech regulators are FCA (Financial Conduct Authority) in the UK and FINMA (Swiss Financial Market Supervisory Authority) in Switzerland.
