Fintech: Gains, Innovations, Challenges & Opportunities

This is the post excerpt.

 

A new breed of Financial Technology start-ups or “Fintech” are on the rise and presenting such aggressive competition to traditional High Street banks and financial institutions. Fintech companies are now providing financial products that is once the exclusive of banks, faster, sleeker, cheaper and more customer-centric way. This trend has not only drastically changed the face of lending and managing financial resources, but also potentially altered how, where and when payments are made.

Though several definitions exist for the term “Fintech”, for the purpose of this essay, it suffices to align with Caitlin Devine’s view that a Fintech is a start-up or company offering a financial services based product mainly through digital channel with an intent to challenge and disrupt the industry by offering an alternative. The most common types of fintech offerings include digital wallets e.g. Apple Pay, peer-to-peer money transfers, mobile payment systems, and peer-to-peer lending.

What is driving the Fintech revolution?

Whilst the overarching proposition of these start-ups is to offer capabilities for customers to get the job done using everyday devices, eliminate the “middle-man” and digitalizing experience throughout the journey and not just at the beginning, the drivers for the surge largely remains the following;

  1. Customers’ expectations – millennials
  2. Social media boom
  3. Lowering cost of technology
  4. Technological advancement in Data Science and AI
  5. Market Size and Venture Capital Investment

The following are highlights some of the offerings from these fintech start-ups:

  • Mobile banking

Fintech start-ups have aggressively latched on the mass-market opportunities presented by smartphones to offer              alternative payments methods. Customers are now able to transfer money, pay for goods and services, set up               regular payments, manage their accounts etc., from the convenience of their smartphones.

  • Digital Wallet

From Google wallet to well known Apple Pay, digital wallet allows users to store, send and receive money from                   their digital wallet accounts to other beneficiaries. The digital wallet would have already been linked to their       credit/debit card or bank account.

  • Peer-to-Peer Currency Exchange:

This aims to cut out the banks and brokers by providing an anonymous online meeting place for those who are                looking to buy each other’s currencies by matching buyers and sellers.

 

  • Peer-to-Peer Lending (Crowdfunding)

Zopa and Funding Circle offer platforms that bring borrowers and savers together to do business without the banking trusted ‘Middle-man.

  • Digital currencies and Cryptography

There are currently numerous digital currency schemes based on distributed ledgers that allows remote peer-to-peer exchanges of electronic value without the need for intermediaries.

  • Internet of Things

When fully realized, every object including cars, building and so on, will not only have data capturing and        processing capabilities, but also internet connectivity.

 

In spite of the gains and promises of fintech start-ups, the journey ahead is still riddled with challenges and pitfalls. I highlight below some of the challenges this industry may have to contend with in the coming years:

  • Cross-border transfer

Differences in legislative frameworks around by countries still present a big barrier. Systems also still largely exists                in silos thereby necessitating the need for the costly intermediary banks which distributed ledger attempts to             eliminate. Though Blockchain technology, a network of distributed ledger, has been recently hailed as the panacea          to cross-border payments, but much is yet to be addressed from regulatory point of view.

  • Anti Money Laundering

The rise in global terrorism has meant AML requirements is further tightened by financial regulators. The process which is largely manual is tedious and laborious. Ripple Labs, a digital currency operator, for instance only recently got fined $700, 000 for its failure fully fulfil and implement AML requirements. It’s a heavy price to pay for a start-up but this hasn’t put off others as there are much opportunities for innovation in this arena.

  • Know Your Customer

With an average spend of £40m per year on KYC Compliance, Fintech can latch on this opportunity by providing            superior solution at the fraction of the cost to eliminate the manual process.

  • Data Protection, Privacy & Security

Blockchain seem able to fulfil these requirements but there are still changes around integration with existing    services and infrastructure as we are still a long way away from replacing the dated infrastructure. MIT Lab currently pioneers an encryption solution but the decrypting algorithms.

  • Digitalized credentials

There are opportunities around digitizing customers’ details and integrating that into mobile wallet which can be             used to transact business as opposed to putting up with the clunky process of having to supply ALL persona details          every time at PoS. This also implies that such digitalized data would have to be ‘compatible’ with most if not ALL               Point of Sale and could potentially be linked with other customer details as Samsung Pay is soon to launch a         product to fill the gap above.

 

Citation

Innovation in Payments BNY Mellon

https://www.bnymellon.com/_global-assets/pdf/our-thinking/innovation-in-payments-the-future-is-fintech.pdf

Payments disrupted: The emerging challenge for European retail banks

https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/financial-services/deloitte-uk-payments-disrupted-2015.pdf

Do fintech startups pose a significant challenge to the big banks

http://www.itproportal.com/2015/12/17/do-fintech-startups-pose-significant-challenge-to-big-banks/

 

Fintech: What 60 Minutes Left out

http://www.pymnts.com/news/payments-innovation/2016/cbs-60-minutes-fintech-disruption/

Global Payments 2020: Transformation & Convergence

https://www.finextra.com/finextra-downloads/featuredocs/bny_mellon.pdf

Complying with AML Laws: Challenges for Fintech

http://www.crowdfundinsider.com/2016/04/83845-complying-with-aml-laws-challenges-for-the-fintech-industry/

 

Fintech companies in fraud prevention, KYC and security

https://fintechvalley.org/2015/09/28/fintech-companies-in-fraud-prevention-kyc-and-security/

3 factors driving fintech startups (and what banks need to do to compete)

https://www.visioncritical.com/3-factors-driving-fintech-startups/

Bloomberg Market – Funding for Venture Capita-Backed Fintech Startups to hit a record in 2016

http://www.bloomberg.com/news/articles/2016-05-25/funding-for-venture-capital-backed-fintech-startups-is-poised-to-hit-a-record-in-2016

https://www.linkedin.com/pulse/part-1-drivers-behind-fintech-revolution-caitlin-devine

Global IT Spending – Gartner

http://www.gartner.com/technology/research/it-spending-forecast/