FinTech is no longer a jargon of the banking industry. Instead, it has become a familiar term in technology in general. The Global investments in FinTech ventures has doubled to a whopping $112 billion as compared to $51 billion last year. This is more than an evidence to prove that the digital revolution is at the doorsteps of financial services sector.
This revolution is having a huge impact on all the banks and financial institutions globally. But what actually FinTech is? Let’s see.
What is FinTech?
The term FinTech is derived by joining two words which are financial services and digital technology. In a nutshell, FinTech simply prompts the use of digital technology by startups to come up with innovative products and services such as mobile payments, alternative finance, online banking, big data, and overall financial management.
FinTech was introduced as a technology that was used at the back-end systems of financial institutions and banks. However, since then its definition has changed significantly. Now it encompasses several applications that are consumer based. By 2019, you can trade stocks, manage funds, and pay for your insurance and food via this technology.
The FinTech for banking has impacted numerous applications and revolutionized the way consumers access their finances. Its impact ranges from mobile payment apps like Square to investment and insurance companies. This profound impact of FinTech can also be seen as a potential threat to the brick-and-mortar or traditional banks.
In today’s digital era, customers are not keen to go for services provided by the traditional financial services industry. Instead, they prefer services that are quick and safe. This is the reason why FinTech and FinTech is gaining popularity and causing disruption in the banking and other financial services.
Now, let’s see FinTech’s impact through some stats. According to a study that took place in 2016, a vast majority of Americans (84 percent) use FinTech for managing their finances. Moreover, the majority of them use between one to three apps in order to manage their finances. In addition, around 69 percent use these apps at least a few times a week and around one-third use it on a daily basis.
Currently there are approx. 1.7 billion people worldwide without any bank accounts. FinTech comes as a savior for all those people by providing an easy option to participate and access the financial services without any need of a bank account. FinTech is the best option to carry out financial inclusion since it’s developed to provide consumers a direct access to their finances through simple yet cutting-edge technology.
How FinTech is changing the financial industry
Smart Chip Technology
Smart chip ATM cards have significantly helped in minimizing the financial loss that occur in the case of mishaps. It comes with EMV technology that is embedded in the chip. This technology uses a one-time password for each transaction. This increases the security since the code is valid only for one transaction; so, even if somebody steals it, he won’t be able to do anything.
Bank officials generally advise their customers to memorize their pin to avoid unnecessary hassles and troubles. Bankers are constantly looking for ways to combat thefts and frauds by providing top-notch security to its customers. As compared to smart chip, the magnetic stripe technology uses the same pin for all the transactions, thus making it more susceptible to frauds.
FinTech in banking industry has given birth to many innovations and biometric sensors is one of them. Biometric sensors along with Iris scanners are two technological advancements that ATMs are witnessing. Moreover, these advancements are path breaking since it would simply eliminate the need to carry your plastic card. Furthermore, you won’t need to remember your pin.
Apart from providing convenience and ease, these advancements will also make ATMs secure than ever since you’ll be able to access your own account without any password. The biometric ATMs use integrated mobile applications, fingerprint sensors, palm, and eye recognition to identify the account’s owner. To make the identification more accurate and secure, ATMs also use micro-veins which completely eliminates the errors made by ATMs in customer recognition.
The usage of biometric technology brings a huge sigh of relief for all the customers who get panic even at the thought of losing their ATM card. It’s because due to this, they would be able to access their funds even when they have lost their card.
Monetary Control Act (MCA) was setup in 1980 with the primary purpose of promoting an efficient payment system in the entire country by encouraging competition between private sector payment service providers and the Federal Reserve.
The Automated Clearing House (ACH) assisted in efficient processing all the electronic interbank payments taking place in the whole country. These electronic payments include insurance premiums, social security, salary, dividend payments, bill payments, and direct debits of mortgage.
The Federal Reserve report for the year 2016 reads that the number of online transactions processed in that year 2015 were more than 3362 million, which is way more than 1189 million transactions that took place in 2012. A similar kind of rise was also seen in the credit card payments. Furthermore, there was a steep rise of more than 45% in the number of payments redirected from the merchant sites as compared to 2012.
The same trend was followed debit card users too. There was a massive increase of more than 90% in debit card users. In the year, 2012, there were about 2.1 million debit card transactions which rose to over 270 million debit transactions in 2015.
Omni-channel & branchless banking
FinTech financial services is transforming the entire banking system from a branch-specific process to various digital channels such as online, social, and mobile. It also reduces the bank’s dependency on its brick and mortar branches to function.
As a result, we see many banks reducing their number of branches by adopting the omnichannel banking. Only in the European Union, around 9100 bank branches were shut down by the end of 2016.
Customer service chatbots
FinTech providers have also come up with customer service chatbots that have really become popular in the recent past. Chatbots are nothing but bits of software that use machine learning and natural language processing that enables them to constantly learn from human interaction.
Chatbots are highly efficient as they streamline customer interactions like query handling and directing customers to the required departments.
Chatbots can also perform other functions such as that of Bank of America’s chatbot Erica, which can provide investment advice to its customers. Whereas, the chatbot used by UBS can scan customer emails autonomously thus reducing the total time taken in the task from 45 minutes to mind-boggling two minutes. Similarly, a chatbot used by Japan’s leading bank can help customers to find relevant piece of information on their website.
Chatbots have become an integral part of all the banks since it not only reduces costs and enhances the customer satisfaction but also allows agents in the call centers to focus on value addition.
Artificial intelligence (AI)
Over the years, AI has become an integral part of the FinTech banking services. AI along with Machine learning is vital for fraud detection. The software that banks use for fraud detection generates alerts whenever there’s a potential fraudulent transaction. Later it is backed up by the human investigation that finally determines if the attack was real or false.
However, with time the detection of attacks is becoming difficult since the attacks are becoming more sophisticated as the day passes. Due to which a lot of time and money is consumed. Moreover, the risk of customer data loss is always there. To combat this issue, banks are now adopting AI technology.
According to McKinsey, the adoption of machine learning-driven statistical modeling, data aggregation platform, and process automation can totally transform the AML operations by simply infusing new efficiencies.
For example, the data aggregation platforms can account data and mine unstructured transaction to offer 360-degree customer view. This view assists in faster transaction validation. Moreover, with machine learning algorithms, the banks can leverage historical data to predict and determine patterns of a fraud attack. This will reduce the manual effort by approx. 50%.
The immense growth of E-wallets is another indicator of the rise of FinTech financial services. Samsung Pay, PayPal, Android Pay, and Apple Pay and are some of the major e-wallet companies in the world. These wallets are used for a plethora of purposes namely P2P payments, top-up & utility bills, international remittances, booking tickets, and many more.
There are also some standalone wallets such as Starbucks and Walmart Pay. E-wallet have managed to attract users due to their tempting offerings which includes exciting offers, lucrative cashbacks, and reward points, and many more. Due to their huge success, many banks are now realizing its importance and are recognizing e-wallets as a collaborative measure to embrace the technological advancements.
The increase in the use of smartphones has forced banks to come up with mobile applications that offers convenient FinTech banking services. Today, most of the banks have a mobile application which has a user-friendly interface. Banks have also come up with mobile apps that recognizes the fingerprints of the user. The application performs this function without any biometric app or hardware.
A mobile application provides quick access to funds. With a mobile application, the user can perform several banking functions such as quick bill pays, check deposit, account balance, statements, and many more.
The advent of cutting-edge technologies coupled with customer’s demand for safe and more user-friendly banking experience has led the banks and financial services to readily adoption of FinTech finance technology.
Today FinTech is bigger than ever as it includes everything that we just mentioned in this blog. In coming years, it is all set to become ever bigger with retail banking software, financial core banking software, and many other components coming under it. Only time will tell how big of an impact will FinTech have in our world.