Technology in Finance: An Overview of the 2021 Landscape
Technology in finance, along with evolving consumer behavior and regulations, are transforming the financial services industry. The COVID-19 pandemic is accelerating the industry’s focus on digital offerings. Government payment schemes, emergency loans, and personal finance management are the need of the hour.
With several bank branches shut and long waiting hours for phone assistance, financial institutions are forced to invest in better IT infrastructure, relevant automation, and technology in finance to deal with the growing consumer demands.
Read more: The impact and significance of digital transformation in financial services.
A study of financial institutions (FIs) by ISMG and OneSpan in North America revealed that providing customers with a top-notch experience is their main priority. 49% of the respondents feel that legacy and manual ID verification are the biggest obstacles to digital opening for FIs, while 35% found that knowledge-based authentication tools were obstacles to onboarding.
Some general FinTech statistics worth knowing are:
- By 2022, the global financial sector is expected to be worth USD 26.5 trillion with a CAGR of 6%.
- 49% of banks and 60% of credit unions in the US believe that FinTech partnerships are worth it.
- Digital payment is one of the most significant FinTech products and holds about 25% of the FinTech market.
That said, many banking and financial institutions are adopting the latest technologies such as artificial intelligence, blockchain, etc., into their operations to benefit their customers, stay competitive, and improve business growth.
Here are the top five technologies that transform the financial services industry currently.
1. Artificial Intelligence
The most crucial advantage of Artificial Intelligence in the finance industry is cost savings, which is anticipated to be worth $447 billion by 2023.
AI systems are a game-changer for the finance industry as they can examine vast amounts of data and find patterns and trends that people may miss, and even predict future trends. AI technology makes it possible to automate processes and manage tasks such as comprehending new rules and regulations or generating personalized financial reports for individuals. For example, IBM’s Watson is capable of understanding complex regulations, including reporting of markets’ requirements in the Financial Instruments Directive and the Home Mortgage Disclosure Act.
Chatbots in banking are helping automate simple tasks such as opening a new account or transferring money between accounts and are proving to be a great money-saving tool.
Many financial institutions such as Bank of America and JP Morgan Chase use AI to streamline customer service. Additionally, AI facilitates mobile banking that allows 24/7 access to customers to conduct banking operations. AI is also helping financial institutions boost security and detect and prevent fraud.
Blockchain is a promising technology that will impact financial systems significantly. Blockchain technology is inspiring to create several P2P (peer to peer) online financing platforms that help monetary interactions happen in a more decentralized way. Blockchain technology can improve existing systems and processes and create cryptocurrencies.
Five typical applications of blockchain include:
- Make cross-border transaction processes faster, more accurate, and less expensive
- Banks can leverage trade finance to create smart contracts between participants, increasing transparency and efficiency
- Clearing and settlement procedures
- Protect against fraud and speed up the verification process with blockchain-enabled IDs
RegTech is a regulatory technology that uses cloud computing technology through SaaS (software-as-a-service) to help businesses comply with regulations efficiently and lower costs.
The various areas of RegTech intervention are:
- Data management
- Reframing regulations and implementing new governances
- Real-time reporting
- Data- analytics and decision
- Fraud and risk management
Non-compliance with mandatory government rules leads to fines and crisis. So most FIs want to do everything in their power to avoid non-compliance.
The need for RegTech solutions is growing as FIs grapple to stay compliant with new and existing regulations. RegTech solutions will create a layer that companies will rely upon significantly. Its high accuracy, single dashboard, data analytics, alerts, and insights will help companies optimize resources allocated to compliance and achieve better results.
4. Machine learning
Similar to AI, machine learning helps create a marketing campaign around the consumer. It enables you to understand what kind of services will attract your target market. For example, how people find a financial website, what page they clicked, and what services they need.
Machine learning algorithms and their capability for sentiment analysis will impact trading significantly in the future. It involves using enormous volumes of unstructured data such as photos, video transcriptions, social media posts, presentations, webpages, blogs, articles, and business documents to understand the market sentiment.
Sentiment analysis will transform the future financial markets, and many believe that machine learning will be central to developments.
5. Big Data
According to the IDC Semiannual Big Data and Analytics Spending Guide, currently, banking is one of the top investors in big data and business analytics solutions. Credit card transactions, ATM withdrawals, credit scores, etc., generate massive amounts of data. Deriving actionable insights from this data is crucial to optimize financial processes and make effective business decisions. It will increase the competency of financial institutions in the future.
Big data can help FIs learn more about customers and make business decisions in real-time. Big data analysis allows FIs to identify market trends and streamline internal processes and reduce risks.
Read more: FinTech Innovation: What Is In Store?
The Future of FinTech Adoption
82% of traditional financial organizations plan to collaborate with FinTech companies in the next five years as they fear losing out. 88% of established FIs believe that they may lose to standalone FinTech companies in the next five years if they fail to adopt FinTech innovation.
Financial companies will have to work towards providing a seamless digital experience for their consumers. To avoid the risk of losing out in the market, many FinTech startups, incumbent financial institutions, and technology companies are entering into new partnerships.
Technology in finance is no different than other disruptive technologies across various industries. It would be wise for even small businesses to consider FinTech as an investment for the future. Fingent has developed end-to-end disruptive technologies and innovative FinTech solutions that will help your business thrive and stay relevant. Contact us for more details.
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The impact and significance of digital transformation in financial services
Changing customer expectations, increasing regulatory complexity, stiff competition, and other factors are constantly pushing businesses for renovation and innovation. Also, the rising number of FinTech companies and solutions over the last few years have completely transformed the financial services landscape. Rather than just technology, digital transformation in financial services has now become an integral part of a successful business strategy. Digital transformation in the financial industry has improved employee and customer experience by helping meet regulatory deadlines and ensure cost-effective operations while remaining highly competitive.
If you consider how banking has transformed over the years, you will understand how digital transformation in banking and financial services has grown to benefit everyone with convenience. From simple branch offices to ATM and mobile apps, digital transformation has offered greater convenience, choice, and experience. Today, customers are gravitating more towards digital experiences and products.
What is the importance of digital transformation in the financial industry?
According to a recent report by Global Economic Prospects, the global economy will contract by over 5% in 2020 due to the COVID-19 pandemic.
However, the crisis has accelerated economic transformation, leading to an increase in the adoption of digital financial services.
Although the digital transformation was a development priority even before the COVID-19 crisis, it has now become indispensable for both short-term as well as long-term sustainable recovery efforts.
Here are four fundamental shifts that are forcing financial institutions to accelerate the rate of digital adoption.
1. Forced adoption of online and mobile channels
Social distancing and lockdowns are forcing people to stay indoors or go outdoors only to buy essential items. This has forced the rapid adoption of digital technology across the globe.
Deloitte reports that the United States, which has traditionally lagged in digital adoption is experiencing an all-time high in the number of check deposits and mobile logins. Interestingly, the major contributors to this growth are baby boomers and senior citizens who have been typically slower to adopt the digital channels.
For example, Goldman Sachs reported a 25% increase in the number of active users on the bank’s institutional platform. Also, the country has seen a spike in call center interactions as customers seek protection from the financial crisis caused by the pandemic.
2. Digital and contactless payments
The lockdown has witnessed a race among retailers to set up e-commerce capabilities to capture sales. With consumers shifting to online purchasing, there has been an acceleration towards digital and contact payments.
While MasterCard reported over 40% growth in contactless payment across the globe, Visa reported a staggering 150% increase in the U.S alone. Hygienic payment modes such as digital wallets, scanning QR codes, click/tap-to-pay, etc. have taken off well to encourage contactless payments during the pandemic.
3. Virtualization of the workforce and ways of working
Previously, financial institutions hardly imagined their workforce working remotely. But, the COVID-19 pandemic has forced financial services companies to build a remote work model.
Wells Fargo and Bank of America have pushed almost 70% of their employees to work from home and have established contingency locations for those employees who are into trading and operations. Standard Chartered Bank has kept most of its employees working from home, increasing its VPN system capacity to 600% to keep pace.
Bandwidth issues aside, this transition has been largely successful due to digital disruption in financial services. Most financial companies have even committed to making the remote working model permanent.
4. Evolution of economies and underlying market structure
Even though financial companies have been enjoying stability for years, the COVID-19 pandemic has fuelled margin pressures for companies.
On one hand, insurers are fighting lowered premiums and high claim costs due to the market scenario, while on the other hand, banks are affected by reduced interest rates. Though it is difficult to predict the duration of the economic downturn, it is forcing financial services companies to operate effectively and efficiently to remain competitive in the market.
Moreover, as the market dynamics continue to evolve, “big tech” is likely to reinforce its foray into financial services leveraging its scale, size, and expanding its role in the consumers’ day-to-day activities. Also, smaller FinTechs could be at risk with their funding models. All these evolutions will have a substantial impact on buying, building, and partnering decisions for many incumbents as well as start-up financial companies.
Top 6 digital transformation trends in the financial industry
1. Mobile banking
The digital banking environment allows customers to transfer funds, deposit checks, and apply for loans easily from their mobile devices. Today customers prefer to do online banking at their convenience instead of visiting the brick-and-mortar banks. More and more customers prefer to use mobile banking as it allows 24/7 access, almost negligible waiting time, and ease of use. Mobile banking has changed the functioning of banking and financial institutions to a great extent and is expected to grow further in the coming years.
Blockchain is gaining momentum steadily and will play a crucial role in digital payments, loan processing, escrow facilities, etc. Additionally, Blockchain will be used in RegTech (a new technology that uses information technology to streamline regulatory processes) to avoid unnecessary regulation breaches.
3. Big data
Big data is everything. Financial institutions including banks are using machine learning to process data and drive analytical solutions effectively. Big data helps banks and other financial institutions to serve their customers efficiently by tailoring their services based on the insights gathered. Eventually, this can help financial institutions to bring in more investment and create a great work environment for both employees as well as customers.
4. Mobile apps
While everything in banking and other financial services is going mobile, there are third-party financial service providers who are competing with the banks. They could be financial managers, unconventional leaders, or financial budgeting mobile apps. Banks will have to consider ways to integrate these third-party services- what information to provide, the companies they want to partner with, and which services they are likely to offer to their customers directly without the need of the middle-man.
5. Automated Wealth Managers
Artificial Intelligence (AI) is disrupting several industries with automation and numerous other possibilities. Wealth bots or automated wealth managers use complex algorithms to calculate the best investment opportunities, best loan providing institutions, best interest rate, etc. Automated wealth managers have made financial planning a breeze and are also helping people achieve their business objectives accurately and with great returns.
6. FinTech (Financial Technology)
FinTech is a modern technology adopted by banks and financial companies to deliver financial services efficiently. It has improved drastically since its ATM and credit card days to the latest digital banks and blockchain technology.
FinTech along with automated technology and machine learning algorithms are revolutionizing the world of finance. Digital technologies such as customer service chatbots, expenditure tracking, and online budgeting tools are some examples of how far financial services have come today.
How Fingent can help you?
As your digital solutions partner, we will help you navigate industry disruption and equip you for future challenges. We apply our extensive experience and deep industry knowledge in fintech to guide you to see digital transformation through fruition. Here, we ensure to maximize value with minimal disruption to your existing infrastructure to help achieve your goals. Get in touch with us to learn more.