The advent of Fintech dates back to the 1950s when the first credit card was invented by a diner’s club. Yet, the official use of technology in financial services can be traced back to 1967 when Barclays Bank installed the first ATM. This marked the real shift from technology to digital technology.
The term FinTech or Financial Technology is derived from two words: financial services and digital technology. In simple words, FinTech is the innovative use of technology in the formation and delivery of financial services. FinTech encourages the use of digital technology in startups so that they can come up with innovative products and services, such as mobile payments, alternative finance, online banking, big data, Robo advisors, peer-to-peer lending, crowd-funding, and overall financial management.
FinTech was introduced as a back-end system technology for financial institutions and banks. However, since then, its definition has changed significantly. Today it encompasses several consumer-based applications which can help you trade stocks, manage funds, and pay for your insurance and food via this technology.
According to a study by Fortune, in 2021 that 90% of US citizens use FinTech for managing their finances. A study also says that by 2021, there were 10,000+ fintech startups registered in the United States alone and over 26,000 globally. Currently, there are approximately 2 billion people worldwide without bank accounts or formal financial services. FinTech came as a savior for all those people by providing an easy option to participate in and access financial services. It is also the best option for boosting financial inclusion as it’s developed to provide consumers direct access to their finances through simple yet cutting-edge technology.
The research, conducted by East & Partners, finds that the core motivations of global respondents to integrate fintech solutions are reducing operational costs (46%), deploying new technology with greater ease (43%), and aligning more closely with evolving compliance needs (37%).
Digital transformation remains a priority, with global institutions investing an average of $367.6 million in transformation in 2023. European banks are investing substantially more, at an average of $886 million. However, while global respondents say they have digitized 47% of their digital processes on average, only 1 in 5 feel they are ahead on their digital journey (20%), and 1 in 2 (54%) believe they are behind. This is substantially lower in the Middle East, where only 12% feel they are ahead and 62% say they are behind. The research was conducted amongst 783 interviewees at 260 banks in the UK, Europe, the Middle East, Asia Pacific, and the Americas, as well as 393 interviews with North American community markets banks and financial institutions. The findings explore the current appetite in the marketplace for fintech investment and integration, and Environmental, Social and Governance (ESG).
Impact of Fintech on Banking
The impact of Fintech on banking and the impact of Fintech on financial services gives the banking sector an impetus for development. The existence of an internet site, a mobile version of a site, and a user’s personal account has already become a standard for a modern bank — and the user, by default, waits for such services as, for example, an SMS message about the movement of funds or the ability to manage his account online. Already nobody will be surprised by the possibility of online payment of bills, including utility bills and fines. Fintech is already developing what banks are only planning to experiment with. Most likely, some innovations will take root, others will not: this is facilitated by the competition.
The ongoing digitization of financial services and money creates opportunities to build more inclusive and efficient financial services and promote economic development. Countries should embrace these opportunities and implement policies that enable and encourage safe financial innovation and adoption. Technological advances are blurring the boundaries of both financial firms and the financial sector.
New infrastructures, providers, products, business models, and market structures are shaping market outcomes in profound ways. As such, it is necessary to ensure that market outcomes remain aligned with core policy objectives as the financial sector continues to transform and policy trade-offs evolve. This flagship publication explores the implications of financial technology (fintech) and the digital transformation of financial services for market outcomes, on the one hand, and the regulation and supervision of financial services, on the other hand, and explores how these interact.
Effects of Fintech on Financial System
The global financial crisis has exposed serious problems and weaknesses in financial regulation and supervision. As a result, the Financial Stability Board is undertaking a comprehensive and ongoing review of the global financial regulatory architecture to set standards. One of the weaknesses identified by the crisis was poor risk data collection and reporting in banks. This led to the Basel Committee on Banking Supervision publishing its Principles for Risk Aggregation and Risk Reporting in 2013. This was a key development as the principles set minimum standards for data collection and management, which may require additional investment in technology and organization restructuring.
The increasing complexity of the global regulatory framework, growing regulatory reporting requirements and the risk of costly penalties as a result of tightening post-crisis standards have contributed to higher compliance costs in financial institutions. This has become especially important for international banks faced with formidable and sometimes conflicting regulations.
The concept of financial innovation is much broader than Fintech, and, accordingly, not all financial innovations are financial technologies (for example, the creation of a new derivative, etc.). At the same time, the concept of financial innovation can be partially included in the concept of the “digital economy” (Fintech completely, since its functioning without digital technologies is almost impossible). Fintech today is often viewed as a unique segment of financial services and information technology. However, the relationship between finance and technology has a long-standing relationship, often complementing and reinforcing each other.
As above said, the global financial crisis of 2008 was a turning point and the reason why Fintech is turning into a new paradigm. This evolution creates challenges for regulators and market participants, especially in balancing the potential benefits of innovation with the potential risks.
E-wallet is one of the top fintech solutions in the financial industry. The immense growth of E-wallets is an indicator of the rise of FinTech services. The Worldpay Report indicates that e-wallets remain a preferred payment method among global e-commerce consumers, registering 44.5% of global e-commerce transaction volume by 2020, an increase of 6.5% from 2019. By 2024, digital wallets are projected to represent 51.7% of e-commerce payment volumes.
While Samsung Pay, PayPal, and Apple Pay are some of the well-known e-wallet companies in the world, these wallets are used for a plethora of purposes, namely P2P payments, utility bills, top-ups, ticket booking, international remittances, and many more.
In addition, there are also some standalone wallets, such as Starbucks and Walmart Pay. E-wallets have attracted users due to their tempting offerings like exciting offers, lucrative cashback, reward points, and many more. E-wallets are positively impacting the banking industry by being the major source of digital payments as the users need to add their bank account details to the wallet for adding funds to it. Also, e-wallets have increased the number of users making digital payments, ultimately benefiting the banks. Moreover, the huge success of E-wallets has led many banks to realize their importance and recognize e-wallets as a collaborative measure to embrace technological advancements.
Smart Chip Technology
According to Thales Group, as of 2020, there were around 10.81 billion EMV cards. Smart chip technology, also known as EMV (Europay, Mastercard, Visa) technology, is a type of chip-based payment system that uses microprocessor chips to secure payment transactions. These chips are embedded in credit and debit cards and are designed to make it more difficult for fraudulent transactions to occur.
One of the most noticeable impacts of smart chip technology on the banking industry is that it has increased the security of payment transactions. These chips create unique codes for each transaction, which makes it difficult for fraudsters to use stolen card data to make unauthorized purchases. Hence, there has been a significant reduction in card fraud and has increased consumer confidence in electronic payments.
Additionally, smart chip technology has also made it easier for banks to comply with Payment Card Industry (PCI) security standards, which require banks to take steps to protect cardholder data. This has reduced the risk of data breaches and the associated costs for banks.
FinTech in the banking industry has given birth to many innovations, and biometric sensors are one of them. Almost all the top fintech predictions and trends have mentions of this innovation. Biometric sensors, along with Iris scanners, are two technological advancements that ATMs are witnessing.
According to ABI Research, the number of biometric sensor cards is estimated to reach up to 20.6 million by 2025. These advancements are path-breaking since they eliminate the need to carry a plastic card and there’s no need to remember the PINs. This offers immense convenience and ease to the customers. Apart from providing convenience and ease, these advancements also make ATMs more secure than ever since the user can access their account without any password. The biometric ATMs use integrated mobile applications, fingerprint sensors, palm scans, and eye recognition to identify the account owner. For more accurate and secure identification, ATMs also use micro-veins which eliminates the errors made by ATMs in customer recognition.
The biometric technology brings a huge sigh of relief to all the customers who panic at the thought of losing their ATM card. With biometrics, they can access their funds even if their card gets lost. Thus, there is a significant impact of biometric technology in the banking sector.
The increase in the use of smartphones has compelled banks to come up with mobile applications that offer convenient FinTech banking services. The use of these applications is called mobile banking. According to a study by Allied Market Research, the global mobile banking market is expected to reach around US Dollars 1824.7 million by 2026.
Today, most banks have a mobile banking application that has a user-friendly interface and delivers almost every service available in traditional banks. They have also introduced a feature of fingerprint recognition for users. The application performs this function without any biometric app or hardware.
A mobile banking app provides quick access to funds, and the user can perform several banking functions such as quick bill payments, check deposits, account balances, statements, and many more.
Over the years, AI has become essential in FinTech banking services. According to Business Wire, the global AI in the banking market is estimated to reach $ 64.03 billion by 2030, up from $ 3.88 billion in 2020, with a CAGR of 32.6% during the forecast period. And AI combined with machine learning is vital for fraud detection. Banks use software for fraud detection that generates alerts whenever there is a potentially fraudulent transaction. Later it is backed up by the human investigation that 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. So, the old method is only costly and time-consuming. Moreover, the risk of customer data loss is always there. To combat this issue, banks are now adopting AI technology.
Moreover, with AI and machine learning algorithms, banks can leverage historical data to predict and determine fraud attack patterns. This will reduce half of the manual effort. And the increasing use of AI and ML in financial services can also help banks in automating their processes and get detailed insights for making informed decisions.
The author, Mr. Nazir Ahmed Shaikh, is a freelance writer, columnist, blogger and motivational speaker. He writes articles on diversified topics. Mr. Shaikh can be contacted at email@example.com.