The rise of financial technology – or FinTech – has been meteoric. Financial institutions often form the vanguard of innovation, be it new products or moving into new markets. However, the rise of FinTech is one of the most telling developments of all, taking some financial institutions by surprise. FinTech has arguably democratised financial services, allowing non-traditional firms to enter the space. By harnessing the power of nascent technological developments in areas such as cloud computing and Big Data analytics, FinTech organisations have become key players.
Through its ability to transform financial services, from the consumer accessing a bank account on a smart device, to revolutionising back office processes, to harnessing the power of the blockchain, it is clear that FinTech is going to be a major force in the coming years. Due to the proliferation of FinTech, established industry players within the financial services space are rethinking their core business models and embracing digital innovations in a number of areas, as well as adjusting their employment habits and compensation packages.
Investors also understand the transformative effect that FinTech can have, not only on firms operating in the financial services sector, but on other industries too. This is clearly demonstrated by the continued investment in FinTech, which has rocketed in recent years.
Yet, as FinTech has matured and evolved, attitudes toward it have begun to change. Regulation is increasing and companies must quickly become accustomed to operating in a more scrutinised sector.
In the UK, the FinTech space produces more billion-dollar-valued startups than any other industry. Yet FinTech is booming in other jurisdictions, particularly the emerging markets, as mobile internet penetration has continued to expand. According to the World Bank, by 2017 roughly 87 percent of all broadband connections in emerging markets will be mobile. The spread of wireless is much faster than in many developed markets because a lack of fixed communications infrastructure allows these countries to bypass the slow process of improving land-based connectivity. India and China have emerged as leading FinTech markets, benefitting from a huge online presence and a rapidly developing IT industry.
Despite the growth of FinTech, investment actually fell in 2016 in some key markets – most notably the US. According to Thomson Reuters, US FinTech investment reached $4.27bn last year, a fall of around 30 percent from 2015. However, this decline was a result of external factors, rather than an indication of declining interest. Namely, uncertainty about the US presidential election and smaller deal sizes put the brakes on investment, according to CB Insights and KPMG.
Rise of the robots
The range of FinTech products and services has expanded rapidly. As such, FinTech is likely to move away from its core business areas in the coming year. According to research from McKinsey, the main ‘tent poles’ of FinTech to date – payment applications, lending and money transfers – are no longer the core focus. Instead, firms are concentrating on a variety of emerging business areas, both within banking and beyond. Areas such as digital lending and cash management, robo-advisory, social integration and trade, among others, are attracting investment and helping to transform the sector.
Significant activity is expected in artificial intelligence (AI), particularly in terms of banking. This process has already begun, with the announcement in early January that Japanese insurance company Fukoku Mutual Life Insurance is to replace 34 members of its claims assessment team with IBM’s cognitive computing software Watson. This is just one example of the increasing use of software robots in financial services. FinTech will help to usher in a new age of AI and robotics. Already, nearly 140 private companies working to advance AI technologies have been acquired since 2011, with more than 40 of those deals completed in 2016.
2017 will be an important year for FinTech, particularly consumer focused products. It will be faster, cheaper and easier for consumers to use financial services due to the explosion of FinTech options on the market. Mobile payments, peer to peer lending and insurance will be just the beginning of this consumer focus. Keeping up with consumer demand for innovative – and secure – products will drive the industry forward.
With the evolution of FinTech and the growth of its influence set to spread, the need for regulatory oversight is clear. Sensitive financial data, for example, must be protected. Yet this oversight should not impinge on FinTech’s ability to develop and reach the consumer. In many markets, regulators are taking a proactive approach to overseeing development in FinTech, facilitating the growth of regulatory sandboxes which give startups the freedom to develop products and services without fear of damaging the wider financial system. The UK’s Project Innovate, launched by the Financial Conduct Authority, is one example, guiding technology start-ups through regulatory processes. It would be prudent for regulators in other jurisdictions to follow suit and introduce similar measures, enabling them to manage the risks associated with FinTech while encouraging growth.
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