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c. P2P services
Fintech is present everywhere.
A study from Juniper Research suggests that the total number of digital banking users will exceed 3,6 billion by 2024, up from 2,4 billion in 2020, a 54% increase. That 2,4 billion people in the world use a sort of Fintech service.
Adoption rates are steadily increasing. According to the Global Fintech Adoption Index 2019, 96% of consumers asked in the survey know at least one alternative Fintech service that helps them transfer money and payments. However, it is interesting to note that the average citizen who regularly pays with their phone may not know what the term Fintech means.
The size of the industry is steadily growing each year.
In Sept 2020, the summarized market value of big Fintech companies (Square, Visa, PayPal, and MasterCard) reached $1,07 trillion.
The aggregated value of six big banks (JPMorgan, Bank of America, Wells Fargo, Citigroup, Morgan Stanley, and Goldman Sachs) was less than $900 billion .
Each year, more and more consumers gain access to easily manageable and cheaper financial services. These benefits made their way to the SME sector, making Fintech services an appealing choice for them too.
New replaces old. It is the cycle of life, nothing new about that. But the trends and ways that this change is happening is indispensable to follow because they will affect all our lives, maybe sooner than we think.
In this blog post, we will review five topics that will shape the future of Fintech.
Financial technology solutions are part of people’s everyday life. They are benefitting not only nations but the individual consumer as well. Transportation apps, investment apps, shopping apps, and even food-ordering apps are now using Fintech solutions. The tech advances and inclusion must follow.
According to a report from 2017 by the World Bank, approx. 1,7 billion people  in the world remain unbanked. The number was 2 billion in 2014.
Most of these people are living in developing countries. But the main reason for being unbanked is not always linked to low income.
As the research states: “Sorting households within each economy into just two groups— the poorest 40 percent and the richest 60 percent— provides another perspective. Worldwide, half of the unbanked adults come from the poorest 40 percent of households within their economy, while the other half live in the richest 60 percent.” Fintech solutions can make a huge difference here.
However, without proper planning, Fintech could undoubtedly push marginalized players further away from the mainstream. The establishment of the Alliance for Financial Inclusion, experiences gained by the Consultative Group to Assist The Poor, and an initiative to provide a blockchain-based ID network for refugees and people who do not possess any government-issued documents by Accenture and Microsoft are all steps towards the shared goal.
Smartphones, internet access, and mobile banking are useful factors too.
According to statistics, 59% of the population uses the internet, and 67%  owns a mobile phone.
With the ever-increasing number of online banking service providers, opening a bank account is now a reality without ever visiting a traditional bank branch.
We are going to review some aspects of Fintech that could drive inclusion.
Companies that do not necessarily provide financial services can embed such services from Fintech companies directly in their products. One of the prime examples of this when you order something online, and upon reaching the checkout area, you have the option to pay in small installments without actually applying for a loan or ever leaving the site. It is called a point-of-sale financing product or buy-now-pay-later.
Social networks like Facebook – which anyone can reach from almost anywhere in the world – will soon be offering services that people use banks to accomplish today. For example, the Facebook Financial Initiative aiming to embed Facebook Pay inside Facebook Shop, creating an infrastructure for customers to stash their money more conveniently within the platforms they already use every day, with no bank account or credit card required.
A Lightyear report indicates that the revenue increase from embedded finance will grow massively, from $22,5 billion in 2020 to $230(!) billion by 2025.
The growth projection takes into account the changing buying behaviors, the openness to non-traditional financial providers, and the willingness to share personal data for the benefit of a better customer experience.
The change in financial perception also affects financial inclusion.
The COVID epidemic forced people to think about their financial lives from a different perspective. It also proved that the current financial system is not prepared to address and respond to economic shocks caused by the pandemic. The lockdowns are changing how people manage their finances. Alternative forms of finance (such as P2P lending, digital assets, and more comfortable wealth management options) are gaining more popularity. The longer the COVID remains, the more of these changes will occur.
P2P-based financial services are great accelerators of financial inclusion.
These dealings include two individuals – a lender and a borrower. The service provider is to match up buyers and lenders and acts as the intermediary and risk mitigator. Borrowers can get money cheaper (lower interest rate) and without long banking processes. Lenders can earn higher fixed interest-like returns than available in conventional fixed interest instruments.
By 31st November 2020, the top 90 P2P and real estate crowdfunding companies reached the aggregate funding of $121,392m.
The rise of these services empowers customers all over the world. They provide a more manageable, cheaper way to access loans while also giving a new investment opportunity for everyone with a little spare money.
The rise of investment apps is also driving financial inclusion. The pandemic made people realize that passive income and wealth generation through investment can be an essential part of their finances. The number of users on commission-free trading platforms like Robinhood, eToro, and Webull skyrocketed during the pandemic, driving the retail investment numbers higher. According to statistics by Financemagnates, page views increased by 241,67% on Robinhood, 97,09% on eToro, and 294,12% on Webull from Dec 2019 to May 2020. This new wave of investors presumably mostly consists of young adults, inexperienced in trading. Still, they make up a large portion of each platform’s userbase.
These apps are making investing far less intimidating for younger people, giving them the chance to invest without access to immense wealth. The option to buy a fraction of a share makes it possible for just about anybody to invest in stocks like Apple or Tesla. For many, this is the first step towards gaining new financial knowledge and learning the basics of these markets. The commission-free model and convenient mobile applications are attractive to the young, increasing the number of people using investing and Fintech services.
The last thing we want to mention in connection with Fintech inclusion is financial literacy. Financial literacy is not only relevant in the case of emerging countries or lower-income households. It is equally significant across millennial and Gen Z segments from developed countries.
In the last few years, Fintech solutions evolved from disrupting the market to globally reaching customers.
According to EY’s Global Fintech Adoption Index 2019, the Fintech adoption index moved from 33% in 2017 to 64% in 2019, based on a survey that questioned more than 27 000 customers across six continents in up to 27 markets. Another key metric is that even among non-adopters, the awareness of Fintech solutions like money transfer and payment options are very high, 96% of consumers.
But reaching and making aware potential customers are one thing. Getting them to use these solutions is different. Streamlining customer experience is a defining factor, but educating and investing in their financial literacy is the thing that can earn long-term loyalty and retention. Integrated financial coaching solutions in Fintech apps can teach customers how to spend or invest their money effectively.
This education process is already taking shape around the globe. Eneza Education, a Kenyan ed-tech company, provides basic educational content – including financial topics – for millions using mobile phones. A more Fintech-related example is Indian neo-bank Niyo Bharat.
The bank started an initiative to improve the financial literacy of blue-collar workers through its mobile app. Non-conventional educational methods are gaining traction too. ALFI, a Peruvian company, uses gamification and machine learning to improve its users’ financial literacy skills.
Although more research is needed, a study conducted in Ireland among working-age members (16–65 years) provides insight that financially capable behaviors could be improved utilizing smartphone apps. During the research, the treatment group received four smartphone apps: a loan interest comparison app, an expenditure comparison app, a cash calendar app, and a debt management app. Citing the research: “For those receiving the apps (the treatment group), statistically significant improvements were found in a number of measures designed to gauge ‘financial knowledge, understanding and basic skills’ and ‘attitudes and motivations’. These improvements translated into better financially capable behaviors; those receiving the apps were more likely to keep track of their income and expenditure and proved to be more resilient when faced with a financial shock.”
The topics above all have a different effect on Fintech inclusion, and there are many other factors that we have not laid out in this post. Fintech inclusion should be a priority trend not only in 2021 but in the decade. If it is done right, millions of people will have the chance to gain more control over their finances.
The year 2020 pressured many businesses to optimize processes and cut operations costs through efficient solutions. As long as the economic effects of the pandemic are present, this pressure will stay too. Automation processes are a crucial part of technological advancement.
Robotic process automation will become more mainstream every year, both in Fintech and in the general financial market. RPA software bots are a great way to automate repetitive manual tasks with low exception rates.
These bots are programmed to interact with digital systems to execute tasks like data entry, reporting, and other low-value tasks, enabling human employees to focus on high-value aspects of the business.
A few examples of how these RPA solutions can currently help Fintech, with a lot more to come in the decade:
- Regulatory compliance
- Invoice automation
- Payroll automation
- Loan processing and approval (a tool for P2P financial service providers)
Fintech companies are always in the lead of innovation, so embracing new solutions that can make their processes quicker and cheaper is almost mandatory.
The ever-growing significance of cybersecurity is a crucial topic every year in Fintech. Fintech companies usually provide purely digital services to users, making them dependent on technology and vulnerable to cybercrime.
As a report by F5 states: “phishing incidents rose by a staggering 220% compared to the yearly average during the height of global pandemic fears.”
Companies had to quickly move several business processes to the digital world, making them more prone to such attacks, and fraudsters were quick to take on the chance.
In the coming years, companies and citizens need increased awareness to recognize and avoid such attacks.
Biometric security systems (such as fingertip identification) are a great way to combat cybercrime, but the pandemic shed light on the importance of contactless solutions in the sector. Face and voice-based identification is a feasible way forward. Fintechs using ITO (Internet-of-Things) solutions should be extra careful, as these can mean a new point of attack for hackers.
Fintech companies work with sensitive financial and personal data, which makes them a prime target for cybercrime. According to Apoorv Gehlot, founder of Matellio LLC, a software engineering studio based in California, security challenges Fintech companies are facing include the following.
- Third-party security risks
- Application security risks
- Money Laundering risks
- Digital identity risks
- Legacy Banking Systems
- Cloud-based Security risks
The good news is that the industry is mostly aware of these challenges. According to a report from KPMG, cybersecurity will be a hot area of investment, particularly in areas related to cloud security and governance. At mid-year 2020, the total investment in cybersecurity already surpassed the full-year value of 2019. As Charles Jacco, Cyber Security Leader and Principal of KPMG in the U.S. phrased: “Looking forward, we’re going to see a big interest in Fintechs focusing on fraud prevention and on providing smooth, more password-less cyber capabilities. Interest is going to absolutely explode if it hasn’t already.”
Digital banks (and neobanks, challenger banks) are getting more attention every year in Fintech. These companies offer banking services like digital bank accounts, global money transfer, debit cards, investment options, and other traditional banking services with minimum or no fee and top that with the chance to buy and exchange cryptocurrencies.
Maybe the most famous example of these service providers is Revolut, but make no mistake, a lot of other players are joining the market to provide these services worldwide.
Some of the reasons why these digital-only banks are on the rise are:
- banking can be fully manageable from a pc or smartphone
- they offer banking services cheaper
- has a more streamlined user experience
- do not need person-to-person contact
- no paperwork
- offer digital services that traditional banks are not yet implemented (like crypto trade)
- provide a much more understandable and more manageable service than conventional banks.
However, the challenges their users face are mainly the offsprings of the benefits mentioned above. Without a physical branch, customers have only digital ways to reach them, making high-quality customer service harder to manage. These services are also fully digital that makes them more prone to cybercrime and technological errors.
Still, the way forward is not in using paper but using digital services. As we mentioned in the Fintech inclusion part, the global internet and smartphone penetration increase each year. These trends are making the services these digital banks offer available to an ever-growing audience.
According to data, the number, customer base, and revenue of digital-only banks are all rising. Should the industry keep up with the ever-growing threat of cyberattacks and continue to provide innovative and customer-friendly services, the digital-only banks will boom in the years to come.
The first things people associate blockchain with are cryptocurrencies and bitcoin, which is a good association. The use of blockchain technology, however, is broader than that. Blockchain will play a significant role in the future of Fintech.
Why? To understand why it is a big thing in Fintech, let’s review some basics. Without getting too technical, the three main pillars of blockchain:
- Store data on all the nodes of the network instead of one. Each node has a record of the data and no central authority over the nodes.
- A blockchain is a consist of linearly and chronologically following blocks that store data. Cryptography and a timestamp provide the security for each block. After a block becomes part of the chain, the consensus of 51% of the network would be needed to alter it.
- Anyone can join an open network, who has the required computational power to validate transactions, which earns cryptocurrencies or tokens based on the system.
Based on these pillars, there are several sides to this technology that can benefit the financial world:
- Faster and more secure transactions and stock trading
- Open the way for cryptocurrencies that are:
- easy to buy and sell
- internationally decentralized
- great way to hedge risks
- has huge growth potential
- has deepening integration with mainstream financial systems.
- Can enhance internal business procedures
- Provides the technology for automated smart contracts
The possible benefits of blockchain technology are undeniable, but it still needs time to integrate into the financial world. However, that does not mean the process has not started. To provide some insight on how the benefits can play out in real life, here are some currently working adoptions of the technology.
Stock exchanges. Uniswap, OpenLedger, and Waves. Exchanges are scratching the surface of peer-to-peer trading, offering a faster, more private, decentralized, and cheaper alternative to trade assets. Currently, these exchanges only operate with cryptocurrencies, but the philosophy and tech could pave a new way for retail investments.
Cross-border payments. Cross-border payments are usually slow and expensive. In some cases, it can take up to 2-7 days to complete a transfer and pay 5-20% fees to the middlemen. Wirex, SWIFT, and Ripple aim to reduce the time and cost of these transfers. They use blockchain technology, fiat- and cryptocurrencies to make it happen.
Smart contracts. Smart contracts are self-executing contracts, where the terms of the agreement between the parties are directly written into lines of code, running on a decentralized network such as blockchain. The code controls the execution, and transactions are easily trackable. The widespread usage of this solution requires large scale enterprise migration onto agreed upon blockchain protocols, and eventually – among other benefits – it could decrease the monitoring and enforcement costs of financial contracts. The best known smart contract platform is Ethereum, but competitors like Hyperledger, Stellar, and Corda are popular too.
What do the executives of the industry say about the future? Deloitte researched 1488 senior executives and practitioners in 14 countries and found the following.
- 55% of respondents claim blockchain is a top-five strategic priority (53% in 2019, 43% in 2018)
- 88% of respondents agree that blockchain technology is broadly scalable and will eventually achieve mainstream adoption (86% in 2019, 84% in 2018)
- 82% of respondents said that they are hiring staff with blockchain expertise or plan to do so within the next 12 months (73% in 2019)
- 39% of global respondents said they have already incorporated blockchain into production (up from 23% in 2019)
- 36% of the organizations planning to invest at least $5 million in blockchain in the next 12 months (down from 40% in 2019)
- 61% of the organizations planning to invest less than $5 million but more than nothing (up from 54% in 2019)
The technology and the will to innovate are present, and in time Fintech companies will further nourish their solutions. Soon, blockchain-related services will become more mainstream in business and everyday life alike.
Fintech services are increasingly becoming part of our lives. The industry is getting bigger every year, providing new and improved financial services to customers and forcing legacy players to modernize their existing solutions. The trends we discussed above are essential aspects of Fintech. If you want to learn more about them, or discover other ones, visit our Fintech focused knowledge hub, BrightMeUp! with 100+ Fintech specific topics to follow.
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- CNBC: Market value of big Fintech companies rises to $1 trillion, more than the largest banks
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- Hootsuite: Digital 2020
- PaymentsSource: Embedded payments are taking a bite out of banking
- Forbes: Uber’s Departure From Financial Services: A Speed Bump On The Path To Embedded Finance
- FinanceMagnates: Are Robinhood, eToro, & Other No-Commission Apps a ‘Gateway’ to Crypto?
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- UiPath: The Buyer’s Guide to Using RPA in Fintech Automating Back-Office Processes
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Mobile App Daily: How Blockchain Technology is Revolutionising Fintech in 2020