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The Not-So-Little World of Fintech

There’s no doubt the term ‘Fintech’ is a modern invention. Traditionally, the word was used to describe any technology applied to financial services activities. Financial technology, also known as Fintech, is an economic industry composed of companies that use technology to make financial services more efficient. Fintech disrupts sectors such as mobile payments, money transfers, loans, fundraising and even asset management. The primary task of these new technologies is to fundamentally disrupt the biggest players in finance. Financial technology companies are founded with the purpose of disrupting incumbent financial systems and corporations that rely less on software.

Shaky news first

Wikipedia says:

  1. Any data breach, no matter how small, can ruin a Fintech company's reputation.
  2. Data security is another issue regulators are concerned about because of the threat of hacking as well as the need to protect sensitive consumer and corporate financial data.
  3. The online financial sector is also an increasing target of distributed denial of service extortion attacks.
  4. Marketing is another challenge as most Fintech companies are often outspent by larger rivals.
  5. Fintech is usually applied to the segment of the technology startup scene that is disrupting sectors as stated above.

Despite all that is going on in the business world, the gold rush continues. Fintech has performed significantly with global investments in the first quarter of 2016 hitting $5.3 billion, a 67% increase over the same period last year, according to figures put together by Accenture.

The technology advances, the latest platforms and the most promising business apps spell profitability for Fintech adopters. As technology changes the financial services landscape, it makes Fintech safer, more efficient and more sustainable by applying various information and communication technologies to all modes of business entities, from multinational corporations to small-scale businesses, and even the way we manage our personal finances.

Business practices are changing rapidly as well as the use of software. The design and development of software is driven by the end-users, and in the future, most of the design will be decided by the users. As technology has changed the financial services landscape, we’re talking about major changes to payments, business and personal loans, venture capitalists, private equity firms, fundraising, brokerage, money transfers, investing, asset management and even currencies.

Moreover, the integration of existing technologies can create new services. You could pay an expert to guide you or you could ask a robot to do it. Above all, it was the development of new applications and growth of business models to meet evolving opportunities – and it wasn’t until they were provided with some intelligence, connected to the Internet and empowered by a new wave of technological accessibility through cloud computing, smartphones and the prototyping capabilities of digital fabrication – that brought Fintech into being.

Technology radically changes the user experience

Generally, transformations proceeded along five different stages. First comes the use of IT to facilitate the overall quality and improvement of the back-end processes. Distribution comes second – facilitating Internet connectivity and global reach of the Internet.

The third stage – and according to the Office of the Comptroller of the Currency – is the new regulatory framework of compliance needed to be created to help foster innovation among Fintech companies. The fourth is data security using reasonable, appropriate measures to protect data obtained from consumers and securely encrypting and storing the information.

The fifth stage is the rise of smartphones leading to a fundamental disruption of the industry and its business models. But in efforts to increase competition and reduce the power of too-big-to-fail organizations, we are seeing governments around the world actively working to make fertile ground for innovative Fintech companies to grow.

The Future of Financial Services is Fintech (Big Data and Hadoop included)

We are witnessing a new model in which big banks are tying up and partnering with Fintechs. Basically, Fintechs would like to take advantage of the banks’ enormous scale without the compliance burden. Disruption is also more likely to be technological for the big banks. Technological advancements have made it possible to effectively analyze and interpret complex sets of data from which new client insights can be gleaned. Biometric technology, for instance, is instrumental in introducing fingerprint, voice, iris and heartbeat scanning and is emerging during 2016 in a big way.

BitCoin is a well-known example of a cryptocurrency and run by a vast network of independent computers spread across the globe, which promises lower transaction costs upfront. While Bitcoin has undoubtedly grabbed much attention in recent times and more so because of its underlying technology, the blockchain. Essentially, the blockchain is a database running across an array of independent machines.

Not only with monetary transactions, bitcoin also oversees the exchange of anything that holds value, including stocks, bonds and futures as well as property and automobile titles. Driven by new digital technologies, stricter banking regulations, changing consumer behaviour and the need to reduce costs, it attempts to develop new applications to meet evolving opportunities for financial futures. Peer-to-peer lending stresses the importance of establishing direct lending and borrowing channels between people by diminishing the role of traditional financial institutions.

Fintech is trying to eliminate the role of the middle man when it comes to making a financial transaction of any kind. As B2C Fintechs bring products, models and solutions directly to the customer, they often eliminate the institutions they develop solutions for and initiate a seemingly endless list of possibilities. Consumers will get to control how the data about them is shared, and they'll have the opportunity to monetize data themselves.

And without a shadow of doubt, the role of B2B Fintechs will grow in importance in the coming years. Attempts are also being made to ensure Fintech lowers the barriers of entry to the worlds of venture capital, investing, private equity firms, angel investing and stock trading.

Because the models rely heavily on massive amounts of data, these new enhanced applications can be dubbed as smarter Fintech applications. Consumer-facing websites, from online banking to e-commerce, use data collected in systems like Hadoop in order to construct predictive models that help businesses understand how a user will behave in response to a specific offer or content. This smarter data management allows insurance firms and banks to create more effective, client-centric solutions that are more aligned to client behaviour and needs.

It is interesting to know that the information supplied by big data via a banking API is of a prime quality, as it is already verified by a trusted source – the bank. Such capabilities can permit banks to optimize their own internal processes and add significant value to clients through better understanding of their business. As more and more companies realize the worth of implementing Fintech strategies, more services will emerge to support them.  It will  result in reduced cost of quality and compliance, improved customer service and increased return on innovation.

A few years ago, banks did not understand the heaps of big data and its value as traditional methods of analysis couldn’t make sense of the volume and complexity. Now it has become intelligible, accessible and massive mainly because of advanced algorithms. As a significant amount of transactions are online or through mobile platforms, financial firms, banks and startups are using big data to add significant value to clients through better analysis and understanding of their business. The idea of Fintech firms is not only to revolutionize how people interact with money, data and banking, but to do so with technology and enhanced decision-making.

Finally, technologists and analysts are on a path to discovery, obtaining answers on how technology and the data collected can make Fintech more efficient and cost effective. As more and more companies realize the worth of implementing Fintech strategies, more services will emerge to support them. Big data together with Fintech will forge the last links of the value chain that will help companies drive more operational efficiencies from existing investments.

Article written by Raj Kosaraju
Image credit by Getty Images, Corbis, Randy Faris
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