It is difficult to imagine modern finance without technology, which is helping players navigate its complicated landscape more efficiently. While bigger and older organisations adopt technology at their own pace, start-ups are blazing new trails – and the two are more often partners than rivals.
India is one of the fastest-growing fintech markets. In the new year, the fate of fintech will be shaped as much by evolving regulatory and policy frameworks as by new technologies. Here are some of the trends that will define the fintech industry:
Cloud and big data analytics
With cloud computing banks can eliminate redundant tasks and work more innovatively. Its other services include storing, managing, and accessing information. Fintech companies that utilise secure cloud-based technology can also help banks find unique solutions for better user experiences, personalisation, and automation.
AI learns and adapts to weed out fraud cases. With ML, risk assessment systems are continuously updated to better protect consumers and businesses in fintech.
— Akash Sinha, Co-founder & CEO, Cashfree
This also means that scaling up the business to higher user demand is much easier as it only needs upgrading the data package that the company is contracted to use: no need to hire, train and re-train employees. On the other hand, payment gateways that are not on the cloud suffer from slow and complicated payment processes.
Usage of big data in fintech is more than a trend. The exponential increase it recorded in recent years will continue, especially due to further adoption of mobile technologies and IoT.
Jatin Bhasin, VP Product, Capital Float says that fintech has largely been a cloud-friendly company. With the advent of cloud solutions such as AWS, GCP, and Azure, and the possibility of hosting a private or public could system, many traditional financial institutions (FIs) have started to migrate a sizable portion of their data to digital formats.
One of the cloud’s main advantages for FIs is storing and keeping track of large data sets that are used for verification of transactions. This makes them agile and fast-paced. This opens up their reach to various different and remote markets, regardless of their location.
An analysis of GlobalData’s Market Opportunity Forecasts Model reveals that cloud revenue in the BFSI sector will grow at a CAGR of 8.2% during 2019-24 to reach USD 27.8 billion in 2024. Banks, fintech companies, lenders, and insurers are leveraging data-sets to maximize customer understanding and gaining a competitive advantage. The fintech industry will also create innovative models for assessing risks.
AI/ML and IoT
With AI, fintech companies are developing new ways in which users can process information. Users can make use of complex information to improve their financial decision-making. The use of AI, ML, and IoT technologies is rapidly changing the financial sector, especially by allowing greater insight into customer behavior.
Blockchain is now being used to authenticate lenders, consumers and transactions, and also plays a major role in preventing unauthorised access and cybercriminals.
— Jatin Bhasin, VP Product, Capital Float
Fintech is combining industry IoT and AI to test banks in using immediate support to customers. Smartphones can function as signs by notifying account supervisors in FIs when a customer arrives at the branch. This way, fintech firms can assist her promptly as well as save her time. AI and ML offer fintech exceptional benefits like more efficient processes, better financial analysis, and customer engagement. Fintechs are creating a sensation by employing NLP-based chatbots and innovating a conversational user interface (CUI) to reform mobile banking.
According to Akash Sinha, Co-founder, and CEO of Cashfree, fintech organisations are increasingly adopting AI and ML to gauge risk and assess fraud. “Algorithms can be created to analyse data across a set of parameters and AI tools can learn and map out user behavior and find patterns to identify potential fraud. Over a period of time, AI learns and adapts in order to weed out fraud cases. With ML, risk assessment systems are continuously being updated to better protect consumers and businesses in the fintech ecosystem.”
For B2C fintech companies, IoT makes the process of data collection, management, and sharing more accessible. IoT will help manage data streams with a very large number of data entries. Distributed stream computing platforms have emerged as the future of IoT by helping with real-time analytics and pattern identification. While IoT in banking is still in infancy, it can already be seen making KYC and customer on-boarding processes faster. The next decade will see IoT grow exponentially by introducing new possibilities and endpoints for payments and optimising branch operations.
Microfinance start-ups are further fuelling ML and AI developments because of the high quantities of data produced, historical records, and financial transformation. Experts point out that AI will enable smarter lending and make credit more accessible to the unbanked and underbanked population of India. Instead of being limited to credit repayment history for loan approvals, AI will allow lenders to use alternative data sources such as regularity of utility bill payments, business reviews, digital wallets, psychometrics, and more to determine an individual’s credit-worthiness.
Robotic process automation
Robotic process automation (RPA) is the new tool of choice for financial market players seeking to automate manual processes. With profit margins thinning, increasing regulation, and interest rates stagnant, using RPA in finance to enhance competitive edge is one way to keep up with the slew of fintech start-ups crowding the market.
RPA in finance differs from traditional automation — instead of relying on APIs to integrate several systems into one platform and perform set routines, RPA notes a user’s actions in a graphical user interface and then repeats those actions in the same GUI. This allows human-like automation of repetitive tasks. The correct implementation of RPA in fintech helps in bridging the gap between different applications present in the legacy system.
Sandeep Wirkhare, MD and CEO at Indian School Finance Company Private Limited (ISFC) highlights that RPA provides quick alternatives to manual workloads and helps organisations avoid huge investments in automation or changes to the core systems. “With the USP of the faster time to market (within weeks or days) and to keep lean manpower structure, RPA will remain a vital tool for organisations to deliver more in less. In coming years, the spread of RPA is expected to go beyond operations and penetrate deep into usually less explored functions like finance and HR,” he says.
3D printing and biometric security systems
3D printing is a process for making a three-dimensional object of almost any shape starting from a 3D model or another electronic data source. Biometric scanning is one of the most essential aspects of any security system, some of which rely solely on it to identify authorised users. While biometrics might be more secure than passwords, the hacker community’s capabilities should not be underestimated. 3D printing is considered a promising trend to prevent card-present fraud in the event of point-of-sale systems and ATMs.
Rohit Garg, Co-Founder, and CEO, Smartcoin says: “The rapid proliferation of mobile banking and other financial services amongst the mainstream masses has also resulted in a number of growing cybersecurity concerns for banks and financial companies. In 2021, it is possible that numerous companies will graduate from touch-based fingerprint readers towards adopting contactless biometric security technology to effectively secure customer information and confidential data in a post-COVID business milieu.”
Decentralised finance or blockchain
Blockchain offers exemplary features like transparency, immutability, traceability, and auditability. It is able to provide a high level of security when it comes to the exchange of money and sensitive information, allowing users to draw off its transparency while lowering operational costs.
Bhasin explains: “Unlike being originally used for crypto-currencies, blockchain is now being used for authenticating lenders, consumers, and transactions, and also plays a major role in preventing unauthorized access and cybercriminals from trying to poach financial transaction information. Cross-chain technology in blockchain brought scalability and stability through Defi [decentralised finance] in 2020. Defi allowed individuals access to financial services such as borrowing, lending and investing.”
Defi applications work through the distribution of functions. Individuals using these applications are responsible for any unsanctioned action as every computer, server, or IP makes its own decisions resulting in the final behavior.
Digital-only banks, in one or the other form, have a huge potential. Raj N, Founder, and Chairman, Zaggle says: “Digital-only banks are the banks that provide various virtual banking services like P2P transfers, contactless transacting and no transaction fees. These banks are equipped to buy various cryptocurrencies like Bitcoin and Ethereum and have gained popularity in the market in a short time. This is major because it offers utmost convenience to their customers by eliminating tedious paperwork, and the traditional way of working, waiting in long queues, and the need to visit a bank physically.”
The number of people who visit the bank in person will go down, as per a report, by 36% from 2017 to 2022, mostly because of the rise of digital-only banks.
Digital-only banks are equipped to buy various cryptocurrencies like Bitcoin and Ethereum and have gained popularity in the market in a short time.
— Raj N, Founder & Chairman, Zaggle
Of course, the RBI does not allow a fully digital bank yet, so such neo banks are required to partner with traditional banks. This year will see the rise of hybrid banking, with banks offering online and offline solutions and services. Collaboration with innovative fintech companies will ensure banks can offer unique products to a larger customer base in India. In 2021, banks that leverage the efficiency, flexibility, and convenience of digital banking while reaping the benefits of personalisation, relationships, and in-person experience that digital self-service cannot provide, will stay ahead.
Regulatory technology (regtech) has established a solid foundation within the fintech ecosystem and has come up with solutions for new and complex regulations, litigation, and regulatory remediation areas faced by FI, combined with an overall reduction in cost compliance. The regtech marketplace can be split into many areas: risk and compliance management, identity management, regulatory reporting, fraud management, and regulatory intelligence. Experts say regtech applications will continue to provide popular, embedded solutions for firms in areas such as compliance monitoring, financial crime, AML/CTF, sanctions, and regulatory reporting.
Sinha of Cashfree says: “Banks and financial organisations operate in a highly regulated environment to safeguard the financial systems and various stakeholders, and data of the customer. The pandemic has also brought specific regtech opportunities to the limelight – online onboarding, data privacy, personal data protection, customer interest, identity risk management, online dispute resolution, and much more.” With the RBI’s bolstered vision for regtech and Supervisory Tech (sup tech), entities like commercial banks, cooperative banks, rural regional banks, payments companies, and non-bank lenders among other actors will be monitored to avert risks.
There are, however, certain drawbacks associated with the implementation of regtech, such as substantial direct costs, lofty obstacles, and barriers to entry associated with critical services. The way fintech players address these concerns will be critical in aiding the regtech industry to evolve and become an important regulatory solution.
The new banking system is proliferating technology within digital banking around the world, forcing banks to change their business models. Instead of competing directly against fintech and third-party institutions, incumbents can leverage open banking to partner with them, and thereby remain competitive in the rapidly evolving industry.
Open banking made things easier for them as they could use banking services from banks through APIs and build better customer engagement and value propositions for their customers. Before getting into the advantages of big techs having others to fast-track their financial services, it is essential to look at the transition made by some of these big techs into banking.
Open banking is reshaping financial services, says Wirkhare of ISFC. “Open banking enables customers to select from a broad portfolio of applications developed by third parties for their own financial benefit. It allows financial organisations to modify these applications to specific individual preferences and requirements, enabling financial establishments to innovate.”
Experts indicate that open banking will overhaul the financial ecosystem into digital powerhouses functioning profitably. There is significant scope for open banking to grow in the foreseeable future. In 2021, open standard of banking is likely to be created using API, fintech would be able to use data from banks using secure protocols built on sharing models via API.