The term FinTech (a combination of Financial and Technology) is commonly used for technology developed to automate and improve financial services. Today, FinTech companies operate across a large swathe which spans financial literacy, education, wealth management, credit, money transfers, payments and even cryptocurrencies like Bitcoin and Ethereum.
What constitutes FinTech and what is driving it?
FinTech is a convergence of various emerging and often disruptive technologies like Artificial Intelligence, Big Data, Distributed Ledgers (Blockchain), Cloud Computing and Algorithms. These technologies have allowed traditionally non-players in the finance field to develop and operate platforms and applications to bring innovative and efficient financial solutions to people. Technology and finance have generally operated on parallel pathways. However, with technology companies increasingly transcending sectors due to emergence of new disruptive technologies, these pathways have begun to intersect.
There is a great demographic shift underway, which is pushing the usage of technology in financial services. We are increasingly living in a world which is populated by millennials (persons reaching adulthood in early 21st century). Of all the global millennials, 58 per cent live in Asia and 385 million of them reside in India, the country with the world’s largest millennial population. Millennials also are a generation that tend to avoid face-to-face interactions and are increasingly technology-oriented. Harvard Business School reports that millennials adopt a “set it and forget it” attitude towards money management. FinTech companies are providing millennials, “investing through a screen” solutions that minimizes human interaction. Since these solutions are based on technology platforms, they have low operating costs, enabling them to provide these services at minimal costs with low investment thresholds. For example, Payments banks in India can provide users with an account for zero minimum balance, while traditional banks require Rs. 5,000 – Rs.10,000 as minimum balance.
While quantifying the size of FinTech is difficult because it is a nascent and ever-evolving industry, a report by Bank for International Settlements (BIS) indicates that global venture capital investment in FinTech companies was pegged at USD 13.6 billion across 840 deals as of 2016. The interest in FinTech projects by venture capitalists is a clear indicator that they see potential in the solutions that these businesses are planning to vend.
FinTech will shape the evolution of Financial Services
A report by IDFC Securities titled “India FinTech – Finnovation, the rise of FinTech” points out that India particularly is at the ‘cusp of hyper growth’ in FinTech considering smartphone penetration in the country is set to reach 63% by 2020. Additional factors that are supporting FinTech industry in India are Aadhaar and JanDhan Accounts. Indeed, there has been stupendous growth in India in areas of Payments Banks and Microcredit. Other government initiatives like Goods and Services Tax Network (GSTN) and IndiaStack are playing a supportive role. The role played by these factors would bring about a transformation across a range of financial services like payments, banking, credit and others.
The disruption is real
Young and nimble FinTech companies offer targeted and more customized solutions with more comprehensive data analysis and better customer care as compared to traditional Banking, Financial Services and Insurance (BFSI) entities. Let’s assess the impact of FinTech on different segments in the BFSI space.
Technologies such as artificial intelligence, Blockchain as well as big data have had a profound impact on banking. Banks that were operating in closed ecosystems are beginning to open up access to their data to third parties, thanks to the development of open banking standards and Application Program Interfaces (APIs). This has enabled the possibility of operators such as FinTech companies, Payment service providers and Payment network providers to work with banks. The emergence of open API architecture means that not only can the API be used to build new open banking products, but the API itself is a product, which requires the presence of a product strategy for its dissemination. APIs can be developed by the financial institutions themselves, who may then open the product for mass adoption by others, but can also be driven by regulators. In India, the regulator has not mandated the adoption of Open Banking platforms, but the government has been working to create a digital ecosystem. They have used measures such as Jan Dhan accounts opened with India’s biometric ID Aadhar and encouraged the transfer of government subsides into bank accounts. KPMG reports that the country currently has 6,900 APIs across 100 departments and 118 chief data officers. Indian regulators have facilitated Open Banking initiatives such as the Bharat Bill Payments System (BBPS) as well as Unified Payments Interface (UPI) and Aadhaar-enabled payment services (AePS) by National Payments Corporation. In case of UPI, a service which has seen a surge in use with transactions growing from 0.1 million in October 2016 to 312 million in August 2018, all the stakeholders are beneficiaries. The government can manage inflows and outflows of funds in accounts easily undermining the parallel economy, the customers get a new channel for digital payments and the banks can monetise the service in the long-run.
In order to further strengthen the digital strategy and proliferate open banking, the Reserve Bank has published a report of the working group on Fintech and digital banking and come up with recommendations for developing Fintech innovations and testing APIs and applications developed by various banks and companies.
Wealth and Fund Management
Wealth Management, though not deeply affected by FinTech, has seen disruptive trends emerge. In this segment, FinTechs can get a foothold through the use of data analytics and automation. Automation is already having an impact as new developments in fund management include ‘Robo-Advisers’, which can provide investment advice with minimal human intervention. These artificial intelligence and computer algorithm based advisors can build a portfolio for an investor, diversify it and even maintain the portfolio so that it remains on point as far as the investor’s goals are concerned. At the moment, these advisors are mostly present in the ETF segment but have the potential to expand in stocks, mutual funds, real estate domains as well. In fact, Robo advisers are likely to have the most significant impact in Asia Pacific region. In India, according to Statista, robo advisors are managing assets worth nearly US$ 20 million as of 2018 and this number is expected to rise to US$ 116 million by 2022 with a CAGR of 54.4 per cent during the period 2018-2022. Elsewhere in Asia, Australia was the first country to see the introduction of Robo Advisers followed by Hong Kong, Singapore and Japan. Factors that are pushing Robo Advisers towards popularity in the region include an aging population who need help in making financial decisions due to low levels of financial education, particularly in China.
Blockchain or distributed ledgers will have a significant impact on stock broking. Blockchain technology can create scenarios where trustless transactions are possible without the involvement of intermediaries. This can lead to the emergence of decentralised exchanges. For now, exchanges such as Nasdaq, the New York Stock Exchange and even Securities and Exchange Board in India have started to use Blockchain technology in some form or another. At the very least, Blockchain could cut down the settlement period and reduce the role of intermediaries. At the other extreme, it could completely eliminate them. While Blockchain technology is yet to fully mature and its applications are for now limited to trading tokens and cryptocurrencies, there is already excitement about its use in securities markets. India’s National Stock Exchange (NSE) is conducting tests for e-voting for listed companies and already has a pilot in place. This e-voting solution will benefit from Blockchain’s immutable nature and will usher in transparency into the process by incorporating a real time trail, which can be verified by the regulators.
The impact of FinTech such as Internet of Things (IoT), Blockchain, Artificial Intelligence and Big Data would be profoundly felt in the insurance sector, so much so that the word InsurTech has already been coined. FinTech would impact risk assessment, claims settlement, fraud prevention, policy issuance and underwriting. Sales channels would also be impacted by Fintech. Overall it can be expected that the insurance industry would be able to offer more products in the future which are time-flexible, driven by events and are modular and adjustable in nature. The demand for such services is already high with Accenture pointing out in their Global Distribution & Marketing Consumer Study, that up to 74% of consumers are ready to be given advice by Robo Advisers in insurance.
Trends in InsurTech point towards a shift from the current risk mitigation model to one that is more prevention oriented. Wearables like smart watches, smart clothing and smart glasses can garner health data that can lower insurance costs for customers. As an example, a smart watch can tell how active an individual has been and transmit this data to an insurer who can reward customers with lower premiums or subsidised gym memberships. Similarly sensors in cars and trucks can generate data on safe or reckless driving which can lead to reduction or increase in motor vehicle premiums for the user. Installation of smart security cameras can reduce premiums for home insurance etc. With the coming of 5G networks and Internet of Things (IoT), connectivity would be possible in real time, which would better connect smart devices and sensors resulting in opening up of further potential for InsurTech solutions.
The Financial Landscape is changing
Technology and Financial Services do not operate in isolation anymore. While they may have been different fields once upon a time, the emergence of FinTech means that it is shaping Financial Services from the outside in. This means new entrants are here to stay or even change the course of the evolution of financial services as a whole. The incumbents have to match up to the agility of the young challengers and work to keep up, while the new entrants have to face challenges like being up to speed on regulations and compliance. However, there is no denying the disruptive effect of FinTech on market share, margins, information security and privacy as well as customer churn.