Most people hear FinTech and think about the latest mobile app which can help them pay for their shoes or meals without paying liquid cash. But FinTech has a long history, and a sequential story of evolution.
It all started with a debit card. Then ATMs replaced tellers and people started queuing up at the ATM, instead of the bank branches. In the 1970s, electronic stock trading began on exchange trading floors. Then came the Internet, and e-commerce business models flourished in 1990s.
Now is the time for FinTech version 2.0 which will lead to paradigm shifts in many branches of finance. Retail financial services are being further digitized via mobile wallets, payment apps, robo-advisors for wealth and retirement planning, equity crowdfunding platforms for access to private and alternative investment opportunities and online lending platforms.
These FinTech services are not simple enhancements to banking services. They are changing how customers avail services, and what they expect from financial institutions. While earlier whipping out a debit card was akin to a James Bond moment, now the millennials want an evolved payment system. Money should be heard as a notification in an e-wallet, not seen at all.
If one visualises the role of FinTech in today’s micro-economic scenario, it may seem like a banyan tree. The various branches use FinTech to provide an integrated experience and facilitate financial inclusion.
From deposits, loans, and payments, now urban millennials want advanced features. Like money management apps like Walnut. The non-English speaking literates need secure mobile wallets and payment apps that allow them to safely store their money and make purchases without having to worry about storing or carrying large amounts of cash. M-Pesa is probably the most successful example of such an app.
Now microATMs and white-label ATMs are also changing the way the masses are utilizing banking functions in their daily lives.
An evolved payment ecosystem
Payment ecosystems are evolving with multiple players. From a simple buyer and seller relationship, now there are myriad stakeholders like closed networks (PayPal, AmazonPay, WhatsApp Pay), e-wallets (Paytm), Credit cards, payment networks (Visa and Mastercard), 3rd party processors, gateways, POS terminals and others. This complex payment system uses FinTech to make life smoother and simpler for the digital native with little patient and urgent needs. Incentives like cashback, redeemable points, discount codes are a major push for online transactions among the digital natives.
Even the government is keen to move towards a cashless economy. With Aadhar, Jan Dhan, BHIM, UPI, India Stack and other initiatives the government wants to inculcate a culture of cashless economy.
Regulatory push towards FinTech
As the financial services make rapid advances with FinTech, the regulatory frameworks too need to catch up with them. RegTech also allows automation of manual processes and enhances timeline management, simplifies and improves the quality of data and minimizes different interpretations of ambiguous rules and regulations.
With increased emphasis on data collection, and the security of this data, RegTech has become the most important aspect. The debates on Aadhar are a part of this larger picture.
Regulation is also important for compliance as the number of stakeholders multiply with the newer advances of FinTech. Now, the bank needs to accept two million records, and in case of any defaulters, needs to identify them and act accordingly. If this task had to be done manually, it would be nearly impossible. RegTech comes to the rescue and digitally updates records easily and automatically. This enhances productivity in such cases by leaps and bounds.
Only if RegTech advances, can we prevent fiascos like Nirav Modi and PNB from happening again.
IoT, customer profiling and risk mitigation in Insurance
Earlier insurance was sold hard, and most bought it for tax deductions. Now the young generation is changing, they insure their smartphones, air tickets and travel plans on the go, with a click and very little thought. With IoT in insurance, there in increasing scope for advanced data collection, integrated service, better customer profiling and detecting fraud. The Insurance Regulatory Authority of India (IRAI) is looking to the possibility of using wearables and other Internet of Things (IoT) devices to improve insurance risk assessments and product development.
By utilizing machine learning (ML) algorithms that improve with usage, insurance companies have expanded the integration of AI beyond fraud detection to areas such as claims management, risk assessment and pricing, sales and marketing, and customer service. According to Accenture, 75 percent of insurance executives believe AI will provide significant industry changes in the next three years.
Advances in Lending with FinTech
FinTech is also changing the lending space. The traditional model of lending embraced by banks for centuries was to accept deposits from some customers in order to extend loans to other customers. FinTech companies have subverted this process with peer-to-peer lending. Companies such as FlexiLoan and Prosper have created a venue whereby individuals can earn interest by lending money to other individuals, and they take a small fee for brokering the connection.
FinTech lenders have incorporated data from UPS, Amazon, QuickBooks, Yodlee, Yelp, Facebook, LinkedIn and multiple other sites. The data can be collected and crunched within seconds to create a snapshot of the borrower’s creditworthiness and likelihood of repaying the loan.
In addition to harnessing data in innovative ways, FinTech companies are also automating the underwriting process. The automation process extends to risk assessment as well, and this helps to speed up the lending process, especially in contrast to some banks that still rely on humans to handle this part of the process.
Micro-finance is another aspect of the lending process that is inculcated to help the underprivileged. Aadhar and banking correspondents will help to ensure that FinTech is helpful to the young non-English speaking aspirants to improve their life chances.
Ease and speed in remittance
Because of delays due to time zone, earlier remittance would easily take 2- 3 days. Companies such as Ripple are looking to change the way cross-border remittance is done. They are using distributed ledger which allows all parties to share information on a ledger. It is like looking at a Google document and we all see the same thing happening. You don’t have to update five ledgers one after another. They can update the shared ledger instantly in 5 seconds.
For the first time RBI has allowed non-banking entity, Earthport to tap into cross-border remittance. The money comes straight into their account through an API, and they deliver it to the final destination.
To conclude, it is apparent that as the various branches of finances are exposed to technology, the next decade will see paradigm shifts in all spheres.
Come to Fintegrate to know more about the new areas emerging within FinTech. Book your seats here.