Financial technology is the buzzword of present times. It implies deliverance of financial services with the aid of technology to consumers. Technology is impacting every sphere of human activity and the advent of smartphones accelerated the change. The financial industry noted a marked increase in its outreach to the sections of society that were previously unbanked on account of lack of access to regulated financial institutions and poor economic status. This wave of change is not just going to surge forward encompassing all the spheres of financial services but carries the potential to disrupt existing traditional business models by ushering an era of innovative and more efficient means of providing services to all. The article summarizes a few transformative agents in the financial technology industry.
A study conducted in 2014 by Nielsen revealed that 85% of millennials own smartphones and about 67% spend a staggering average of 14.5 hours on a daily basis on their smartphones. It is not surprising then that Forrester Research forecasts that U.S. mobile-based payments will surge to $142 billion in 2019. Moreover as of now smartphones are being used as credit card terminals owing to eBay’s PayPal, Intuit and ventures like Square. Hence there is a lot of competition to conventional cash and credit cards for payment transactions.
Currently mobile payments and remittances are the dominant service segments among consumers. However customer-to-business (C2B) payments are expected to grow to over 2 billion users by 2019. There is a lot of potential in mobile payments for bringing about a digital transformation for business-to-business (B2B), government-to-business (G2B) and government-to-customer (G2C) payments according to a recent report by one of the Big Four. Segments such as savings, micro-financing and micro-insurance are gathering momentum too. The onus is now on financial institutions to develop a strategic digital plan to utilize mobile as their key infrastructure platform for service delivery.
2.5 quintillion bytes of data is being created in the world on a daily basis and this data, commonly referred to as big data, offers the beneficial opportunity of collection, processing and analysis. Financial firms are utilizing big data technologies to enhance customer intelligence, maintain regulatory compliance, reduce fraud and develop more targeted marketing campaigns. Big data is not just about data but analytics, the business insight provided by it aid the decision making process facilitated by it. Data is owned by a business and not technology so it is vital that the owners of the data and information assets comprehend the significance of their assets and champion the cause to use it to solve business problems. Big data can provide improved forecasting enabling the CFO to take more informed decisions to gain a competitive advantage. According to a recent survey by Strategic Analytics of 450 companies, banks lead most industries when it comes to big data analytics. For example banks can analyze the factors that cause borrowers to default on loans and develop strategies to circumvent those factors resulting in improved lending. Big data analytics can help banks gather unimaginable amounts of information about their customers, resulting in improved CRM, a need of the hour to retain customers considering the plethora of choices customers have nowadays in terms of new startups to cater to their financing needs. Risk management, performance analytics, budgeting, product innovation, historical analysis and customer profitability are all areas where financial institutions can benefit by using big data technologies.
The goal of artificial intelligence (AI) is to enable the development of computers that are able to do things normally done by people. AI can aid banks and financial institutions by enabling the development of applications often called the “robo advisors” that can act as automated financial advisors and planners assisting users in making financial decisions. AI can be utilized to offer digital and wealth management advisory services resulting in lower fee-based commissions. Data-driven AI applications for better informed lending decisions, insurance underwriting AI systems and personal finance management using AI through smart wallets are some of the areas where the financial institutions are putting their money on to gain a competitive advantage. Accenture research on the impact of AI in 12 developed economies states that AI can double economic growth rates and boost labor productivity by up to 40%. As per predictions, in coming times AI will be used in financial analysis, asset allocation, forecasting, reporting of earnings and quarterly “close” to leverage on its speed and accuracy features.
Traditional business practice is that all participants in a business network maintain their own ledgers to record transactions. Investments in integration and B2B technologies to reduce the complexity of such ecosystems and increase their interconnectivity has not resulted in much success with participants still exchanging data files. The consequence of this is that asset ownership and asset transfer in traditional financial systems is frequently expensive, inefficient and vulnerable. Blockchain is a public ledger of transactions that consists of a peer-to-peer network and a decentralized distributed database. The ledger is ever expanding and is protected against revision, deletion and tampering. It facilitates business transactions between multiple parties without the need of a trusted third party acting as an intermediary.
The finance industry can benefit immensely by incorporating such a shared ledger system as it would not just help in automating processes but would also reduce compliance errors. The historical record of all transactions that have taken place and all documents that have been shared can be used as evidence that a bank or the financial institution has acted in accordance with the guidelines placed by regulators. Blockchain can prove to be particularly useful in international payments by facilitating real time payments and reducing operational costs, human error and fraud. Blockchain in combination with smart contracts can transform supply chain and trade finance by cost reduction and guaranteeing authenticity and origin of products being supplied.
Smart contracts are automated programs that interact with real world assets and when a certain programmed condition in the contract is triggered then the contractual clause following that condition is executed by the smart contract. Currently smart contracts are being built on top of bitcoin and other virtual currencies. Bitcoins are also computer programs so smart contracts can interact with it and trigger release and transfer of payments. Smart contracts unlike paper-based agreements are capable of unilaterally applying strict rules and consequences on the basis of fresh data inputs. Any kind of business logic relying on data can be coded by way of smart contracts. The applications of smart contracts can be in Islamic finance capital markets, inheritance law, loans, cryptocurrency wallet controls, proxy lawyers, takaful and escrow accounts. The shariah laws can form the conditions of a smart contract ensuring compliance to Islamic laws in a transparent manner.
Internet of Things
Internet of Things (IoT) can be visualized as a giant network of connected things including people, by way of people-to-people, people-to-things and things-to-things relationships. It implies connecting any device with an “on” and “off” switch to the internet or to each other. The amount of data generated by interactions between objects in such a huge network would be staggering.
As per predictions by 2020 the world would have around 75 billion connected devices. According to Cisco the market size could be worth $19 trillion within the next decade and could add over $10 trillion to the world’s GDP. According to McKinsey Global the industry can rake in $6.2 trillion annually by 2025. The data generated by an always “on” IoT device can be utilized by banks as they are generated to enable banks to act on them immediately. The Takaful industry can benefit from the data generated from smart homes and cars via telematics to offer customized premiums to customers based on the amount of risk or loss they can encounter based on usage statistics. IoT can also be useful in the retail sector and in payment services. Financial institutions can use IoT to create context-aware customer rewards, innovate to improve risk management, reduce costs and improve operational efficiency.
IoT can be used to develop customized products and solutions to help customers make sound financial decisions at all times. Biometric and positional sensors can aid to track the physical location of customers and track goods being shipped which will improve the underwriting process and help in reaching new markets. IoT can prove to be especially beneficial in Bai Al-Salam in Islamic finance. Sensors that monitor the activity of retail industrial and agricultural businesses can be employed and farming could benefit immensely from real-time data feeds. This would allow farmers and the respective banks to continuously assess and value the farm’s crops and livestock enabling an accurate valuation of yields, property and overall business value.