Think about names like Square, Stripe, and Robinhood. Each company is worth billions of dollars, yet these are relatively young companies. Square is the oldest – formed only 14 years ago. So how did these Fintech startups find such success? They each introduced a new and disruptive solution for how we handle financial transactions, writes Stacy Dubovik, a financial technology and blockchain researcher at ScienceSoft.
It’s impossible to ignore the magnetic pull of FinTech these days. It’s everywhere, and it’s big business. The Fintech industry is currently valued at $165 billion. That number is projected to balloon to over $400 billion over the next four years. Money and technology have bonded together, altering the sphere of finance. Fintech is a cocktail of innovative tech, disruptive ideas, groundbreaking software, and a sprinkle of audacity.
While the market is full of interesting prospects, a few technologies are especially important to the success of the industry. It’s time to dive into these key technologies, so we can understand what makes the finance industry tick.
1. AI and ML Technologies
The first technologies on this list are probably pretty obvious for anyone keeping up with the tech industry. Artificial intelligence (AI) and machine learning (ML) are seeping into nearly every software solution on the market – FinTech or otherwise. We’re seeing these technologies rapidly move beyond theory and become an integral part of the financial ecosystem.
Financial forecasting is less of a guessing game and more of a science, thanks to top-notch prediction models.
Then, there are AI-powered fraud detection systems like those implemented by Mastercard. Its Decision Intelligence solution uses ML to break down cardholders’ behaviors, spending habits, and transactions. Mastercard’s system gathers more data points with each new transaction to become better at detecting anomalous behaviors that could indicate fraud.
2. Distributed Ledgers and Smart Contracts
Distributed ledger technology and smart contracts are all the rage right now. DLT’s unique selling point is its focus on transparency within the blockchain. Plus, the security of assets and users. Then there are smart contracts – self-executing code snippets that power contracts. When certain pre-determined conditions are met, the contract executes. No middlemen, aka banks, are required.
But it’s an uphill battle for this area of Fintech. Companies need to build public trust and understand and overcome regulatory challenges to see mass adoption.
3. Robo-Advisors and Automated Wealth Management
The world of financial advice is being upturned by an unexpected play – the robo-advisor. Robo-advisor is just the more fun way to say automated wealth management platforms. These platforms are backed by algorithms trained on massive volumes of data, and they’re serving up financial advice with limited human intervention.
Consider Betterment, one of the pioneers of this slice of Fintech. Its platform employs complex algorithms to build and manage portfolios around each customer’s goals and tolerance for risk. Customers feel like they have a personal financial advisor on call, day or night, ready to offer sound advice.
4. Processing Systems
Payment processing systems seem mundane but don’t be so quick to write them off. Even these platforms are changing to support smarter, faster, and more versatile transactions.
Stripe has successfully integrated its complex processing system into popular e-commerce platforms so merchants can offer digital transactions to customers worldwide. While lesser-known FIS offers payment processing services to financial institutions and credit unions. By reducing the friction between customers and their cards, FIS is quietly but significantly improving the experience of digital transactions.
5. Real-time Payments and Instant Cross-Border Transactions
Gone are the days of waiting and waiting days for transactions to clear. Today’s financial technology is beating the clock. Now, money can zip across the globe in sections.
For example, consider real-time payment platforms like Zelle in the US or Faster Payments in the UK. Allowing peer-to-peer payments is altering how we handle personal transactions. It’s as simple as sending a text, and voila! Money is transferred instantly.
And let’s not forget about PayPal-owned Venmo. This social payment service is wildly popular, particularly with younger demographics, combining P2P payments and a fun social aspect where users share transactions (minus the amount) with their network.
6. Internet of Things (IoT)
Imagine a world where a fridge pays for groceries, and a car automatically pays for fuel. That’s the potential behind the Internet of Things (IoT) finding its way into the financial real.
First, a bit of background for those unfamiliar with this concept. IoT is a vast network of ‘smart’ devices that can connect to a network to collect and exchange data. Combining that with finance is a recipe for success. Take the example of smartwatches like Apple Watch or Fitbit. These aren’t just fitness trackers anymore. When set up correctly, a simple flick of your wrist can make payments.
IoT is also quite appealing to financial institutions. The wealth of information that IoT devices are a goldmine in the age of data. Institutions can gather rich insights into real customer behaviors, spending patterns, and preferences.
The last one on this list is a nod to the compliance side of the industry – Regulatory Technology, or RegTech for short. After the 2008 financial disaster, the industry was reworked to fix broken systems. Finance is now tightly regulated, so staying on top of rules and regulations can be a major headache.
RegTech is a collection of technologies that automate and streamline regulatory compliance. ComplyAdvantage, with its automation solutions, is one example. This firm is making a name for itself by taking the hassle out of know-your-customer (KYC) requirements. They’ve taken the grunt work out of compliance and allowed companies to focus on serving customers.
For traditional banks, the rise of FinTech seems like a major threat. But teaming up with FinTech startups can actually help traditional banks stay ahead of the curve. Traditional banks can act as FinTech incubators to help these innovations reach the next level.
As these seven specific technologies continue to shape FinTech, the future of finance looks fascinating. From DLT to complex processing systems and RegTech, these technologies are shaking up the market for the better.
Article by Stacy Dubovik, a financial technology and blockchain researcher at ScienceSoft.
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