Financial Technology

 Fintech, or financial technology, is the term used to describe any technology that delivers financial
services through software, such as online banking, mobile payment apps or even cryptocurrency.
 Fintech is a broad category that encompasses many different technologies, but the primary objectives
are to change the way consumers and businesses access their finances and compete with traditional
financial services.

Examples of fintech

 Fintech is changing the world of finance for consumers in a myriad of ways. For example, you can
now open a bank account over the internet, without physically visiting a bank. You can link the
account to your smartphone and use it to monitor your transactions. You can even turn your
smartphone into a “digital wallet” and use it to pay for things using money in your account.
 Fintech is also rapidly changing the insurance and investment industries. Car insurance providers
now sell “telematics-based” insurance where you’re driving is monitored using data collected via
your smartphone or a “black box” fitted in your car. This data can then be used to determine how
much you pay for your insurance policy. In the future, it may be possible to buy insurance on a
short-term or “pay as you go” basis.
 Advances in technology means consumers can also invest over the internet on an “execution only”
basis without any face-to-face interaction. In time, you may be able to get automated financial advice
or “robo advice” with little or no human interaction.

Potential benefits

Speed and convenience: Fintech products tend to be delivered online and so are easier and quicker for
consumers to access.

Greater choice: Consumers benefit from a greater choice of products and services because they can be
bought remotely, regardless of location.

Cheaper deals: Fintech companies may not need to invest money in a physical infrastructure like a
branch network so may be able to offer cheaper deals to consumers.

More personalized products: Technology allows fintech companies to collect and store more information
on customers so they may be able to offer consumers more personalized products or services.

Potential risks

Unclear rights: Fintech companies may be new to the financial industry and use different business
models to traditional providers. This can make it harder to ascertain which ones are regulated, and what
your rights are if something goes wrong.

Making a rash decision: Financial products that are bought instantly online without ever meeting
anyone face-to-face may make it easier for consumers to make quick, uninformed decisions.

Technology-based risks: Financial products bought online may leave you more exposed to technology-
based risks. For example, your personal data could be mis-used or you could fall victim to cybercrime.

Financial exclusion: While technology increases choice and access for most consumers, it can exclude
those who don’t know how to use the internet or devices like computers, smartphones and tablets.
Technologies that Contribute to Fintech

1. Artificial Intelligence (AI) and Machine Learning

(ML) - Artificial Intelligence (AI) and Machine
Learning (ML) are some of the most used technologies
in fintech, offering the potential to play an even bigger
role in the finance industry as developments continue.
Some of the fintech applications of AI and ML include
credit scoring, fraud detection, regulatory compliance,
and wealth management.
 Artificial Intelligence (commonly referred to as AI) is the process of imparting data, information,
and human intelligence to machines.
 The purpose of AI is to develop self-reliant systems that can mimic human behavior. To achieve the
goals and perform given tasks, AIs are applied with problem-solving abilities, i.e., task-reward
systems.
 Most AI systems simulate natural intelligence to solve complex problems. Some common examples
you can find in the image below.

Machine learning (ML) uses computer algorithms and analytics to build predictive models that can solve
business problems, including such from the fintech industry. ML is based on algorithms that can learn from
data without relying on rule-based programming.

So what exactly can ML and AI applications in the financial industry improve?

1. Increased cost-efficiency - Automated processes require less staff to be involved

2. Advanced fraud prevention - Any abnormality can’t be left unnoticed by a properly adjusted
operating system
3. Reduced biases - Predefined checks enable the system to be predictive and stable
4. Boosted customer engagement - Personalized settings motivate customers to be more involved in a
product
5. Enhanced scalability - Your system can be easily adjusted to the scale of your business needs
6. Improved time-management - The algorithm works faster than you, don’t even doubt

The top 10 applications of AI and machine learning in the fintech sector are enlisted in this article
1. Advanced Decision Making: The different apps aimed to improve decision-making in monetary
organizations such as insurance and investment businesses or banks are a major component of fintech.
 Artificial intelligence and machine learning approaches actively contribute to data visualization and
analysis, allowing for more accurate decision-making.
2. Customer Experience Automation: AI virtual voice assistants and chatbots are transforming customer
service. Fintech organizations are turning to AI-powered customer support bots to provide their clients
with a convenient and frictionless experience.
3. Virtual Financial Assistants: Virtual financial assistants have been created using AI and machine
learning. This allows users to make decisions about their financial objectives and portfolios, as well as
track stock and bond prices, among other things.
4. Security: The digitization of financial assets and services has increased the likelihood of cybercrime
and fraud. This necessitates the deployment of appropriate cybersecurity safeguards. Users may
instantly view any activity connected to their accounts/assets and keep track of questionable behaviors
using AI and ML online security.
5. Managing Assets: AI is actively used by investment businesses to build algorithms for anticipating
trends and patterns. As a result, fintech firms are increasingly embracing automated asset management
systems, removing the need for middlemen and allowing customers to directly watch and manage their
account activities.
6. Loaning: Loans made possible by AI and ML technologies greatly decrease operational downtime and
the probability of mistakes. Furthermore, the candidate assessments and, by extension, the ultimate
judgment will be devoid of human prejudice through this medium.
7. Accurate Forecasting: Fintech programs may do extensive computations and analysis to make very
accurate predictions about an asset’s future financial performance.
8. Increased Personalization: Fintech has fundamentally transformed the financial services business by
utilizing AI and ML techniques. As a result, this industry now has the potential to personalize one’s
money using platforms such as smart wallets.
9. Client Risk Analysis: Artificial intelligence is also used to automate customer selection based on their
risk profile. Delegating selection/review procedures to AI has the extra benefit of removing human bias.
10. Trading: This is the most important use of machine learning in fintech. For hedge funds and investment
banks, ML algorithms are used to do significant data analysis to facilitate trading.

2. Big Data and Data Analytics - Data from customers and markets is of high value to fintech
companies. Through large datasets, consumer preferences, spending habits, and investment behavior can
be extracted and used to develop predictive analytics.

 Predictive analytics refers to predicting how consumers are likely to behave using past information
and a mathematical algorithm. The collected data also helps in formulating marketing strategies and
fraud detection algorithms.
 The “BIG” in big data, on the other hand, offers firms with a treasure trove of consumer information
that has the potential to turn the financial world on its head.
 The value of big data will increase as the Internet of Things (IoT), mobile technology advances, and
improved authentication mechanisms become available.
 As a result, fintech firms will continue to spend heavily in data science departments in order to focus
on data collection and processing. So, formerly underbanked and underserved audiences now have
access to new financing opportunities.

Big data has three distinct V Characteristics:

 Volume – Traditional technologies are incapable of processing the massive amounts of data that a
big data platform must handle.
 Velocity - Data must be processed in real-time, which is a necessity for the majority of enterprises.
 Variety - A strong big data platform should be able to handle a variety of data formats, including
unstructured data such as audio, tweets, status updates, and videos.

Benefits of Big Data in Fintech Industry

 Customer Orientation: Fintechs may utilize big data to develop thorough user profiles and precise
client segmentation strategies, allowing them to customize their services to their specific demands.
Individualized services may be provided using sophisticated modeling approaches that take into account
an individual's risk perception, age, gender, money, location, and even relationship status.
 Enhanced Security: While fraud is a prevalent problem in the digital banking sector, big data may
assist fintech in developing accurate fraud detection systems by detecting any odd transactions. Fintechs
may also use digital applications to keep consumers informed about security concerns and secure their
money.
 Improved Risk Assessments - Fintech businesses that specialize in big data analytics may integrate
data from a variety of sources to guarantee that no stone is left unturned. Fintechs can operate with more
financial certainty, manage cash flow, and give consumers competitive rates thanks to improved risk
assessments. The way banks think about risk is changing as a result of predictive analytics.
 Unmatched Customer Service - Forget about dialing numbers and waiting hours to talk with an
account manager. Fintechs may use big data to establish a digital trail of a customer's financial behavior,
spot possible problems, and give consistent assistance. Fintechs may also use data and forecasts to
propose the correct services/products depending on their clients' specific spending habits.
 Chatbots, Bots, and Robotic Process Automation - Chatbots use artificial intelligence to enable
interaction 24 hours a day, 7 days a week. These intelligent Chatbots may assist consumers in a number
of ways, including handling transactions, providing vital information, and handling transactions.

3. Robotic Process Automation (RPA) Robotic Process Automation (RPA) refers to the process of
assigning manual, repetitive tasks to robotics instead of humans in order to streamline workflows in
financial institutions.

The most widespread applications of RPA in finance are:

 Statistics and data collection
 Regulatory compliance management
 Communication and marketing through e-mails and chatbots
 Transaction management

Five ways to use RPA in finance

When getting started with RPA technology, many finance leaders look for tasks that are the most prone to
human error, cause the greatest workflow bottlenecks or create inefficiencies that lead to poor customer
service and employee engagement.

Here are five areas to consider using an RPA platform, powered by AI and ML, to transform your financial
institution.

 Drive sustainable growth - The competition for banks and financial services firms is fierce,
particularly in a world of low interest rates and costly digital transformation initiatives. One way to
increase revenue is by identifying cross-selling opportunities for new financial planning products.
With an RPA implementation, your financial institution can have customer behavior data
automatically sent to specific people in the organization. ML models help group customers into
categories based on their behavior, so the most appealing products or services can be recommended
to them. For example, banks know which customers might be most interested in opening a new line
of credit.
 Boost operational efficiency - RPA technology drives down operational costs by automating the
transaction-heavy, manually intensive tasks that require reconciliation. Digital workers can retrieve
and compile data from multiple back-office systems, reconcile amounts (say, for invoice payments
or billed amounts) and take action to resolve breaks in real-time. For example, using natural
language processing, digital workers can analyze the text that comes in with invoices and
automatically route issues to the correct team.
 Revitalize the customer experience - Today’s consumers have more options than ever for financial
services, and they have high expectations for personalized services, fast processing times and
responsive support. RPA tools can improve all aspects of the customer experience, from initial
onboarding to account updates. New customers can open new accounts and apply for additional
products in minutes with automated Know Your Customer (KYC) validation. RPA also helps notify
stakeholders about specific events, such as customer complaints about a new mobile banking feature.
 With ML, data about similar past complaints can be filtered to predict the most impactful
improvement opportunities.
 Fight financial crime - To help detect and prevent fraud, financial institutions need the right
cybersecurity technology for due-diligence checks, sanctions screening and transaction monitoring
and investigation. RPA improves the speed and accuracy of fraud detection. First, RPA bots confirm
whether data adheres to federal anti-money laundering (AML) guidelines. ML helps by analyzing
variances to infer why they may have happened and to flag any instances of potential fraud.
 Manage regulatory compliance -To limit the risks of regulatory fines and reputational damage,
financial institutions can use RPA to strengthen governance of financial processes. RPA helps
consolidate data from specific systems or documents to reduce the manual business processes
involved with compliance reporting. ML goes further by deciding what data an auditor might need to
review, finding it and storing it in a convenient location for faster decision-making.

4. Blockchain Blockchain technology is being adopted at a large scale in the financial industry, primarily
due to its ability to securely store transaction records and other sensitive data. Each transaction is
encrypted, and the chances of successful cyber-attacks are relatively low when blockchain technology is
employed. Blockchain technology is also the backbone of many cryptocurrencies.

Eight Effects Of Fintech And Blockchain On Financial Institutions

Below are just some of the impacts that fintech and blockchain will have on financial institutions:

 Improved Service - Blockchain will be able to offer personalized services that fit specific needs. For
example, suppose you are a trader—your bank's platform should provide you the ability to monitor the
performance of your digital assets portfolio in real time. In contrast, if you're a person who wants to
open a savings account, you only need a simple online banking service.
 Speed And Cost Savings - Blockchain technology can save businesses significant amounts of time and
money. If you open a small business and want to pay taxes and other utilities, you must apply for a
license. The process is tedious and complex, but the financial institution will require the information
from you (your bank account), which limits the number of businesses that can access this service. On
the other hand, blockchain could quickly provide this service as it can be programmed to accept
information from any source with no human intervention needed. This means that every business could
apply for a license without taking days off work or the like.
 Shift In Control - Human wants are changing and evolving. These growing demands for open and
secure financial transactions demonstrate the inability of traditional financial institutions to meet the
needs of their growing customers. The democratization of finance is imminent, and traditional financial
institutions will be decentralized by the disruptive power of blockchain. Users will own and manage
their data without having to deal with middlemen.
 Huge Size - The number of transactions a blockchain can process will be more than that of traditional
financial institutions. Speaking of volume, blockchain platforms have what it takes to manage high
transaction volume without slowing down, which is a viable competitive advantage. There are no limits;
blockchains do not need to rely on intermediaries to process any transactions efficiently.
 Faster Transactions -Financial transactions that were completed in days will now take seconds over
blockchain platforms. This is because blockchain transactions do not require third parties for
verification; rather, they are stored publicly. Once you request one network node, it will be processed
immediately across all nodes.
 Lower Costs - Blockchain technology will help reduce financial institutions' operational expenses. This
is because smart contracts will immensely reduce the need for manpower and other related operating
costs. Especially for large banks, cutting down these overhead costs will be an effective way of boosting
their profit margins since they already have a lot of clients. The cost savings that blockchain can bring
to financial institutions are immense; it will offer services that provide more excellent value at lower
costs than what's currently available on the market today.
 Better Transparency - Blockchain has better transparency than traditional financial institutions do. For
example, if the U.S. Securities Exchange Commission wants to trace the origins of insider trading, it can
easily do that using blockchain. If we compare this with banks, tracking payment origins through them
is challenging, but the blockchain is completely possible and can be done in just a few seconds.
 More Opportunities - Due to their limitations, there will be vastly more opportunities and services that
traditional financial institutions don't provide. For example, investments in the stock market that require
significant amounts of time and money won't be offered by banks because they wouldn't be able to
process such transactions efficiently enough.

Applications of Fintech

1. Crowdfunding Platforms - Crowdfunding is a way of raising money to finance projects and

businesses. It enables fundraisers to collect money from a large number of people via online platforms.
Crowdfunding is most often used by startup companies or growing
businesses as a way of accessing alternative funds. It is an
innovative way of sourcing funding for new projects, businesses or
ideas.

It can also be a way of cultivating a community around your

offering. By using the power of the online community, you can also
gain useful market insights and access to new customers.

Main types of crowdfunding

Peer-to-peer lending - The crowd lends money to a company with the understanding that the money
will be repaid with interest. It is very similar to traditional borrowing from a bank, except that you
borrow from lots of investors.
Equity crowdfunding - Sale of a stake in a business to a number of investors in return for investment.
The idea is similar to how common stock is bought or sold on a stock exchange, or to a venture capital.
Rewards-based crowdfunding - Individuals donate to a project or business with expectations of
receiving in return a non-financial reward, such as goods or services, at a later stage in exchange of their
contribution.
Donation-based crowdfunding - Individuals donate small amounts to meet the larger funding aim of a
specific charitable project while receiving no financial or material return.
Profit-sharing / revenue-sharing - Businesses can share future profits or revenues with the crowd in
return for funding now.
Debt-securities crowdfunding - Individuals invest in a debt security issued by the company, such as a
bond.
Hybrid models - Offer businesses the opportunity to combine elements of more than one crowdfunding
type.

2. Mobile Payments - A mobile payment is the transfer or payment of funds typically to a person,
merchant or business for bills, goods and services, using a mobile device to execute and confirm the
payment. The payment tool can be a digital (virtual or e-) wallet, mobile browser, or SIM toolkit /
mobile menu.

Mobile payments (which encompass mobile wallets and mobile money transfers) are regulated
transactions that take place through your mobile device. That is, instead of paying for stuff with cash,
cheques, or physical credit cards, mobile payment technology allows you to do so digitally. Mobile
payments can be used in a “peer to peer” context or for paying at a brick-and-mortar business. In a peer-
to-peer mobile payment, you could be making an e-transfer via your bank to, say, pay a friend back for
dinner. In a mobile payment at a brick-and-mortar business, you’re using an app on your mobile device
—instead of cash or a card—to pay for specific goods or services at the checkout counter. In this
instance, the business would need a specific type of point-of-sale device (which we get into below) to
process the transaction.

Mobile payment applications and gateways are some of the most prevalent uses of fintech. Such
applications allow users to carry out banking activities without physically visiting a bank. For example,
companies like Venmo and Interac allow customers to send and receive money through smartphones at
minimal transaction fees.
3. Robo-Advisors - Essentially a digital service that uses highly specialized software to do the job of wealth
managers or investment advisors. Those are the people who decide what type of investments you should
be making and then tinker with those investments over time by continually monitoring the movements of
the market and making rational decisions.

Robo-advisors typically have the users (the investor) to answer some simple questions to determine your
risk appetite. By using some propriety algorithms, spreads the cash into a variety of investments.
Globally, a new generation of digitally-savvy, self-directed investors has emerged. Although Millennials
(1980–1999) and Generation Z (after 1999) investors tend to possess higher digital propensities and
competencies, these investors are not limited to a single wealth or age group. Investors from every
wealth and age group are increasingly adopting digital sales channels for their banking needs.

Robo-advisors are online investment management services that use algorithms to allocate assets and
generate portfolios for customers optimally. They allow users of all age groups to engage in investment
activities at low fees with minimal manual effort.

4. Insuretech - The term insuretech refers to the application of technology to the insurance model, which
allows companies to provide tailored insurance services and data security. Insuretech helps streamline
the insurance process through online claims filing and policy management.

Key Applications of Insurtech

Verification of Customer Identity - The Know-Your-Customer (KYC) process is an important aspect

of customer identification that has to be completed by insurance companies, reinsurers, and brokers.
Insurers have to collect all counterparty information to verify identities, which means dealing with a
sizable amount of data. Insurtech can offer much-needed relief here. Some insurtech companies have
used blockchain to develop prototype software that stores customer identification details from issuing
authorities. This enables an insurance company, the reinsurer, and the broker to have complete control
over all customer records.
Managing Claims - Companies can use blockchain technology to create a standardized claims
document--evaluated by underwriters in real-time. They can also automate smart contract elements,
ensuring its execution is flexible and transparent. This strengthens relationships between customers and
insurers.
Smart Contract Formulation - Smart contracts have automated protocols that make it simple for
documents to be authenticated, negotiated, and even enforced when needed. In the case of a life
insurance policy pay-out, the system automatically looks through death registers online, ascertains the
validity of the claim, and initiates the pay-out--without troubling the grieving family. Smart contracts
increase the speed and accuracy of clearing claims. Companies can register contracts, run
authentications, and clear claims much faster, without the need for an assessor. This reduces the
likelihood of fraud and increases customer satisfaction.
Detecting Fraud and Risk Prevention - A large number of claims are fraudulent. The investment
required to manage fraud effectively has historically been extremely high. With insurtech, companies
can detect and eliminate the chances of fraud with a decentralized digital depository. This verifies the
authenticity of the individual and the claim, safeguarding against duplicate transactions or third party
interferences--enabling all transactions to public record.
Payment Processing - Insurance companies must have the ability to streamline premiums and claims.
For example, auto insurance policyholders draw payments based on the miles driven. A telematics
system inside the vehicle records these miles in real-time so the premium can be calculated and paid.
This not only simplifies the process, but also reduces errors.

5. RegTech - Regtech (regulatory technology) focuses on the automation of compliance processes for
financial institutions. It offers fast and cost-effective management of large amounts of data, including
transaction records and compliance documents, such as corporate tax returns.
RegTech is a community of tech companies that solve challenges arising from a technology-driven
economy through automation. The rise in digital products has increased data breaches, cyber hacks,
money laundering, and other fraudulent activities.

Regtech tools seek to monitor transactions that take place online in real-time to identify issues or
irregularities in the digital payment sphere. Any outlier is relayed to the financial institution to analyze
and determine if fraudulent activity is taking place.

From a practical perspective, regtech has a wide range of potential applications, adding automated
speed, efficiency, and accuracy to important compliance processes that would otherwise need to be
completed manually. In the financial sector, regtech may serve the following purposes:

 Customer Identity verification

 Transaction monitoring
 Customer risk assessment
 Data storage and record-keeping
 Automated suspicious activity reporting
 Data analysis
 Cyber-security
 International sanctions screening
 Politically Exposes Person (PEP) screening - Political Exposed Persons (PEPs) are defined as
high-risk customers with more excellent opportunities than ordinary citizens to acquire assets
through illegal means such as taking bribes and money laundering. Therefore, PEPs must be
identified and screened in financial institutions because of their risks. Identifying PEPs and
determining their risks is generally referred to as PEP List Screening. It is an essential screening for
the best implementation of AML compliance programs, especially in financial institutions.
 Adverse media monitoring