Finances, which provided the foundation for communities from the dawn of humanity, are the basis on which the world’s governments operate today. Of course, its primitive origins included the trading of goods rather than currencies. Other terms we know today, such as debt, investment, or market, also existed in the archaic form. They are the building block of modern financial theory, which draws from mathematics, economics, management, accountancy, and experimental and behavioral finance. With your interest hopefully piqued, let’s jump straight into key aspects of financial technology.
What is financial technology?
Financial technology, or FinTech for short, represents innovation and technology whose goal is competition with, and eventual replacement of, traditional methods in the distribution of financial services. It includes processes, products, applications, solutions, and business models, more often than not provided as an end-to-end procedure over the Internet. The majority of financial technology examples stem from new business ideas in renowned financial establishments. However, an increasing number of emerging technologies stem from startups e.g., new businesses. These financial technologies have a shared purpose – improving the user experience, saving time, boosting productivity, and increasing the institution’s revenue.
Examples of financial technology
Here are some of the prominent representatives of financial technology:
Digital and mobile banking
We discussed when we talked about modern technologies in banking. They combine hardware (mobile devices, ATMs, computers, and even smart cars), and software (API (application programming interface), programs, and applications), deployed in devices or the cloud. The goal is simple – convenient and secure access to finances from any place on Earth.
Blockchain and cryptocurrencies
Blockchain has been the talk of the entire world in recent years due to its decentralized nature. It eliminates both the need for a middle-man and reliance and confines of a single country’s currency or its conversion. This makes transactions near-instantaneous, available worldwide, with no transaction costs or close to it. Most importantly, it boosts security, since transactions are encrypted and immune to the influence of third parties. We took a deeper dive into it when we mentioned it as an example of information technology.
Robotic process automation (RPA)
Robotic process automation (RPA) is a technology that relies on software robots and digital workers powered by Artificial Intelligence (AI). Operating in a virtual environment, they automate tedious and repetitive tasks using an API and/or a scripting language. Most importantly, RPA provides a GUI (Graphical User Interface) responsive to user input.
This allows for loading biometrics (fingerprints, magnet tape, facial recognition, etc.), and other forms of authentication. Thus, the system is cost-effective, accurate, consistent, faster, easily scalable, and better protected. It reduces the chance of impersonation, human error, scamming, and screen scraping.
Robots in Customer Service, also named chatbots, have proven to be dramatically cheaper compared to traditional alternatives. Because they each have a virtual workstation, they can provide pre-programmed answers 24/7/365. They only route the request to human employees if they cannot provide a solution, which saves time and effort on both ends. Robots can also send invoices, smart (digital) contracts, notifications, reminders, and handle the feedback data by entering it into one or more applications, such as bookkeeping systems.
Estimation and management
Financial institutions are starting to wisen up and implement machine learning, big data, and AI. In doing so, they shrink wasted time and boost efficiency and accuracy at estimation and management of finances. For example, JPMorgan uses AI to go over commercial loan agreements and approve, deny, or send them for further review. By their estimation, seconds of work AI performs replace close to 360,000 hours of their lawyers’ time annually.
Many of the world’s leading banks are also intertwining AI and HPC (High-Performance Computing). By achieving low latency and high bandwidth in computing, they can analyze and process market conditions in real-time. Do this allows financial institutions to adapt to nanosecond-short trading windows.
Application of financial technology
The following are some of the areas that benefit from financial technology:
We analyzed how technology impacts the job market, then shifted our focus to the negative (for some) aspect – ways technology replaces jobs. In it, we mentioned that, by estimates of The Bureau of Labor Statistics in the United States, 8% of the bank teller jobs will be cut by 2026. Reading that article and cross-referencing it with this one, you’ll quickly spot the similarities. Jobs of financial analysts, advisors, journalists, and editors, mortgage and insurance agents, clerks, security guards, some lawyers, stock traders, stockbrokers, customer service employees, human resource representatives, on-premises cybersecurity experts, and bank managers will be replaced by technology in one form or another.
Banking as a Service (BaaS)
Top financial organizations implement Banking as a Service (BaaS), a model that allows renting their API to other establishments, usually other banks or third-party service providers (TPSP). This allows them to earn extra money by individually offering each function of their financial system to others, boosting the level of overall technological advancement. Moreover, by leasing their infrastructure to others, they allow FinTech startups, big holding companies, retailers, and venture capital firms to improve framework elements and, potentially, invent and implement new ones.
We talked about the beneficial applications of technology in globalization in the past. During that time, we concluded that interconnecting financial establishments amongst its subsidiaries and other organizations, friendly or adversaries, helped immensely. Then came the rise of online marketplaces such as Amazon, eBay, AliExpress, and Newegg, accompanied by multiple ways of online shopping, all relying on financial technology. COVID-19 pandemic also provided a test of how far financial distribution and management came. It laid the groundwork for digital transactions and authentication, and facilitated sharing and utilizing industrial and academic resources worldwide.
AI, big data, and machine learning play a key role in data security nowadays. More specifically, three systems do – fraud detection and prevention, AML (Anti-Money Laundering), and KYC (Know Your Customer). Algorithms analyze every transaction on the platform in real-time and generate decisions within milliseconds. This can prevent malversation, but also provide suggestions regarding inefficient policies, potential exploits, possible money schemes, automated claim responses, risk mitigation, data breaches, and even account protection guidance to each user individually.