Bitcoin and other cryptocurrencies are digital or virtual currencies which use cryptography to secure and verify transactions. They are neither issued nor backed by national governments and are seen as alternative forms of payment. Cryptocurrencies are increasingly accepted in outlets as payment for goods and services. Some Subway branches in the United States, for example, allows bitcoins to be traded for meal items and PizzaForCoins states that it is the only form of payment that they accept. The market capitalisation of cryptocurrencies passed US$700bn this year showing that there is still an investor appetite.
Cryptocurrencies have many advantages; for example, the contract is completed at a fraction of the time and expense compared to traditional payment methods, making it an efficient way of moving money. Additionally the use of distributed ledger technology, otherwise known as blockchain, safeguards cryptocurrencies against fraud and prevents account tampering.
However, the underlying technology is complex and this can make cryptocurrencies difficult to understand to the uninitiated. Investments may take place without proper knowledge and a lack of understanding of how to use cryptocurrencies may result in investors opening themselves up to hacking.
Banking infrastructure has also taken advantage of the FinTech boom, utilising blockchain across its hardware, software and the services for banks core businesses.
Technology developments have helped link banks and credit accounts, providing a more streamlined offering to consumers and also creating more efficient ways to process transactions. Smarter IT systems have created leading software by centralising external and internal data into a single point of access as well as leveraging developments such as mobile, agile and cloud.
For financial institutions and banks, infrastructure is a critical part of business and efficiency. Cloud and mobile storage enhances usability and provides greater accessibility. Software developments can span across every banking function, providing a streamlined service and greater customer and employer satisfaction.
However the lack of budget can hamper innovation as significant sums of money are spent on maintaining legacy systems, rather than implementing new and innovative technologies. Additionally, infrastructure management and production support can be time consuming, which may result in a preference towards keeping legacy systems.
Banking & Lending
Digital transformation in the banking and lending sector is expanding and FinTech firms have been steadily entering the lending and borrowing market and revamping traditional offerings. Business models such as peer-to-peer lending connects lenders to borrowers and vice versa, allowing FinTech companies to take a small fee for brokering the connection. Additionally, innovation in the corporate loan market is also being tested, with FinTech emerging in factoring loans, invoice financing and business lines of credit. BBVA, for example, recently issued a corporate loan of €75m using distributed ledger technology, the first bank to do so.
FinTech development in the banking & lending market helps reduce the time it takes to process loans, makes lenders more efficient at handling loan demands, and provides significant improvements to user experience. Lower costs and lower rates allow FinTechs to adjust to the changing environment, and lighter regulatory burdens compared to traditional lenders allow them to utilise means of underwriting. However, marketplace lenders can suffer funding strains and the cost and time involved in setting up the infrastructure can be cumbersome for traditional banks.
Financial technology is altering the way that payments are made, received and who facilitates them. Dominating both the retail and consumer payment industry as well as entering the corporate payments area, FinTech is revolutionising and creating new innovative solutions within the payments spectrum. Retail developments include mobile wallets which allow consumers to make payments via their mobile phones and P2P mobile payments which allow transfers from one person’s account to another. The wholesale and corporate industries have also evolved and have seen an increased harmonisation of standards and markets worldwide. For example the Target2-Securities (TS2) initiative offers centralised delivery-versus-payment (DvP) settlement in central bank money across the European securities markets. Bank payment hubs are being set up to update legacy infrastructure, which bring together different elements of the banking system, help manage payment flows and improve flexibility within the system.
FinTech in the payments system helps with speed, convenience and efficiency and this in turn reduces costs and timescales for payments drastically. Innovation in security has also enhanced consumer confidence in using mobile platforms which has opened up a new market for payments. However, it is important to note that regulatory change such as PSD2 which includes developments such as ‘open banking’ creates innovation in this space.
International Money Transfer
FinTech companies are having a profound effect on traditional cross-border transactions where the elimination of third parties from the equation allows payments to be sent in a more cost-effective manner. Payments are becoming more simplified; for example, TransferWise allows recipients to receive money by providing no more than their email address and Azimo lets users register for their service through Facebook, integrating finance with users' day-to-day digital lives.
Eliminating third parties means there is less commission, fees and hidden charges, resulting in consumers having more comfort and transactions becoming more cost-effective overall. However, the market for this service is competitive and complex.
Adoption of FinTech within this industry has helped expand online investment platforms, robo-advisors, wealth management solutions and the automated tools of investment. Edgefolio, for example, provides a platform which helps connect institutional investors to hedge funds. Hedge funds have full access to investor activity and unlimited document storage and investors can take advantage of an online fund data consolidation tool. FNEX offers a transactional marketplace for alternative investments enabling investors to make direct investments into private companies, hedge funds and a variety of other investment vehicles. FNEX sources this for investment banks, brokers and fund managers. Other examples include platforms that enable users to invest in securities, platforms that apply scientific methods to research and digital advisor platforms for investment advisors and broker-dealers.
FinTech development in this area can help enhance portfolio performance, utilise performance data and provide accurate forecasting and market monitoring. However, problems such as initial costs, regulatory crackdown and security can create barriers.
Crowdfunding has revolutionised the way businesses raise finance for their ventures. Crowdfunding’s increased popularity has seen it used across private security markets, innovative start-ups, and legal and judicial claims. Whether through donation, debt or equity, crowdfunding provides flexibility and accessibility to funds. The regulatory environment has encouraged the use of crowdfunding with the European Commission proposing crowdfunding “passports” for the European Union as part of efforts to boost growth in the financial technology sector.
Crowdfunding is advantageous as it provides easier access to capital and is an alternative way of funding without companies having to give up debt or equity. It is also potentially easier than applying for a loan or pursuing other capital investments and allows companies to pre-sell which can gauge market and investor reactions. However, the risk of not reaching funding targets, plus the time spent on interacting and providing incentives and rewards to backers as well as other players can make crowdfunding competitive and costly.
InsurTech is a sub-segment of FinTech and it is a rapidly growing area. InsurTech developments are reinventing the way people buy insurance, how insurers manage their risks and is helping customise policies and develop new approaches to underwriting. InsurTech companies are able to leverage existing data and produce deeper insights into risks; for example, life insurance companies are using lifestyle data to create personalised policies for their customers. On-demand protection allows consumers to purchase insurance in smaller quantities, and short-term policies can be turned on or off depending on consumer needs. Individuals are able to activate certain coverage with a SMS or a phone call or purchase cover on a weekly, daily or even an hourly basis. Insurers themselves are able to utilise such developments with some InsurTech companies offering programmes which analyse consumer documentation and suggest appropriate policies as well as model, price and distribution packages. The world of InsurTech is expansive with the internet of things (IoT), cloud, drones and chatbots all being exciting developments.
InsurTech allows refined risk assessment and risk-based pricing, more efficient ways of identifying trends and emerging risk as well as more attractive and lower premiums. Innovation in the industry is creating new products such as smart contracts which improve efficiency and transparency. However, the insurance industry is a heavily regulated sector and InsurTech companies will also need to comply with all legal and regulatory requirements that may apply.
RegTech, the marriage of regulation and technology, is the use of technology in the context of regulatory monitoring, reporting and compliance. RegTech solutions involve analysis of real time information, combined with algorithmic analytics to help overcome challenges in the financial services industry. London is seen as a leader in RegTech, with the FCA building a number of proofs of concept (PoC) that aim to change the way firms report regulatory information. The digitalization of manual reporting and compliance processes can result in costs savings. In addition, online fraud prevention can be increased by firms deploying systems that scan transactions in real time to assess whether they are real or not.
RegTech helps companies benefit from agility, speed, integration and analytics. It helps firms automate compliance processes and reduce operational risks associated with reporting and compliance monitoring. However, the human element of compliance cannot be underestimated, as culture and co-operation are equally important in determining regulatory compliance. Additionally, regulation is always changing, meaning that RegTech solutions will need to be updated frequently for regulatory compliance.
FinTech is continually expanding and entering various parts of the financial services market. The blockchain revolution has provided clear advantages across a range of applications and has helped speed up and simplify complex transactions. These areas present a cross-section of the markets that have been leaders in FinTech evolution, but it appears likely that soon FinTech may penetrate nearly every sector of the business world.