The world is witnessing the fourth industrial revolution owing to breakthrough digital and communication technologies (such as Artificial Intelligence, Cloud Computing, Big data, and Internet of Things (IOT)). The advancement in the technologies planted the seed for the birth of a large number of “tech titans” who have become the driving force for the influx of digital services; Uber, Netflix, Airbnb, Google, Facebook, etc.
According to a NASDAQ report, tech giants Facebook, Amazon.com, Apple, Netflix, and Google knew as FAANG has a market value of USD 3.9 trillion. If FAANG were a country, it would be the fifth-largest in terms of economic output, outgunning Britain and snapping at Germany’s heels.
The 21st century\’s teen years, bookended by a financial crisis at the beginning but the wonder of the fin-tech revolution at the end, were a decade of disruption. They also have an inestimable impact on competition, innovation, and job creation, while offering a wide range of services from payments to wealth management, from peer-to-peer lending to crowdfunding.
Since 2008, more than 11,000 Fin-techs have marked their presence on the Globe, most of them are start-ups. In 2019, the investment in Fin-techs was valued at USD 141 Billion.
The word Fin-tech is derived from a portmanteau of “financial technology,” it is an economic industry composed of companies that harness existing and new technology to “improve and automate the delivery and use of financial services.
The use of technology for automation and delivery of financial services is not new, one may argue that history goes back as far as the 1950s when Dinners introduced the world to the first-ever Credit Card. In 1967, Barclays Bank acquainted the world with Automated Teller Machines (ATM). In 1970, the first electronic stock exchange “NASD- AQ” of the world was established followed by the launch of SWIFT (Society For Worldwide Interbank Financial Telecommunications) in 1973.
The 1980s saw the upsurge of bank mainframe computers and the world was presented to online banking, which flourished in the 1990s with the Internet and e-commerce business models.
The dreadful financial crisis in 2008 had shaken the world, financial giants like the Lehman Brothers collapsed. The financial crisis primarily happened due to subprime mortgages and caused the lack of trust in traditional financial institutes by the public.
There is a controversy about the meaning of the Chinese word for crisis, whether or not it is composed of two characters “Danger and Opportunity”. But undoubtedly the financial crises brought an opportunity that lead to the creation of a new breed of financial institutions known as Fin-techs. The world is now being surrounded by them. According to a survey, half of the world says it is using at least one Fin-tech.
Disruption
If we could go just 10 years back, doing shopping through mobile could only be a bewildering idea but a few years later it has become a ritual. The behavior of consumers is changing at a very fast pace due to advancements in technology and the growing penetration of mobile phones.
Millennials and Generation Z, that consist of 63% of the world population are very tech-savvy, they need to perform their financial transactions, such as one-click ordering see it, like it, click it, buy it. Fin-techs like Apple Pay, Google Pay, AliPay, WeChat, and others are offering innovative payment solutions to cater to the dynamic needs of society.
The other major factor for the existence of Fin-techs is Financial Inclusion. According to the Global Findex Report 2017, about 1.7 billion adults remain unbanked. Fin-techs Solution is generally inspired by electronic platforms, leapfrogging technologies, and Digital KYC procedures making their operating model very cost-effective and convenient, which, as a result, allow them to serve the unbanked and lower-class segment of society, During 2011 and 2014, 700 million people became account holders, but not through a bank rather by Mobile-led Fin-techs. An epic paradigm would be MPESA who has reached out to 80% of households of Kenya within four years.
FinTechs are spurring the agility, innovation, and customer-centric products that are required to disrupt and create new value propositions. They give high emphasis on providing an iconic user experience with low cost, swift and personalized services. The benefits portfolio of Fin-tech includes but is not limited to:
Convenient
The unanimous demand by the global village segment is convenient. We are living in an age where the maximum effort we want to put into doing most of the transaction, is just to grab our phone or any electronic device while laying on the sofa and make a few clicks. Fin-techs are streamlining the process and making it simpler and convenient for users. An epic paradigm would be Ali pay, a unicorn tech titan, which offers a consumer in Pakistan to make a purchase from a seller in China.
Intuitive Process
Fin-techs by virtue of harnessing advanced technologies such as Big Data, Artificial Intelligence, the Internet of Things, and Application Programming interfaces, etc, managed to reduce the processing time. For instance, the decision of Loan, Financing, and opening a mobile wallet can be done in just a fraction of an hour. In China, Tencent’s ‘WeChat’ now allows users to apply for un collateralized loans of up to US$30,000 and get a decision in under a minute, while individuals can transfer money to each other. Among a few renowned names are Avent, Credit Karma, and Kabbage. In Pakistan, Tez Financial is also geared up to offer small-scale instant loans.
Flexible
Leaner structure coupled with technology-driven processes enable firms to make quick decisions, create space for creativity and out of box thinking to offer tailor-made and personalized innovative products according to the need of consumers.
Safe And Secure
The safety and security of consumers are being kept on high priority by Fin-techs Companies. They generally comply with all the relevant regulations such as PSD and GDPR, Use multi Factor and Biometric Authentication to secure the process, adapt security standards like PCI-DSS, PADSS to protect their infrastructure from intruders.
Business Models
There is a wide array of financial services that are being offered by the Fin-techs, some major categories of products are explained below.
Digital Wallets and Payments
Digital wallet is one of the revolutionary products brought by Fin-techs in financial services. Digital wallets can be opened through electronic platforms or Mobile Apps that generally consume APIs. Fin-techs generally use a risk-based KYC approach along with Biometric verification to open a wallet. The wallets encompass a large suite of financial transactions such as Mobile Payments (QR & NFC), P2P & Bill Payments, Loan approval, and payments, etc.
In China, Wechat registered more than a billion users who can perform a wide array of financial transactions through the Wechat app without opening a bank account. Ant Financial (Financial Arm of Ali Baba) also allows hundreds of millions of users to pay immediately.
Crowdfunding Platforms
Crowdfunding companies generally provide electronic platforms that allow individuals or businesses to pool funding in an early-stage unlisted company even for niche products from financial backers and potential customers around the globe. It is more efficient and effective than traditional funds raising. Crowdfunding can be categorized into two major categories i. Equity-based ii. Reward-based. In Equity-based, people invest in an early-stage unlisted company in exchange for shares in that company. Companies like Kickstarter, Patreon, GoFundMe, and others illustrate the range of fin-techs that offer crowdfunding platforms.
Robo-Advisors
Robo Advisors are automated software platforms that provide financial advice, which thus reduces human intervention and enhances efficiency. These platforms are generally leveraged by Artificial Intelligence (AI) and machine learning. Robo Advisors have mainly disrupted the asset management sector by providing algorithm-based asset recommendations and portfolio management options on a 24/7 basis to a large volume of clients. They have increased efficiency and lowered costs. Betterment, Wealthfront, Robinhood, and Acorn are among the few popular Robo Advisors.
Fin-techs by virtue of harnessing advanced technologies such as Big Data, Artificial Intelligence, the Internet of Things, and Application Programming interfaces, etc, managed to reduce the processing time.
Insurance (Insurtech)
These companies are also known as “InsurTech\’\’, are revitalizing a well-established industry to make it even more vibrant, sustainable, and agile. They usually offer services through mobile apps or electronic platforms that are backed by AI and Big Data. The renowned names include but are not limited to Oscar, Clover, and Bright Health.
Blockchain and Cryptocurrency
A Blockchain is a distributed ledger technology that forms a “chain of blocks.” Each block includes information and data that are bundled together and verified. Blockchain technology permits verification without having to be dependent on a third party, it provides additional security as the data structure in a Blockchain is append-only. Hence, the data cannot be altered or deleted. It offers a bundle of benefits such as greater transparency, enhanced security, and easier traceability. The business across the world financial services, healthcare, government, Fin-tech, and many other industries are exploring ways to use Blockchain to disrupt and transform brick and mortar business models.
Cryptocurrency is a digital currency, it leverages Blockchain technology to gain decentralization, transparency, and immutability. Cryptocurrencies can be transferred directly between two parties through the exchange. The distinct advantages of a cryptocurrency over traditional forms of payments are minimal processing fees, instant processing, and low chances of fraud. Cryptocurrency exchanges like Coinbase and Gemini connect facilitate users in buying or selling.
