Fin-Tech Convergence and Emerging Fin-Tech Fields
What is Fin-Tech?
Fin-Tech refers to the application of digital technology in financial institutions to boost efficiency, accessibility and delivery of financial products and services to its customers. It supports to modernize the traditional financial services industry as well as enable new products and business models to the financial services industry. In that case, open banking system plays a crucial role in enabling Fin-Tech solutions to access the data in financial institutions. Financial customers have opportunity to share their financial data securely to a third party, with their consent in order to receive efficient financial products and services.
Fin-Tech solutions can be classified into two categories. They are Fin-Tech infrastructure and Fin-Tech applications. Fin-Tech infrastructure refers to the process, that a company offers digital facilities including backend technologies and API, allowing another company to offer financial products and services. It focuses on connectivity, security, compliance, data aggregation and payment processing. Stripe is an example for Fin-Tech infrastructure, that processes backend payments. Fin-Tech applications refers to the mobile applications, that end-users interact to manage their funds productively. It focuses on user experience, customer acquisition and branding. Neobanks like Chime and Revolut are examples for Fin-Tech applications.
Emerging Fin-Tech Fields
There are several emerging Fin-Tech fields can be identified due to the convergence in finance and digital technology. They are Banking and Infrastructure, Wealth Tech, Payments, Blockchain, InsurTech.
- Banking and Infrastructure
Neobanks or challenger banks can be observed as the key segment in Banking and Infrastructure. It refers to the digital financial institutions, that offer banking services exclusively online without physical branches. They operate entirely through mobile apps and websites. Neobanks provide the majority of facilities offered by traditional banks and digital banks with some additional services including investment management, personal finance management, financial education and trading cryptocurrency. Furthermore, Buy Now Pay Later (BNPL) facility can be recognized as another key segment in Banking and Infrastructure. It is a form of installment financing, that enables consumers to purchase goods and services now and pay over time. Buy Now Pay Later (BNPL) facility helps to obtain product ownership instantly via online and in-store mechanism. In that case, BNPL providers pay upfront of the merchants, while assuming the credit risk. This Fin-Tech facility is characterized by its ease of use, fast approvals, and flexible repayment terms, making it an attractive alternative to credit cards, especially for younger consumers and those with limited access to traditional credit. - Wealth Tech
Capital Markets Tech can be observed as a fundamental segment in Wealth Tech. It refers to the digital technologies developed to ensure the efficiency, transparency and functionality of capital markets. These digital technologies support several core areas in capital markets including data management, trading financial instruments and regulatory compliance. They help to streamline the transactions, reduce transaction costs and enhance decision making process. The second critical segment in Wealth Tech is Retail Trading Infrastructure. It encompasses the digital wealth management solutions, which assist individuals, business entities and financial advisors to carry out their wealth management tasks via virtual platforms. It includes robo advisors, online trading platforms and digital infrastructure solutions. Wealth Management Platforms is also another fundamental segment in Wealth Tech. It covers a suite of digital solutions designed to enhance financial planning, estate planning, investment management and retirement funds services by helping individuals, business entities and financial advisors to grow and save their wealth productively. This technological transformation makes financial expertise more accessible, cost effective and transparent. Private Equity funds can be identified as another crucial segment in Wealth Tech. They are specialized software solutions, designed to optimize and streamline every phase of investment lifecycle in private equity firms and institutional investors. They offer advanced tools and automation to firms in order to maximize deal flow, reduce operational risk, improve transparency and accelerate value creation. - Payments
Biometric Payments can be observed as a key segment in Payments. Biometrics refers to the use of biological and physical characteristics of an individual for identity verification, user authentication and access control. Biometrics can be classified in to two categories. They are physical biometrics and behavioral biometrics. Biometrics like facial recognition, finger print scanner, voice recognition, iris scan, DNA analysis and hand geometry are considered as physical biometrics. Signature analysis, touchscreen gestures, mouse movements and keystroke dynamics can be identified as behavioral biometrics. Financial services industry uses biometrics in payment authentication, customer onboarding, account login, fraud detection and prevention, transaction verification, physical access control, workforce management and behavioral analysis. Moreover, Digital Wallets play a critical role in Payments. It is also known as “mobile wallets” and “virtual wallets”. They are online payment tools, that enable users to carry out their transactions via mobile apps. It aims to address the hassle of carrying physical wallets, while allowing financial customers to store digitized versions of credit cards, debit cards, loyalty cards, coupons, and even tickets in one centralized location. - Blockchain
Blockchain acts like a digital notebook, shared across many financial customers. Every page in this notebook is called a block and each block records number of transactions including payments, documents and contracts. When that block is full, a new block is added in order, by creating a Blockchain. It removes the need for intermediary authorities including banks, government and other authorized firms, in verifying transactions as the network of computers verifies every transaction together. There is no central authority to control this process. The transactions in Blockchain cannot be changed once it is recorded. Furthermore, every financial customer who uses this digital platform has accessibility to check the transactions of every user. But their identities can be hidden using encryption. However, Blockchain acts as an underlying ledger, that keeps permanent and verifiable records of all digital money transactions.
Cryptocurrency can be observed as a key segment in Blockchain. It is a type of digital money or a digital asset, that uses cryptography to secure transactions. In future, they will function as programmable money, allowing logic and rules to be embedded directly into financial transactions. Payments and agreements can execute automatically through smart contracts once predefined conditions are satisfied, removing the high transaction cost. Real World Asset Tokenization (RWAT) platforms play a crucial role in Blockchain. They are Blockchain-based solutions, designed to digitalize and fractionalize ownership of physical and financial assets including real estate, shares, debentures and agricultural commodities etc.… These platforms convert traditional asset ownership into compliant digital tokens, while representing legal claims to underlying real world assets. It offers several benefits to financial customers. They are; it increases liquidity, gives fractional ownership to real world assets, reduces transaction cost, streamlines the transactions and provides global accessibility to real assets. - InsurTech
Personal Lines represent a key segment in InsurTech industry. It can be categorized into three categories including auto insurance, life insurance and home insurance. In auto insurance, Usage Based Insurance (UIB) models can be used via mobile apps to track the behavior of the driver including speed, distance as well as breaking patterns. It supports insurers to personalize premium, offer rewards to safe driving and asses the price risk accurately. Life insurers use data driven models, by leveraging wearables, health records and predictive analytics to assess the risk and life expectancy. They offer customized coverages and dynamic premiums based on the health and lifestyle of their customers. In addition, insurers leverage gamification to promote healthier lifestyles, which in turn reduces the risks and insurance claims. Modern home insurance leverages IoT sensors, smart devices, geospatial analysis, and data analytics to monitor risks including fire, water leaks, natural disasters and burglary. This enables insurers to personalize premiums, prevent losses proactively and respond faster to claims.
In conclusion, Fin-Tech convergence represents the transformation of financial services industry through the integration of digital technology and financial goods and services. It demonstrates how digital technology reduces transaction cost and expands financial customer experience by removing the tasks of financial intermediaries. Fin-Tech fields like Biometrics, Digital Wallets, Cryptocurrency, Real World Asset Tokenization (RWAT) and Neobanks help to enhance efficiency, easy accessibility, financial inclusion, transparency and innovation in financial services industry. However, this Fin-Tech convergence highlights the pressing need for strengthen policy initiatives and policy reforms for cybersecurity.
Source: UZABASE
D. M Sebastian
4th Year
B.A (Hons) Financial Economics
Department of Economics
University of Sri Jayewardenepura
