Since the rise of financial technology, a crop of fintech start-ups capitalized on big data technologies and emerged tech-enabled business finance models disrupting traditional financial institutions and their existing models. With technology opening up new doors, anyone with an internet connection can make payments, transfer money, take out a loan, or become an investor themselves. Fintech business models are shaking the industry compelled long-standing incumbents to embrace new technologies or fall behind.
Through the eyes of traditional institutions and the media, this shift in financial services has labeled fintech start-ups as a “disruptor.” But, is financial technology really disruptive? Globalization, growth, and digital adaptation was inevitable. Fintech did not change finance; the world changed. Demand from the underbanked and the digital consumer rose, and incumbents were slow to adapt, opening opportunities for fintech to grow and progress the system.
We are now witnessing mobile banking, online lending platforms, automated trading and investing, algorithmic risk management, digital currencies, and expansive options for investors all driven by cutting-edge technology. As fintech innovation deconstructs the walls of the traditional banking system, digital technologies are simultaneously changing consumer’s behavior and expectations.
Fintech firms and those adopting fintech models are merely riding the digital wave to meet consumers with the same digital experience offered by Google, Amazon, and Facebook. Alongside our societal tech-transformation, sectors within the finance ecosystem such as banking, payments, lending, investments, and insurance are evolving with fintech leading the way.
Fintech’s driving factors:
Lowered Barriers of Entry
The rise of digital technologies lowered the barriers of entry and brought us the golden age of start-ups and entrepreneurship. In the finance world, the antiquated U.S. banking system that exclusively held so much power was reluctant to adapt to technologies opening the opportunity for fintech firms to disrupt the financial ecosystem. The unmet demand for digital financial services, small business financing, and digitally driven customers emerged a new marketplace for fintech start-ups to enter.
With more options and competition in the market, businesses have shifted their focus to the customer, their needs, and how they can meet them more efficiently than their competitors. Furthermore, consumer behavior has progressed with the adoption of tech to the digital experience, and so have their expectations, including those of their financial service providers. Compared to traditional institutions, fintech leaders focus on customer-centric operations identifying, specializing, and excelling in niche products or services, providing enhanced accessibility, convenience, and tailored products.
Big data and risk management
Another driving factor of the fintech revolution is the big data and machine learning technologies that reveal advanced insights such as behavioral patterns as a factor for measuring creditworthiness that are increasing capabilities while decreasing risk. The introduction of tech-enabled financing models like crowdfunding and peer-to-peer (P2P) lending has allowed fintech lenders like LQD Business Finance to flourish and have enabled widespread access to funding for borrowers, which is expected to rise over the next ten years.
Major investments in fintech
As society follows a digital transformation, an increasing number of businesses and consumers are adopting digital payments, transfers, mobile banking, marketplace lending, and many other fintech services, driving demand and growth of the fintech market. The global fintech market has reached over $100M in value and is expected to surpass $300B by 2030. An increase in funding and investments in fintech are supported by predictions of further advancements in banking, payments, lending, financial planning, and insurance. Investors and technoptimists are buying in and expecting to see fintech growth and widespread/pervasive adaption.
What We Can Expect from The Growth of Fintech
AI intelligence continues to grow and reduce costs
First adopted by fintech firms, artificial intelligence (AI) improves operational efficiencies and significantly reduces costs spreading the embrace throughout all financial institutions. According to BFSI Market Research Report on the financial industry, AI will reach $130M with a 28% annual growth rate by 2026. With AI’s ability to work with unstructured data and machine learning algorithms, it is reshaping how financial services operate, meet customer-centric needs, and tighten cybersecurity.
As big data was a driving entry point for fintech start-ups, artificial intelligence and machine learning was the window of opportunity for digital lenders. Instead of manually processing, assessing risk, and underwriting loans like traditional lending institutions, fintech lenders utilize AI to analyze creditworthiness and manage risk. For example, LQD Business Finance, a fintech lender, uses artificial intelligence and machine learning technologies to create automations within their underwriting process. LQD Business Finance analyzes creditworthiness with AI and predictive analytics by intaking a more inclusive range of data and behavioral factors which increases accuracy and reduces risk while qualifying a wider range of businesses for adequate valued financing.
Following the success of fintech disruptor’s, AI technology is becoming widely adopted in the banking sector. Among the first, Bank of America found success with their virtual assistant, Erica, who uses predictive analytics and cognitive messaging to complete customer requests and provide financial guidance at a much faster speed than a human. Erica quickly set the standard for banks and other financial services that are adopting chatbots, automated routine banking tasks, and other smart systems. Gartner predicts that by 2022, 70 percent of all customer interactions will involve AI tools like chatbots and machine learning messaging. This not only enhances the self-service customer experience, but automated procedures significantly reduce manual labor costs. Per the Autonomous report in the financial industry, AI technologies are expected to reduce 22% of financial service operating costs by 2030 saving upwards of $1 trillion in the next 10 years. The cost of purchasing or developing AI technologies is significant to take on; nonetheless, the embrace of AI is indicative of the impact it has on cost optimization.
Artificial intelligence advancements are additionally playing a key role in cybersecurity. With predictive analytics and real-time data integration, AI is enabling firms to detect financial fraud threats, protect customers’ payment card industry (PCI) data, and secure fintech’s financial assets.
AI is well poised to increase the reach and scope of financial institutions. Across all financial sectors such as payments, lending, insurance, and asset management, AI can enhance security, profile risk, evaluate credit, and provide digital assistance such as robot transactions, financial advisory, and other scenarios like managing dividends. Institutions and investors are embracing artificial intelligence to the point where it will become imperative to survive.
Blockchain technology predicted to change the finance landscape
The global financial system that moves trillions of dollars a day has been exclusively operated by centralized financial intermediaries and is crowded with problems. With inefficient costs due to fees, delays, onerous paperwork, regulatory costs, fraud, and manual processes transferred into a digital space without real reinvention, financial technology’s intervention has been critical to the economy’s endurance and is continuing to lead the way with blockchain technology.
Originally developed by cryptocurrencies, blockchain technology is a distributed ledger that stores and moves anything of value and runs on all participants’ devices without a central ledger in control. For example, Bitcoin, an anonymous cryptocurrency database, exists and is maintained across all global participants; there is no single party that authorizes transactions. Each user transaction forms a data block with a timestamp that enters onto the database chain that cannot be altered once added; and the more participants and data entered, the more secure it becomes. Recently, a man with $250 million worth of Bitcoin forgot his password, but without a gatekeeper to grant him access into his account, he is set to lose it all. Blockchain’s decentralized security is a sad story for this man, but this revolutionary technology has created cybersecurity within a database that has never been as highly achieved nor accepted in fear of fraud. Compared to other industries and the entire economy, the financial services sector suffers the most from fraud; and as fintech further integrates financial services into the digital world, demand for cybersecurity is on the rise and blockchain might just be the solution.
The adoption of blockchain technology can further provide more transparency and decrease the need for financial intermediaries such as banks and governments and potentially provide underserved populations with wider access to various financial tools. With blockchain’s distributed ledger technology, assets, equity, deeds, or anything of value can be transferred and stored securely, privately, and from peer-to-peer creating accessibility and a newfound trust like never before. Today, anyone, individuals, sole proprietors, businesses, can make agreements and transactions without the need of traditional gatekeepers and human labor such as contracting, settling, documenting, and other record-keeping tasks.
Blockchain technology is receiving a lot of buzz and investments from its role behind cryptocurrencies; however, its adoption and productivity within financial services are just beginning. Many firms in the financial industry are investing in the promise of blockchain solutions and the security and efficiency optimization that blockchain-based applications will provide. Since blockchain technology runs on cryptography and exists digitally among participants’ devices rather than a brick-and-mortar bank’s operating business hours, transaction availability, speed, and costs can be highly optimized. And, blockchain’s decentralized nature allows all data entered to be viewed and tracked making transactions transparent and traceable which accounts for more security and inclusivity.
Blockchain can further change the financial industry through payments, transfers, lending, etc., and many incumbents like Goldman Sachs and JPMorgan are investing in the possibility of the technology. With advanced security, heightened accessibility, and optimized operational efficiency, the development of blockchain remains on the distribution path set to change financial transactions worldwide.
Tech-enabled financial services
The proliferation of fintech data computing is declining costs and reshaping many finance sectors. With optimized customer service, enhanced security, and increased access to financial tools we are experiencing an increasingly competitive financial market and firms grasping for the most sophisticated and innovative financial services and platforms. Established incumbents and robust fintech start-ups are beginning to collaborate their powers, and fintech is will continue to impact financial services such as asset management, insurance, regulatory technology, complete digital banking, and borrowing and lending.
Asset and investment management services are embracing AI and machine learning and experiencing a shift from tech-enabled wealth managers to cloud-based, automated robo-advisory platforms. Using behavioral and predictive algorithms to assess real-time transactions, investment advice platforms can better identify and quantify risk and form a more holistic view of customers while reducing operational costs. With a transformation on the delivery of financial advice, the pressure is on wealth management firms sending them to adapt to tech-driven models and accept the possibility of standalone robo-advisory becoming mainstream.
We are also finally seeing the emergence of regtech. While the finance industry is one of the most heavily regulated, it also experiences constant changes from dynamic financial technology models and regulatory frameworks following. Regulatory compliance is the last to see its injection of tech-driven models and cost optimization. With big data and cloud computing, regtech is emerging to improve regulatory systems and help financial institutions efficiently adapt to changing law systems reducing regulatory costs and risk. Regtech tools can indicate fraudulent activity minimizing risk and avoiding data breaches.
The borrowing and lending industry has also evolved with fintech’s introduction of alternative finance lending models: P2P lending, crowd investing, and small business alternative loans, and has become a playing field for multiple participants. Access to funding has become much more transparent, accessible, and less centralized. Supported by computing power and improved underwriting algorithms, alternative lending models are scalable and deliver better acceptance rates, faster loan approvals, and maximum customer satisfaction. While still smaller in size than incumbents, alternative lending platforms have steadily grown each year and the global fintech lending industry is estimated to reach over $300 billion by 2023.
The digital era has arrived. Whether incumbents were ready or not, it is time to embrace new technologies and join the revolution and the race to be the Googles and the Amazons of the finance world. Cutting-end technology, evolving customer expectations, and emerging fintech business models are reshaping finance as we know it and leading the way to a tech-enabled paradigm shift in modern finance.
LQD Business Finance, an alternative lender, was founded on the future of financial technology and is engineering/creating a paradigm shift towards accessible financial security through transparent, flexible, and efficient financing options. When George Souri, founder and CEO, realized the lack of financing options available to the lower middle-market, he became determined to develop a fintech lending model and proprietary technology to solve this problem. LQD Business Finance’s, algorithmic computing technologies now serve businesses with a wide range of short-term business loans and working capital solutions with the highest level of fintech accuracy, sophistication, and efficiency.
LQD Business Finance, among others, is leading the paradigm shift in the financial lending sector and the business finance world driven by fintech innovation.