The Development of FinTech and its Implications on Financial Markets

According to Schueffel, 2017, FinTech can be regarded as an emerging industry within the finance spectrum which leverages its position in the market through the application of modern technology to improve financial activities. An alternative definition, given by Lenny, 2017 views FinTech as system, which comprises recent applications, procedures, products or business models, integrated with multiple complementary financial services that are provided on an end-to-end basis over the cyberspace. FinTech has a history that can be traced back to the 1950s, with the advent of credit cards, which simplified banking and minimized the inconveniences of carrying and walking around with money. In the 1960s, Automated Teller Machines were introduced, which resulted into banks closing some branches and laying off tellers. This revolution did not stop, and in the 1970s, electronic trading commenced in the stock exchange.

Within the integrated financial framework, banks can now easily access information regarding the credit history of loan applicants from credit reference bureaus within shorter durations as compared to the traditional model whereby it could take days or weeks to access the same information. This enables banks to easily classify clients into their respective risk profiles, thus granting credit facilities to clients based on a data-driven model. This model, applied in conjunction with statistical techniques, provides an effective tool for credit risk management as well as making predictions on the likelihood that loan applicants might default within a given period of time. AI’s influence in this industry has witnessed exponential growth in the recent decades. Banks have developed technology capable of performing the analysis and automated execution of contracts.

Banks have been on the fore-front to ensure that their systems are intact and impermeable to intrusion, either by internal staff or the external stakeholders. One of the key developments in this area has been the implementation of biometric kits that are installed in banking premises as well as on automated teller machines. The advent of these developments was in the 1960s, when banks launched credit cards and automated teller machines, resulting into massive layoffs of tellers and closure of some branches. The new technology would provide an efficient and cost effective way of carrying out transactions. This was a convenient solution to the customers, enabling them to walk around with minimal cash at hand and only making withdrawals whenever it was necessary.

Moreover, blockchain technology has enabled banks to have more comprehensive information about their customers, facilitating the sharing of information between banks A key component of the current revolution in the financial services sector is the blockchain technology. The application of the concept of blockchain has gained a widespread momentum in the field of finance. Blockchain refers to an interconnection of distributed databases where the entire content of the database is repeated across the whole network. There exist algorithms that ensure consistent updates. These algorithms also prevent replication errors, in addition to preventing intrusion and malicious infiltration of systems, either internally or by external systems. With the existence of such a model, the intermediate parties in financial transactions are automatically eliminated, leading to an efficient solution with respect to time and costs.

The distributed architecture comprises the cryptography component as well as the distribution ledger. These two have the effect of ensuring there is some level of confidentiality enforced and maintained, as well as the ability to work within a localized environment, without having to connect to a common source. Blockchains have enabled people across the globe to carry out financial transactions over the internet, breaking the confines of territorial limitations, and enabling investors to trade in cryptocurrencies in different jurisdictions. Figure 1 (see appendix) gives a pictorial summary of how blockchain technology functions. The concept of “Big Data” has been a useful tool in investment related decision-making in the recent past. Big data refers to large volumes of data that investors can analyze in order to establish any noticeable trends and relationships with respect to a given quantifiable phenomenon.

With the help of modern technology, investors can now access volumes of information about various components of the stock market, including the key financial reports of publicly listed companies. Historical information about various companies and industrial sectors has been uploaded and availed on online platforms, such as Yahoo Finance, enabling investors to perform their own analyses of the stocks that they wish to invest in. Moreover, securities exchanges all over the world have adopted mobile platforms, which enable investors to buy and sell stocks online, with the minimal intervention of stockbrokers. As enterprise risk management becomes a focal point of concern, software such as MasterControl Risk Analysis and A1 Tracker have become essential tools in this process, serving as complements to other common application tools such as MS Excel, which can be used to calculate various risk parameters such as the standard deviation of returns, value at risk (VaR) and expected shortfall.

Knowledge of these is important to investors, since the risks associated with different categories of investments vary. FinTech has therefore provided great tools for assessing and mitigating the risks inherent in the various portfolios of assets. There are even more prospects for the application of FinTech in this area. For instance, technology has the potential of changing the set up of meetings, transforming the physical annual general meetings to teleconferences, thus enabling shareholders from far and wide to make their contributions. Clients can now subscribe to policies, check premium rates as well as compute benefits using application software. This direct link between the public and this category of institutional investors has eliminated the need for agents and middlemen, reducing the costs associated with sales and marketing that are incurred by insurers.

In addition, insurers can now access data about the general public from online platforms. With the integration of artificial intelligence with data mining, companies can analyze key features and trends in population data, enabling them to develop customized investment products for each segment of the population. Claims assessment and analysis is a crucial element of the insurance framework. According to a report issued in 2017 by Accenture Consulting, the regulatory framework is slowly shifting, adopting FinTechs and RegTechs, with many in support of developing this technology by means of regulatory sandboxes, inter-country bridges and special charters. The report states that as of 2017, ten countries had designed regulatory sandboxes to promote the implementation of RegTech and FinTechs, while four nations had implemented FinTech links that would help in coordinating international development and implementation of FinTechs.

RegTech, also known as regulation technology, uses IT to facilitate the regulation process. Its main objective is to promote transparent, consistent and standardized regulatory processes. Some of the key objectives of this technology are to automate and digitize Anti-Money-Laundering (AML) regulations, whose goal is to reduce the acquisition of incomes through illegal means, as well as Know-Your Customer processes, which aims to aid in the identification and verification of the customers of financial institutions in addition to detecting and preventing fraud. Traditional banks have to adapt to new strategies in order to remain a competitive force in an evolving world. There has been an increase in investments towards research and development in this area, following a generational change, coupled with the penetration of internet coverage on the global scale.

With the introduction of crowd funding, online loan application software and mobile money services, markets have shifted to companies that offer a wider array of high quality services in the most convenient manner. Figure 2 (see appendix) provides a visual summary of the rankings of financial technology strategic objectives across industries. Consumer expectations have been rising quite rapidly, with customers being relatively intolerant towards old or obsolete products. Data on online platforms are susceptible to theft by unauthorized parties. This risk poses a grave danger to FinTechs, since any breach in their privacy policies might result into legal battles with customers. A case and point for this scenario is the taxi-hailing service provider, Uber, which was faced with a myriad of lawsuits following an alleged data breach in that occurred in the year 2014 Another major drawback to this technology is its costs.

Financial technology is quite expensive to develop and implement. Companies have had to allocate more funds into research and development in this area, making it a reserve of the larger institutions, as small to midsized companies employ this technology on a small scale, making it a challenge to reap the full benefits that come with such innovations. Incumbents have recently adapted to new strategies in order to derive the benefits that come with the evolution of FinTech. Most of these companies have initiated partnerships with new entrants to the FinTech industry, as well as collaborating with companies that offer complementary services, to provide integrated service delivery platforms. This is evident in the form of partnerships between banks and telecommunication service providers, which has resulted to the interlink between mobile money accounts and bank accounts.

This enables consumers to perform financial transactions using this platform. Such trends are expected to increase as competition between firms gets elevated. The world of accounting has not been left behind in this revolution. The application of FinTech in accounting and finance has been on the rise, with financial institutions adapting to the latest technology to take over the accounting function. Better, consistent audit trails can be maintained, while errors are minimized with the use of accounting software. Moreover, computerized accounting systems provide a better avenue for fraud detection and prevention. In order to adjust to this trend and remain relevant in the industry, accountants are stretching beyond their traditional academic confines, gaining knowledge in programming and artificial intelligence. The FinTech revolution has just started, and as more and more investors and institutions embrace this new technology, the customer service landscape is bound to change.