What is Financial Technology?

The world of technology is changing and evolving with every passing year, impacting every area of society. One of the biggest industries affected in the past ten years is the financial sector, with the introduction of financial technology. ‘Fintech’ is one of the biggest growth markets in modern society, introducing benefits to both business and consumer. A key focus of all the fintech services is reframing the customer experience, making it more personal by making better use of the available data.  

In the broadest terms, fintech is any kind of innovation that disrupts or changes how traditional financial services are delivered. One of the key points of fintech is the idea of automating processes or services, to make them more efficient. Financial innovation has been on a constant trajectory since the 1950s. After not changing for hundreds of years, technology bought us ATMs and access to instant cash without the need for a teller and branch. The 1970s saw the introduction of electronic stock trading and the 1980’s saw computers and electronic data bought into banking systems. The 1990’s bought in the dotcom era of online retail and e-commerce, but it is only in the last ten years that fintech has really started to shake up the large and dominating banking systems that we are familiar with.  

How is fintech impacting current financial services?

According to reports, one third of consumers have used at least two or more fintech services in the past year.  So what are the biggest changes happening right now to our financial services?

Fintech and Banks:

Banking has always been branch focused, using their marketing messages to encourage people to come in and then apply for products or services. Although customer data is available on computers, the way their systems are built often means that the layers of data exist separately and do not speak to each other. This is what is called ‘legacy tech’ and it puts the large traditional banks at a disadvantage unless they start using other platforms that can work with their existing systems, or build something entirely new. 

Fintech has introduced new ways of banking including neobanking, which are branchless banks that exist completely online. It reduces the costs of having a brick and mortar store which makes them more cost-effective but also allows them to streamline the traditional banking process and remove any friction from the processes. A basic example is being able to apply for a bank account online using a service that authenticates your identity without having to talk to a person. 

Fintech and Superannuation: 

Australia’s superannuation assets totalled $2.3 trillion at the end of the March 2019 quarter and is one of the largest pools of wealth in the world. Since inception, it has been an important part of the Government’s retirement plan for citizens, and the Baby Boomers (primarily male) are the first to really experience the benefits of having superannuation in place for much of their working life. The only super funds to have dabbled in fintech are the retail funds connected to banks. Having your banking and super all in one place means viewing and managing your balance, the insurance and the share options all in one place, as well as making easy contributions. 

The industry sector might seem more removed from member engagement by design but produced better returns overall. There is huge potential for the industry super funds to embrace fintech and really engage their members because of how they are grouped. Even though many funds are open to people outside of their industries, the lack of education and engagement around financial wellbeing, financial literacy and how their investments work is a barrier but has huge potential for improvement and growth. Fintech offers delivery channels that can inspire actual behavioral change and increase awareness. 

Fintech and Wealth Management

Wealth Managers have been able to leverage developments in fintech, using AI and machine learning to help provide clients with investment advice or retirement plans via complex algorithms, with minimal input from humans.
Roboadvisors have helped to make the cost of entry much smaller by using customer data to profile the stage of life, what outcomes they expect, and how much risk they are willing to take. Micro investing and Self-investing is the automation of savings in small increments that are placed into a portfolio that is based on a basic questionnaire. Instead of paying a wealth management fee, a subscription or small percentage of the balance is charged, making apps like Raiz very appealing to the mass market.

Other areas of Fintech Disruption

Fintech is impacting the traditional banking sector but also creating new ideas of what banking and transactions can look like. Mobile banking, as well as digital wallets and ledgers (like the sort used for cryptocurrency), are key factors in financial technology.

There are also plenty of investment services and wealth managers directly influenced by financial technology. Peer-to-peer lending platforms like Lending Club, online insurance tech firms like Oscar, Bima or Qantemplate, and stock trading apps like Robinhood all utilize financial technology solutions to give customers fast and integrated services that use API’s to connect multiple platforms, providing data-based intelligence and instant approvals. 

Mobile Payments: This does not require data or a bank account. The transaction is recorded between the merchant and buyer via SMS, the account can be topped up like pre-paid credit using cash. No account details are shared so it’s super safe. 

Cryptocurrency: This is a digital currency built on encrypted protocols that make it more secure than cash and with a fluctuating value due to a predetermined amount being created. 

Insurtech: Using algorithms and personal data to offer customised insurance options. This includes car insurance, home, and content insurance and health insurance. Car insurance providers are using fintech to sell what is known as telematics insurance, which uses information collected by a black box in your car, and this can determine your premium. 

Roboinvesting: Using data and algorithms to allocate, manage and optimise client assets, and providing financial or investment advice with minimal human intervention. 

How big is fintech right now?

By the end of 2018, fintech startups were believed to be worth in the region of $147.37 billion, with North America and Asia being the two largest producers of fintech startups. Some of the biggest growth areas include blockchain, cryptocurrency, smart contracts, open banking, insurtech, robo-investing, and cybersecurity. The underbanked which consists of people who might have a bank account but don’t really use the offerings of a bank due to being underfunded. The unbanked are the two billion who do not have access to banks or accounts or the credentials needed to open one. The traditional systems do not work in parts of Africa, Asia or the Pacific, and fintech solutions are flourishing, building economies and entrepreneurs along the way. 

What’s new in Australian Fintech?

Open Banking will allow customers to own their data and share it with other service providers. This means your financial history can go with you, streamlining applications for loans, insurance, and other products or services.

Neobanks in Australia have been applying for licenses and have started popping up and although they target millennials, the market is much bigger than that and branchless and cashless banking will become the norm. In the future, instant approvals, product recommendations and personal budgeting will sit in your mobile phone an integrate seamlessly with the rest of your life.

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