Tech Zone

FinTech Drives Innovation and Changes in Payment Systems

There has been a lot of talk about FinTech and its disruption power. FinTech has the potential to radically change the human experience in the financial services industry.
By Karen White

When a new term like "FinTech" enters mainstream lingo, it likely has importance. FinTech, short for Financial Technology, first came to the public's attention when cryptocurrencies like Bitcoin began to grow in popularity. However, just like Bitcoin is only one product of blockchain, FinTech encompasses a number of technology-based systems and processes.

As an evolving technology, FinTech is expanding into a variety of areas that include robo-advising, blockchain technologies for financial services, peer-to-peer lending and crowdfunding, and payment systems. The impact of FinTech on human experiences is only going to grow as financial technologies continue to develop novel technological solutions for business and consumers.

Transformative Technologies Have Only Begun
FinTech is changing the customer journey and commerce in many ways. It began with blockchain technology and has blossomed to embrace artificial intelligence (AI) and the Internet of Things (IoT), creating a new world in which humans are needed less often and a myriad of products and services are embedded into the FinTech system.

People can do mobile banking, pay with digital tokens, get personalized investment advice from a robo-advisor, and get matched with lenders. FinTech combined with AI is expanding into a variety of other areas, too, like detecting fraud or security issues.

Despite the exciting and innovative promise of FinTech across industries, there are challenges to overcome. A major challenge is security, which is closely tied to the challenge of gaining consumer trust. Another challenge is establishing systems and processes that meet complex regulatory requirements.

These two reasons are enough to make the continuance of legacy financial systems assured for a long while. However, it also leads to the third challenge which is integrating FinTech and traditional financial systems so that all consumers are seamlessly served. Not everyone embraces technology. There are millions of people who still avoid the Internet, refuse to enter their credit card or bank accounts online, and have no interest in paying with digital tokens.

Technology engineers and cybersecurity experts are developing new security systems, and marketing and consumer education will expand usage of FinTech. Collaboration between people managing legacy systems and FinTech systems is the only way that FinTech can reach maturation. In the meantime, the state of the FinTech industry is expanding as companies like Visa incorporates the IoT into the Visa payment system.

Blockchain Cryptocurrencies and Digital Tokens
Visa is a company that saw the potential of digitized tokens or tokenized payment. Payment tokenization combines blockchain and the IoT to create a system in which payments are embedded into connected devices. Devices can be placed in anything, including vehicles, watches, wearables and anything else where an Internet connection is available.

The Visa company calls it the Visa Ready Programme and provides device manufacturers the technology needed to enable payments. One of the most vivid examples is a person fills the gas tank and then touches a button in the vehicle to pay for the gas.

The possibilities are unlimited for doing things like paying for grocery store or restaurant food with a watch, or ordering and paying for groceries with an IoT device connected to the refrigerator.

Banks and Insurance Companies and Financial Service, Oh My!
Blockchain was first used for cryptocurrencies like Bitcoin, but today it is used to create anonymous public transaction records across the financial services industry.

Capgemini's "World FinTech Report 2018" discusses the ways FinTech is transforming the customer journey. The rise of FinTech firms, according to the report, is a response to gaps the legacy financial firms have in their systems. The main gap is the ability to engage customers seamlessly across non-linear touchpoints.

Capgemini categorizes the FinTech firms by type of services offered. BankTechs are retail banking technologies that are involved in lending, cross-border transfers and money management. PayTechs offer services in the payment space, like Visa. WealthTech firms offer online or mobile wealth management and investment management services. InsurTech firms offer insurance products, while RegTechs concentrate on financial services regulatory challenges.

BigTechs are also getting into the FinTech arena which is not surprising, but they are causing great concern in the financial industry. The reason is that the collaboration needed between banks and financial services firms and technology firms to advance innovation is the very thing that can make it easier for BigTechs to enter the financial services industry in direct competition. Unlike the banks, insurers, and wealth managers, it is companies like Google, Amazon and Facebook that have the deep experience and knowledge of customer-facing AI, cloud computing, and big–data analytics.

FinTech firms have, so far, not been seriously challenged by BigTechs in direct competition. However, as Rob Galaski at Deloitte Canada explains it, FinTechs drive the direction of innovation and the speed of change, but the high cost of customer switching and the rapid response of incumbents (existing financial services businesses) have made it difficult for smaller innovators to scale and become serious competitors. Robo-advisors are a good example of new technology incumbents introduced in response to FinTech disruptors.

Talk to the Computer
Robo-advisors use AI algorithms to assist clients with asset management, securities, banking and insurance.

FinTech also enables a new form of peer-to-peer lending and crowdfunding. One peer is a person, but the other peer is anyone with peer-to-peer technology. It is a complex process that begins with individuals and small business borrowers who provide their data to a peer-to-peer lending platform. Other inputs come from banks and credit scoring firms. Using the data, the lending platforms determine the type of lenders (banks, individuals, institutional investors etc.) to send the information to.

New links in blockchain are in a constant state of construction. Just recently, it was reported that it is likely the government is considering blockchain for secure messaging and could use it to secure supply chains and protect custody of files.

There is no doubt that yet-to-be envisioned blockchain links will be developed over time. FinTech is an exciting trend that is still in its early stages. The best is yet to come.