A report released in May 2023 by Boston Consulting Group suggests that financial technology revenues will grow sixfold, from $245 billion to $1.5 trillion, by 2030. The global management consulting firm views the fintech journey as still in its early stages. We will witness an even more considerable rise in financial technologies aimed at enhancing customer experience and providing solutions to credit-starved and underserved small businesses.
As consumers increasingly use mobile financial solutions for their daily operations, and digital investment platforms lower the entry barrier for new customers by offering low-cost and user-friendly investment options, AI and big data are also transforming the financial landscape. They provide more accurate risk assessments, help companies build detailed customer profiles, and enable smart assistants to address the most critical issues immediately. This article will delve deeper into the most important trends in the fintech industry.
Robo-Advisors
Robo-advisors are digital platforms that offer algorithm-driven financial planning, investment management, and recommendations based on individual goals and risk tolerance. These platforms reduce the barrier to entry for investing by providing affordable and personalized solutions, including account services, goal planning, and portfolio management. Robo-advisors do not require human intervention to provide financial assistance to the client; however, they have faced criticism for their lack of empathy and complexity.
According to Statista research, in 2023, robo-advisors are expected to manage up to $2.76 trillion in assets.
Blockchain, Cryptocurrencies, and Decentralized Finance
Blockchain technology ensures secure and transparent transactions and data fidelity by distributing data across multiple network nodes in different locations. This technology has the potential to simplify banking and reduce costs substantially. It is the foundation of the most dynamic areas of fintech innovation, including cryptocurrencies, smart contracts, and decentralized finance applications.
Cryptocurrencies handle fast cross-border payments, often with minimal or zero transaction fees, and eliminate the need for third parties like VISA to confirm transactions. In addition, cryptocurrencies rely on decentralized cryptographic systems that do not collapse at a single point of failure. However, their price volatility, excessive energy consumption for mining activities, and potential for malicious use hinder the further expansion of cryptocurrencies and blockchain technology.
Smart contracts are computer programs that enable trusted transactions and contractual agreements without the need for a central authority or legal system.
While cryptocurrencies challenge traditional currencies controlled by governments or central banks, decentralized finance (DeFi) represents an emerging financial technology that challenges the modern centralized banking system. This technology eliminates the fees that financial institutions charge for their services by using peer-to-peer transactions. For example, DeFi can fulfill a person's credit needs: its algorithm finds peers who agree to the lender's terms and assess their creditworthiness, after which the loan is granted. Peer-to-peer lending does not mean there will be no interest and fees; however, it provides individuals with more options, as they can find lenders from anywhere in the world.
Open Banking
Open banking allows fintech companies and payment providers to access financial data from banks and other organizations through application programming interfaces (APIs). These APIs enable access to customers' bank account information and transaction history and offer personalized financial services to maximize savings or investments and reduce overdraft fees. For example, open banking software may offer a new savings account with a higher interest rate than the customer's current savings account or a credit card with a lower interest rate.
The concept of open banking was first introduced in 2003 as part of the open innovation movement, a process that involves sharing and collaboration between companies, startups, and R&D centers to keep up with the rapid pace of development and the overlapping of technologies.
However, critics of open banking software point out increased security risks, as malicious actors can target third-party providers and banking customers with phishing scams. However, social engineering training prevents organizations from becoming vulnerable to phishing scams and other cyberattacks.
Insurtech
Insurtech's software products cover areas where traditional insurance has limited flexibility and leverage, such as personalized insurance policy selection, commercial auto insurance, and workers' compensation insurance. Insurtech software uses data analytics, telematics, artificial intelligence, and machine learning to assess risk, underwrite policies, and manage claims quickly and efficiently. It also incorporates geolocation tracking of cars and wrist-worn activity trackers, processing this data to create more distinct risk groups and dynamically price premiums according to customers' identified behavior.
In addition, insurtech eliminates the need for customers to drive to a branch or wait for business hours to speak with an insurance representative, allowing users to quickly access the information they need online. Companies that build insurtech software, in turn, gain insights into each individual's actual needs, improve pricing, and offer flexible, short-term, or transferrable plans.
Examples of insurtech companies include Lemonade, which offers homeowners, renters, and life insurance policies, as well as auto coverage, all available through its app with the ability to file instant claims. Another example is Etherisc, a platform that utilizes smart contracts for end-to-end automation of insurance transactions and processing. It provides an ecosystem for building decentralized applications, enabling a more effective purchase and sale of insurance at reduced operational costs.
Payment-Processing Software and Integrated Invoicing
Payment-processing software has evolved into sophisticated, mobile-first products for managing money, accepting payments, and consolidating crucial accounting, all integrated into other vital business functions and software such as client portals.
To understand the growth in the field of payment-processing software, consider the example of Stripe, a payment infrastructure provider that helps to manage invoices and subscription payments. It offers no-code and low-code integrations, enabling payment methods such as PayPal, Apple Pay, bank debits, or transfers. Additionally, Stripe allows customers to build a payment form or use a prebuilt checkout page to accept online payments. It also supports setting up recurring billing, such as split purchases and subscriptions for e-commerce and SaaS companies and regular donations for charities.
Expanding on payment-processing solutions, MailMate in Japan innovatively caters to expatriates and travelers. This service allows users to easily pay physical bills while abroad. Upon receiving a bill notification, users select “pay bill” in the app, prompting a MailMate representative to pay the bill at a local convenience store.
AI-Supported Customer Assistance
In 2023, AI-powered chatbots and machine learning have captured most of the attention. Their advanced algorithms and deep learning architectures, developed by skilled fintech app developers can solve a wide range of customer issues in multiple languages, all without human intervention. Smart assistants can recommend products, help customers with transactions, and provide a personalized experience by learning from past conversations and enhancing their responses.
Companies expect that AI-driven chatbots will define the future of fintech applications, becoming more accurate and efficient in problem-solving and financial guidance. Moreover, to further streamline their operations and customer service, many companies are turning to specialized fintech BPO solutions to complement their AI advancements.
Big Data Analytics
Big data allows companies to analyze customer behavior, create relevant offers, and position existing financial products effectively. The challenge for companies lies in creating a comprehensive portrait of the modern consumer. This portrait, in addition to financial statements, includes information about social media activity, Google search history, shopping preferences, areas of interest, and other digital footprints. Companies collect and process such data to better understand specific audiences. This mechanism allows them to segment customers based on shared characteristics, tailor and personalize their offerings, and assess risk more accurately.
Moreover, AI and big data are being used to identify suspicious activities, prevent data breaches, and deter fraud attempts.
Biometric Authentication
Biometric authentication is a security method that uses customers' physical characteristics to verify their identity. These characteristics include fingerprints, spoken language, facial features, and iris scans.
Most smartphone users are already familiar with face recognition technology and fingerprint scanners, which are integrated into their devices.
While iris scanners can be installed in any ATM cash machine, iris authentication is impossible for the current generation of mobile platforms. Therefore, companies won't use this technology in heavily mobile-oriented fintech products.
Biometric technologies create a unique combination of human-device or human-software interaction. They are more convenient than traditional authentication methods, such as passwords or PINs, which can be easily forgotten or stolen.
However, opponents of facial recognition consider the technology a violation of privacy. Many people aren't comfortable with the idea of their facial scans potentially being shared and linked to their other digital footprints without their consent. Moreover, facial scans can be linked to people's profiles on professional social networks and communities, leading to potential prejudice based on age, ethnicity, or location. For this reason, many fintech companies still retain the option of using passwords and authentication apps.
Final Thoughts
Financial technologies are evolving to create secure systems enriched with big data and seamlessly integrated with other vital business functions and software. Current major trends in fintech include:
- Developing applications enhanced by machine learning and artificial intelligence.
- Focusing on mobile device use.
- Automating the management of financial services.
Modern fintech applications no longer require traveling to a bank branch or waiting until the start of business hours to speak to a customer service virtual assistant. Such software will gain deeper insight into customer behavior, identify more distinct financial risk groups, and provide more accessible, personalized financial services.
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