Fintech Revolution

With the birth of Amazon, the book industry was radically revolutionized using internet technology. A reader no longer needed to make visits to a physical brick and mortar bookstore, instead, they could purchase books online or read books in electronic formats. Among the different aspects of human life that are being transformed by the internet and technology, the financial aspect is no different which has given rise to the term “Fintech”. Fintech can be understood as the use of technology in the financial sector to improve and automate the delivery and usage of financial services. The ‘tech’ in Fintech refers to the emergence of brand new technologies such as machine learning, blockchain, Internet-of-Things, cloud solutions, big data, and analytics.

 The Fintech revolution started about 10 years ago and has been disruptive in the fields of insurance, deposits and lending, capital raising,  payments, investment management, and market provisioning. Insurance companies are now using IoT devices and big data analytics to negotiate the terms of insurance among its customers. For example, by using data from IoT sensors to measure the speed of car or tracking product-delivering vehicles, insurance companies can better assess safety indices and risk factors while writing down contracts of vehicle insurance. Insurance companies are also keen to collect health-related data such as age, diet and nutrition, Fitbit data, activity such as pill ingestion using various technologies that determine the refund of clients and premiums paid on health insurances. Likewise, in the fields of lending and deposits, banks are now using big data and machine learning technologies to evaluate credit risk from customers. Signet Bank, which was once only the 354^th largest bank in the US, engaged in the collection of its customers’ credit data and employed data analytics to become the first bank to provide credit card services to its customers. Banks and credit institutions keep track of purchases, date of payment of credits (delayed or not), location data (where and how often do customers move), etc to score the credit ratings of its users. Also, banks and financial institutions use natural language processing and neural networks on the customer loan application (which includes a free-form speech as to why the loan should be approved) to determine whether or not to approve loans. Fintechs are also revolutionizing the way capital is raised in the market. Small-scale businesses that have an idea of the product/prototype they want to develop can raise capital through crowdfunding. Start-ups promising revolutionary services are raising abundant capital though ICOs instantly. Besides these, Fintechs are also being used by investors to manage their portfolio. Trading algorithms are being used by investors to trade stocks and bonds more timely and effectively without the use of brokers. Recent trends suggest that the younger generation of investors are more inclined to algorithmic trading rather than trading via a broker or employing financial advisors. There are also services that employ machine learning in portfolio management that gives investors with the insights of when and how much stocks to buy or sell (opponent of efficient market hypothesis). Fintechs are also revolutionizing the way we make payments. Traditionally, banks served as an intermediary between lenders and borrowers and made a profit by facilitating such exchanges. Fintechs are changing this traditional banking concept by reducing or removing the intermediaries involved in a transaction and thereby facilitating cheaper (less transaction cost), faster transactions with near real-time settlements. Blockchain technologies and cryptocurrencies are being popular due to this concept of disintermediation. Smart contracts are being used as an automated process for exchange of value between lenders and borrowers without requiring a third-party. The use of cash is gradually decreasing while that of digital wallets and cryptocurrencies are on the rise. Fintechs are also provisioning the growth of new markets. For example, considering applications that allow you to transfer value between users with minimum transaction costs. Like Uber and Airbnb exploited the market for peer-to-peer ridesharing and accommodation-sharing, Fintechs can also exploit the peer-to-peer lending market. Moreover, distributed ledger technologies and blockchains promise real-time tracking or ownership of products which provide greater market transparency and efficiency. Therefore, Fintechs not only aim to transform payments but also revolutionize real-estate markets, supply chain management, asset clearing and settlement services, etc. among others. 

In my opinion, the Fintechs promise a great deal of innovation and restructuring of the traditional banking models. However, it is still in its infancy. The hype around blockchains and cryptocurrencies that peaked in towards the end of 2017, has come to a stop. Many ICOs that were promising revolutionary services have been declared bankrupt or turned out to be a Ponzi scheme. Although blockchains and cryptocurrencies promise open, distributed, faster transactions, a reality check on cryptocurrencies suggest that their prices are extremely volatile and do not scale well compared to VISA or MasterCard. This is not to say that there is no potential in Fintech businesses at all. However, as of right now, we lack technological advances that scale Fintech businesses even further. Also considering the fact that traditional banks are backed by governments while blockchains and cryptocurrencies do not foster any form of central governance, it will still be a while before cryptocurrencies are widely accepted. In the past few years, the flow of cash is being substituted by the flow of digital wallets and currencies. For example, in China, all payments from the daily purchase of groceries to cars or electronics are being done using digital currencies rather than fiat cash. Buyers and sellers feel bothersome to conduct transactions in cash as it will require making changes from the register and such. Likewise, we can imagine of a near future where cash is replaced by cryptocurrencies for everyday use and Fintechs revolutionizing the traditional banking models.