Indeed, FinTech is one of the most exciting revolutions in the financial world—or any other industry, for that matter.
And, as the cliché goes, you ain’t seen nothing yet! So here are thirteen trends that will shape the financial world for 2021 and beyond.
Table of Contents
A digital-only bank is one that operates entirely online. Everything from opening an account to making transactions is done through a mobile app or website. It’s in sharp contrast to traditional banks going digital, as they have physical branches alongside online options.
Aside from the absence of brick-and-mortar locations, the biggest differentiator of a digital-only bank is innovation. In fact, fulfilling customer needs which traditional banks can’t meet is the number one motivation for most of these digital banks, according to Lane Martin, a partner at financial consultancy firm Capco.
In a way, it’s not hard to see the appeal of digital-only banks. Thanks to the low overhead of having a purely online operation, they can offer low transaction fees and higher interest rates. Plus, as mentioned earlier, they also deliver innovative features that incumbent banks don’t.
But the single biggest draw of a digital-only bank is the convenience of accessing your money anytime, anywhere, without the hassle of going to your local branch.
However, going all-digital isn’t entirely beneficial. Most customers, for instance, still want the option of talking to a human when they encounter problems. The ability to balance innovation with this human touch is what will spur digital banks forward.
Not to be outdone by digital-only banks, traditional financial institutions are also taking their services online. Many team up with Fintech startups instead of developing the digital infrastructure on their own.
While incumbent banks first saw FinTechs as a threat, the benefits of collaboration far outweighed the reasons for competition.
For FinTech firms, the main drivers were stability and compliance. Sizable investments from banks can infuse a much-needed cash flow to firms, freeing them to focus on what they do best—innovating. Established banks also have the market penetration and experience with financial compliance that FinTech firms desperately need.
On the other hand, incumbent banks benefit from the technological innovations that FinTechs can bring. It allows them to deliver a more seamless digital experience to their existing clients and offer a broader range of services.
BENEFITS FOR STARTUPS
Stability and cash infusion
Experience with financial compliance
BENEFITS FOR BANKS
Better product experience
A broader range of services
Of course, the partnership isn’t without challenges. One of the biggest is a culture clash between the dynamic, entrepreneurial spirit of FinTech startups with the safer, calculating nature of big banks.
This incompatibility even extends to the underlying tech, as most banks have legacy IT systems that need to be updated for digital integration.
Microservice architecture is a software development approach that splits an application into independent components.
Each component, called a microservice, is an autonomous entity that can be created, run, and modified independently of each other. They then communicate with other microservices via application programming interfaces (APIs), thus making them appear as a single, cohesive application to the end-user.
The most significant benefit of microservice architecture is agility and scalability. Traditional monolithic programs are made with individual but tightly coupled parts and thus are challenging to upgrade and modify. This is the exact problem Amazon faced early on in its growth.
Switching to a microservice architecture allows software development teams to create new features and modify existing ones without affecting the rest of the application. This reduces testing time, speeds up the introduction of new services, and lowers development costs.
What’s more, microservices is already a proven architecture. Large tech brands like Uber, Netflix, and Paypal have successfully used it to scale and dominate their respective niches.
Microservices are also the key to solving many of the challenges of digitizing the financial sector. They bring a sense of safety and resilience to digital banking because if one feature fails, the rest of the system won’t be affected. This can feed innovation and encourage the adoption of bolder features by financial institutions.
The approach can also benefit smaller institutions without the luxury of large development teams. Developers can create reusable, off-the-shelf microservices, then offer them cheaply to smaller banks and credit unions to mix and match as they see fit.
Regulatory technology, or RegTech, is the technology that helps other FinTech firms and financial institutions comply with regulations faster and cheaper.
The need for RegTech stemmed from the fact that the move to digital financial services increased the risk of breaches, money laundering, and other fraud, thus prompting governments to impose tighter regulatory oversight.
RegTech works by combining artificial intelligence and big data to monitor transactions and identify irregularities. These data are then shared with regulatory bodies via cloud services.
The value of RegTech is sifting through these large volumes of data to uncover insights, saving the financial institution a lot of time.
The future is bright with RegTech as various exciting trends drive its growth. One is the use of biometrics for anti-money laundering, as well as Know Your Customer (KYC) processes, and onboarding verification.
Another is using tools for identifying compliance gaps quickly to help with business decisions. RegTech is also eyed as one of the critical FinTech sectors that can benefit from blockchain.
Blockchain Decentralized Finance
Decentralized finance (DeFi) has been a hot topic ever since Bitcoin introduced blockchain in the early 2010s. Simply put, it’s a system where anyone can get financial products without going through intermediaries like banks or brokers.
While digital money is the obvious application for decentralized finance, it’s only a tiny part of it. DeFi is a revolution that can impact every sector of finance, from stock trading to insurance.
For digital banking platforms, decentralization will have a significant impact. Every financial system in the world currently uses a centralized approach. Banks act as the trusted intermediary for borrowing and lending between two parties and enforces the contract when needed.
While this system works, the integrity of the transaction is only as strong as the bank itself. Fraudulent activities do happen, as banks are often the target of hacks and financial crimes.
And the global financial crisis of 2008 proved that even big banks could fail.
Decentralization solves this problem by enabling two parties to deal directly with each other. Once a transaction or contract is logged into the blockchain, it cannot be altered or deleted, thus ensuring transparency and security for both parties. In addition, any data logged into the public blockchain is anonymous, guaranteeing privacy.
Without a middleman, people can also enjoy lower fees and better interest rates. Anyone can also open a bank account without the need for credentials.
Open banking is a growing initiative that enables banks to share their data with FinTech firms and other financial institutions. This is done through an application programming interface (API) that connects an app or website to the bank’s database.
Given that banks are traditionally secretive about their financial data, you might ask yourself: why do they agree to this?
The answer, as with anything in FinTech, is—to stay competitive.
Open banking is a way for traditional banks to provide better financial services and provide their clients with exciting possibilities not available with a centralized approach.
One of these is account aggregation. This service allows users to view all of their accounts from multiple institutions in one convenient app, thus eliminating the need to log in to each one manually. Good examples include Tink and Plaid.
Taking this idea one step further are personal finance management apps like Mint.
By centralizing a customer’s financial data in one location, users can manage their finances better. The app can, for example, suggest a recommended budget for the user based on their bank balance, income level, and financial goals.
Financial institutions have a lot to gain from open banking as well. With open banking, lenders can instantly assess a person’s credit risk by accessing their financial records.
This allows lenders to give reasonable interest rates on their loans. On the flip side, borrowers can also quickly compare loan and credit card providers to gauge their chance of approval.
Autonomous finance is the delivery of personalized, automated financial services through artificial intelligence (AI).
The term “self-driving money” is perhaps the most suitable description for this area of FinTech.
In a nutshell, the innovation enables an app to autonomously create and execute a financial plan based on a person’s goals, risk tolerance, age, bank balances, and other factors.
It’s like an intelligent digital financial advisor that manages your money 24/7.
Say you want to save up $1 million by the end of the year. An autonomous finance app can look at your risk tolerance, then invest in financial instruments that match that. Or, if it finds excess money in your monthly budget, it can invest that amount in assets with higher returns.
But here’s the problem: the average person tends to use multiple platforms to manage their finances.
For instance, you can pay a bill with Paypal, receive your salary in Wise, and manage your finances using the Chase app. However, dealing with various apps can be tedious and time-consuming, detracting from the customer experience.
Thus, the next step is to integrate everything and automate all of the steps for the customer’s benefit. While it’s still an emerging FinTech trend, it will undoubtedly change how people manage their finances in the near future.
Financial inclusion, as defined by the World Bank, means “individuals having access to useful and affordable financial services that meet their needs.” The goal is that anyone, regardless of financial or social situation, can enjoy essential banking services like saving, payments, and lending.
People with no access to banking services, or unbanked individuals, are surprisingly common in the developing world. For example, more than 60% of the population of countries like Morocco, Vietnam, and Mexico are unbanked.
The problem is that banking, as essential as it is as a service, is generally geared towards the middle and upper class. Interest rates for loans and savings, for instance, are often better the more money you have.
Fintech solves the financial inclusion dilemma by providing accessibility and ease of use to financial products and education. This, in turn, can help the growth of the economy as a whole.
One example of a FinTech firm that helps with financial inclusion is Kiva. This non-profit crowdfunding microloan platform serves borrowers from underprivileged locations worldwide.
In addition, digital-only banks like Chime also help financial inclusion with zero fees, increased interest rates, access to digital payments, and ease of opening an account with minimal requirements.
Financial inclusion presents a more altruistic side of FinTech. And with the pandemic causing people to lose jobs and income globally, it’s a welcome innovation.
Biometric Security Systems
Biometrics refers to the use of physical characteristics, such as their face and fingerprints, to authenticate users. The most significant advantage is that biometrics is nearly impossible to bypass, as it relies on data points that are unique to an individual.
A mobile wallet is exactly what it sounds like. It’s a digital repository for a user’s payment information such as credit cards, rewards cards, and coupons. It then allows that person to make payments online or in participating retail stores easily.
It’s no surprise that the mobile wallet is a rapidly growing trend, seeing as it’s a fundamental component of the digital payment revolution that accelerated dramatically during the COVID-19 pandemic.
Compare that to enhanced security, which only 14.8% of respondents claimed was their primary reason for adoption.
It’s also not surprising that millennials and Gen Z are the leading mobile wallet users, with as much as 85% of them having used at least one mobile wallet platform. However, Gen X (at 65% adoption) and baby boomers (at 33%) aren’t far behind.
With the vast market potential, mobile wallets is one area of FinTech where the big boys are playing. Most of the world’s leading tech firms, like Apple and Google, have their own e-wallet platforms.
But China is where most of the action will be. It’s forecasted that almost 50% of the world’s mobile payments will come from the country by 2023, with platforms like AliPay and WeChat Pay leading the charge.
Robotic Process Automation (RPA)
We talked about autonomous finance above, where AI is used to automate financial management for consumers.
But that’s just the tip of the iceberg. The same technology can also be applied to the operation of banks and financial institutions—an innovation called robotic process automation (RPA).
Specifically, RPA can automate high volumes of repetitive, rule-based tasks.
In the financial world, these include:
Know Your Customer (KYC) verification
processing client requests
Fortunately, we don’t need to look too far ahead into the future to see RPA in action.
Bank of America, for example, has Pega Robotic Automation. This AI-powered system executes payments, helps solve mortgage and card disputes, automates customer service tasks, and even enables automation in their obsolete system.
However, the adoption of voice commands in FinTech is still in its early stages. The biggest concern and roadblock is security, as voice recognition technology is still not as secure as other forms of biometrics like face and fingerprint identification. For instance, most consumers in Germany and Austria don’t trust voice-enabled payments just yet.
Still, some financial institutions are already experimenting or using voice commands in their FinTech initiatives.
MIA provides an entirely voice-enabled experience when executing financial tasks like getting account details, sending money, or exchanging currencies. It’s even smart enough to give personalized suggestions based on the user’s habits.
Voice commands represent one of the more exciting FinTech trends that promise to deliver an even better customer experience. Other potential areas include multilingual text-to-speech for cross-country customer service and speech analysis to gather decision-making insights.
Fintech-as-a-Service and Banking-as-a-Service Platforms
Fintech-as-a-Service (FaaS) and banking-as-a-service (SaaS) are approaches where firms and banks allow other entities to access their services and products. This is done through application programming interfaces (APIs), smart contracts, or blockchain technologies.
FaaS and SaaS are similar to the Open Banking initiative we discussed before. However, instead of just opening up their data, banks offer their services as well.
These can include payment processing, KYC verification, lending, and account management.
The main advantage of FaaS and BaaS, as with other “as a service” approaches like SaaS, is lower cost since you don’t need to develop and maintain the infrastructure yourself. That also means you can bring a FinTech app to market faster.
But the real benefit is mixing BaaS and SaaS services from different firms and banks. This allows FinTech apps to offer a host of amazing features into one convenient package at less cost.
Developing FaaS and BaaS APIs is now a growing trend in FinTech.
Railsbank, for instance, is building an API platform that enables developers to drag and drop financial services into an app just like they would any element.
Other emerging startups focused on FaaS and BaaS include Rapyd and incumbent-focused FintechOS.
It’s an Exciting Time for FinTech
We’ve covered some of the biggest and most exciting trends in the FinTech world. And the fantastic thing is that it’s not even scratching the surface of what this industry has to offer.
One thing’s for sure: after the changes that are bound to happen in the coming years, the financial world will never be the same.
Hopefully, we have given you some inspiration for your next big FinTech idea.
Ante is a true expert. Another graduate from the Faculty of Electrical Engineering and Computing, he’s been a DECODEr from the very beginning. Ante is an experienced software engineer with an admirably wide knowledge of tech. But his superpower lies in iOS development, having gained valuable experience on projects in the fintech and telco industries.
Ante is a man of many hobbies, but his top three are fishing, hunting, and again, fishing. He is also the state champ in curling, and represents Croatia on the national team. Impressive, right?