It is a widely held belief that a nation’s financial sector is the heart and soul of its economic health. Hence, it is no wonder that so much attention is paid to the advent of new financial technologies, aka FinTech. Currently, FinTech trends dominate almost all aspects of banking, trading, and global finance. With the introduction of real-time payments, open banking, and blockchain technology, financial management has changed significantly, and many new advances are more likely to follow.
Our world is gradually moving toward a digital world where almost all financial transactions are conducted electronically. Despite the fact that privacy concerns are on the rise, the ability to conduct financial transactions across geographical barriers has the potential to bring with it a number of benefits. Below we discuss the top seven FinTech trends that will drive the global financial sector to new heights.
What is FinTech?
To begin, let’s look at the basics and answer the question of what really qualifies as FinTech.
FinTech, which stands for financial technology, encompasses technological advances and solutions that make financial services more accessible, efficient, and reliable. FinTech trends are changing the way people engage in the financial market today, making a positive impact on banking, personal finance, and investment management.
“Already, many banks are partnering with FinTech firms to enhance their service offerings. Financial institutions are realizing that in order to maintain brand loyalty they have to focus on speed, accuracy, and transparency.”
Said Gabriel Lakeman, an associate at Latham & Watkins, a global law firm, that advises the businesses and institutions driving the global economy.
Top 6 FinTech Trends You Should Watch Out for
FinTech trends are transforming almost every aspect of the banking and international financial markets of today. Currently, fintech is valued at about 3.56 trillion dollars with digital payments accounting for over 8.5 billion dollars by 2022. Since. there is still a long way to go in the growth of this industry, FinTech is expected to expand at a compound annual growth rate of 23.58% over the next three years. Below are the top 6 FinTech trends in the works that could have a significant impact on consumers’ financial behavior.
1. Central Bank Digital Currency (CBDC)
In the same way, a digital currency is simply an electronic form of money rather than a physical one. Central bank digital currencies are digital representations of a country’s physical currency regulated and issued by the nation’s monetary authority or the central bank. They are simply the digital asset version of a fiat currency, such as USD, EUR, or GBP. The purpose of CBDCs is to improve the efficiency of payments and financial inclusion as well as to reduce the risks associated with cash transactions.
It implies that “£10 of a UK digital currency would always be worth the same as a £10 note,” explains the Bank of England in the United Kingdom.
Central Bank Digital Currencies (CBDCs) are poised to become the most pervasive innovation in the digital and payments space, impacting the global financial services industry fundamentally. According to the Bank of England, CBDCs do not have the volatility of privately issued digital currencies such as Bitcoin, Ether (Ethereum), or XRP since they are pegged to the national currency of their respective countries.
According to the Federal Reserve, America’s central bank, CBDCs would be “the safest digital assets available to the public, with no associated credit or liquidity risk”. People can hold CBDCs either in their bank account or in electronic form. These electronic tokens can be stored on mobile devices, prepaid cards, or other forms of digital wallets.
According to the Atlantic Council, an American think tank, central bank digital currencies could improve financial inclusion by making money easier and safer to access. As a result, financial systems could become more resilient. According to the International Monetary Fund, a CBDC could provide a backup if cash was unavailable due to a natural disaster or the failure of a payment company. Another motivation is reducing financial crime. While the un-traceability of crypto facilitates crime, the digital currencies issued by central banks, on the other hand, can improve money flow transparency.
The upcoming front-runners in the CBDC race are China, Taiwan, India, and Europe!
Experts predict that China will be the first to launch a CBDC. The digital yuan was supposed to be launched nationally during the 2022 Olympic Winter Games in Beijing. The outbreak of Covid delayed their plans to roll out the digital yuan until 2023 or 2024. The Central Bank of Taiwan (CBT) is also working on rolling out the CBDC, a payment method that does not require a debit or credit card. India’s finance minister Nirmala Sitharaman announced that a digital rupee of RBI will be introduced sometime between 2022 to 2023. European Commission officials announced in February 2022 that a digital euro bill would be available the following year.
2. Artificial Intelligence (AI) for Finance Applications
Fintech has been slowly integrating artificial intelligence (AI) technology for quite some time now. McKinsey estimates that artificial intelligence (AI) can enhance global banking revenue by $1 trillion annually.
What’s more, the use of AI in the financial sector has the potential to affect operations across the entire spectrum, from front offices to middle offices to back offices. Artificial intelligence can make a significant impact in four different areas of financial institutions:
Improved Customer Experience: As with e-commerce, AI-powered chatbots can help customers with simple and common problems and reduce the workload of customer service representatives. As an additional benefit, a number of popular banking apps offer personalized financial advice to assist their users in managing their finances better.
Profiling of Advanced Risks: A number of financial companies are using Artificial Neural Networks in order to categorize and classify the risk profiles of their users. An enormous volume of unstructured data is used in this process, which is then processed by neural networks.
Fraud Detection: According to the Federal Trade Commission data, consumers reported losing more than $5.8 billion to fraud in 2021, an increase of more than 70% over 2020. Another area where AI can be helpful is that it automatically and proactively blocks access to an account when it detects potentially fraudulent activity.
User Behavior Analysis: In order to be profitable, it is essential to understand what services users desire to use. By leveraging AI APIs, banks and fintech companies can minimize the number of requests and improve efficiency. Unlike other applications, the application is more responsive to users and offers a more personalized experience.
3. Blockchain Technology
Whenever you think of Blockchain and the financial market, you automatically think of cryptocurrencies. Even though Bitcoin, Ethereum, and other cryptocurrencies have influenced financial markets globally significantly, they are not the only blockchain applications responsible for shaping FinTech trends.
A distributed ledger technology, or blockchain, allows users to record, share, synchronize, and distribute data across a distributed network of computers. It is the foundation of many innovative solutions emerging in the financial sector. Innovations in the fintech sector are driven by solutions such as zero-knowledge proofs and smart contracts.
Here are some of the most important fields in which Blockchain technology is impacting FinTech trends:
Decentralized Finance (DeFi): The term decentralized finance refers to software architectures that can validate transactional data without intermediaries. By doing so, customers can access loans and make investments without having to rely on centralized financial institutions. Using DeFi methodology, smart contracts are deterministic, which greatly improves efficiency, security, and transparency while minimizing the risk of rent-seeking intermediaries.
It is undeniable that decentralized finance has gained popularity as the value of DeFi has surged by nearly 50 times in the past 10 months, underscoring the technology’s value for finance.
Settlements in Real-Time: Blockchain allows banks to settle collateral and cash portions of a transaction simultaneously. With Distributed Ledger Technology, digital collateral for financial instruments can be traded more efficiently, scalably, and transparently than ever before.
Zero-knowledge Proof Authentication: Using Blockchain for zero-knowledge authentication is another unconventional application emerging from the FinTech trends. Customer identity is currently verified online by sharing crucial information. By using zero-knowledge proof authentication, online users can share only the information needed for each transaction, while other data is safely stored on the trusted provider’s server. Therefore, user perception of privacy and safety is greatly improved.
Support for Digital Assets: Blockchain contributes to FinTech trends in the institutional investment market as well. A tokenization service for unlisted companies, spot cryptocurrency exchanges, key escrow encryption… all of these services make it easier for companies to access financing options and fuel their growth.
4. Open Banking and APIs
Open banking is also one of the top FinTech trends for 2022, which was also a hot topic last year. Open banking, or open bank data, is the practice of making financial data accessible to third parties by banks and non-bank financial institutions.
The goal of open banking is to facilitate the exchange of financial and transactional information. Secure exchanges of sensitive banking data only take place with the consent of the end users. Despite the fact that using private information in this way may seem counterproductive, it can benefit both financial companies and their customers.
A personal finance example will help you better visualize this. Until a few years ago, managing your finances essentially meant going to your local bank, reviewing their offers, and saving money where you could. The availability of open banking solutions and easy access to account information allows financial companies and banks to provide a much broader range of personalized services. Suppose you want to save for a new car, and the bank recommends a loan tailored to your income and creditworthiness or a lease that is attractive to you.
But what are the impacts of all this on current FinTech trends?
There are three key beneficiaries of the open banking solutions that I would like to point out:
- For commercial businesses – open banking is a valuable asset when maximizing profitability since it actively provides bank client data.
- For financial service providers – advanced services are available through open banking that allows them to diversify their portfolios.
- For customers – it helps deliver customized financial advice and offers based on their unique financial needs.
Technologies like these bridge the gap between traditional banks and FinTech companies. By enabling information sharing among banks and FinTechs, open banking brings Fintechs and banks closer together.
5. Regulatory Technology (RegTech)
RegTech is a term coined by the UK’s Financial Conduct Authority (FCA) that refers to a subset of fintech which concentrates on technologies that may make regulatory requirements more efficient and effective than existing technologies. Simply put, it refers to any technology that ensures compliance with regulatory requirements. RegTech operates across a wide range of financial and regulatory fields. A number of projects are automated by RegTech, including employee surveillance, compliance data management, fraud prevention, and audit trails.
RegTech, which stands for regulatory technologies, assists banks and financial institutions in managing regulatory compliance. RegTech refers to a variety of FinTech solutions that support reporting, compliance management, and monitoring. Since the rise of digitization of the BFSI industry, there has also been an increase in data breaches, cyber hacks, money laundering, and other fraudulent activities, and RegTech companies use automation to solve these challenges. (BFSI stands for the Banking, Financial Services, and Insurance sector.)
RegTech solutions are predicted to dominate FinTech trends in the near future with the help of artificial intelligence and machine learning technologies. Regtech uses AI and big data to reduce compliance risks by providing information about money laundering activities conducted online, which may not be known to a traditional compliance team due to the increase in underground marketplaces.
Real-time monitoring of online transactions by RegTech tools helps to identify issues or irregularities in digital payments. Without technology, managing compliance can be challenging, especially when a banking or financial institution operates under different political and regulatory conditions. Also, every country has different rules regarding anti-money laundering. Compliance can be simplified using regulatory technology services, whether it is KYC or anti-money laundering.
6. Online-Only Banks
The world of digital banking encompasses many different tools and FinTech trends, but there is one thing all of them have in common: digital banking has been steadily expanding more than ever before. And Online-Only Banks are just enhanced versions of such FinTech trends. Furthermore, digital-only banks have lower operating costs due to their lack of infrastructure and human resources requirements.
Here are some key advantages of Internet Only Banks:
- Cost-Effectiveness: Online banks do not require human staff or expensive main street locations. Instead, they exist only in virtual reality. The advantage of this is that they do not have to bear all the overhead costs that brick-and-mortar banks deal with. These savings can therefore be passed on to consumers by internet-only banks. Consequently, internet-only banks offer all their services at lower prices to their customers. As long as a customer has some other type of relationship with the bank, they can use their infrastructure to transact for free in some of these banks.
- Higher Interest: Lower costs don’t just reduce fees; they also result in cost savings. This also results in the banks offering their customers higher interest rates. There is a reputation among internet-only banks for offering higher interest rates regardless of the type of savings product chosen. Despite the fact that these banks seem like amateur novice banks competing against legacy banks with hundreds of years of heritage, many customers prefer to park their funds there.
- Added Services: Last but not least, internet-only banks offer some of the highest quality services. These banks, for example, partner with software makers for personal finance apps that allow you to track your spending. Using the app, you’ll receive budgeting tips and get a forecast of your financial situation. Also, they may allow you to set up alerts so you don’t have to worry about late fees.
Banks offering digital-only services include contactless MasterCards, peer-to-peer money transfers, international remittances, etc. With the availability of digital infrastructure in modern times, banks can provide customers with banking services without requiring them to visit the bank physically. Ultimately, this is what digital-only banks are all about. Online-only banks operate without any physical infrastructure. Instead, they invest in high-tech computer infrastructure that enables them to service their customers more effectively and efficiently.
Conclusion: We are entering the era of connected customers!
Online banking is no longer a one-stop shop when it comes to the convenience of doing financial transactions online. With more and more FinTech trends appearing almost on a daily basis, customers nowadays prefer to use their mobile devices for virtually everything, from trading to transportation to shopping to banking. Consequently, digital and tech-savvy customers require their banks to go mobile and innovative.
The AximTrade Trading App is certainly one such effective trading application that goes hand in hand with the leading FinTech trends dedicated to assisting you in everything that has to do with the market. As a top financial service provider and award-winning broker, AximTrade maintains maximum compliance with international regulatory standards and best business practices for traders’ safety and protection.