The times of FinTech
Technology and finance often go hand in hand, as both are dependent on each other. The interlinking of both is called financial technology, or FinTech. FinTech is used to describe technologies that are utilised by the financial industry to enhance financial operations and services. It can simply be defined as technology enabled financial solutions. Its main purpose is to promote smooth financial operations between businesses and consumers. It is used by companies as a business strategy to provide faster and effective operations between employees and customers which helps them compete in an ever evolving market. Such a technology can be in the form of a software or service that provides technological ways to make financial processes more efficient. The major technologies that contribute to FinTech are:
Unified Payments Interface (UPI): UPI is the first thing that comes to mind when one thinks of FinTech. It has revolutionised the FinTech market through an extremely easy way of providing almost all banking services at your fingertips. UPI is helping in making the country cashless and the payments truly digital. Several companies have also started resorting to UPIs to make their transactions seamless.
Artificial Intelligence (AI): Artificial Intelligence is also one of the most used technologies in the FinTech industry. AI is the use of smart machines to perform tasks that are normally performed by humans. Such machines are used to eliminate human error, to increase efficiency. It can also be utilised to provide automated customer support, wealth management, fraud detection, financial analysis etc.
Application Program Interfaces (APIs): APIs facilitate interaction between two different systems through a set of protocols and computing resources. An example of FinTech API would be a platform that allows its users to access their account information and to make online purchases on the same platform or on some other platforms. However, to access the library of that platform, some specific functions and procedures are required.
Blockchain: Blockchain has been on a rise in recent years in the FinTech industry as it helps in securing financial transactions. Due to the encryption of the transactions, the chances of hacking attack are reduced and it also helps in disrupting transaction barriers due to multiple currencies.
Robotic Process Automation (RPA): It is the process in which robots are assigned certain repetitive tasks and such a machine executes it through some pre-programmed rules. This helps the industries to get their routine jobs done automatically with the help of prior decisions and data, resulting in improved speed and quality. Such a technology is utilised in statistics and data collection, sending automated messages through chatbots (use of such technology in financial management is called conversational banking) and regulatory compliance management etc.
Big data and data analytics: Big data provides companies with valuable information regarding consumer behaviour and their future preferences. This data is then analysed by those companies to develop marketing strategies for growth. It can also be used to detect possible illicit activities, by analysing billions of transactions and providing financial access to people who could not access it before.
Cloud computing: Cloud computing is a technology model in which the data is stored on a cloud storage rather than a local server. It enables users to access information stored on the cloud through any computer with an internet connection. The companies also use it to store, share and analyse their data which would increase their transparency. It is less expensive than physical storage of data. Financial companies use cloud computing for data management, and for optimising their payments and transactions.
Analysing the applications of FinTech
Regulatory Technology (RegTech): RegTech is a subset of FinTech. It uses technological developments like cloud computing, big data and machine learning etc. to help the companies comply with regulatory requirements of different countries. Such requirements are mainly related to identity management, transaction monitoring and regulatory reporting. It also helps in identifying potential real time threats, minimising risks and preventing data breaches.
Digital Banking: Digital banking has brought a revolution in the finance industry. It has contributed the most in disrupting traditional methods of financing. Assessing money has become a lot easier these days due to online banking. It helps to avoid problems like check bounce, delayed payment etc. Banks have benefited immensely from FinTech as they do not have to cater to a lot of people coming to them for transferring their money from one account to another as it can be easily done through UPI with just a few taps or clicks. The COVID-19 has been a blessing in disguise for it as most of the people accessed banking facilities in their smartphone rather than visiting banks owing to COVID protocols.
Crowdfunding platforms: FinTech has given rise to a lot of crowdfunding platforms which are used by entrepreneurs to raise funds from all over the world, including friends, family and strangers. Some of those platforms are Kickstarter, Patreon and Crowdcube etc. On these platforms, one can put her/his advertisement showcasing their idea and plan, and ask people to donate if they are fascinated with the idea. Thus, FinTech here helps as an alternative to the traditional way of borrowing loans from banks and other financial institutions.
Robo-advisors: Robo-advisors are platforms that collect information from clients through detailed questionnaires along with their future goals and current financial condition, and then use it to create and manage their investment portfolios. It provides technology-driven financial decision making on the basis of the needs of the clients. Robo-advisors are inexpensive as compared to the traditional human advisors and require a very low opening balance.
Insurance Technology (InsureTech): Insuretech is similar to Regtech but it is applied in case of insurance models. In this, the technology is used to create insurance models, allowing companies to offer tailored insurance policies and data security. It also helps in streamlining the whole process of insurance like online filing of claims and management of policies.
Smart Contracts: These are the self executing contracts mostly made using blockchain technology to remove the middlemen in an agreement between the two parties. It proves very useful for those who do not want to engage banks, govt and other agencies.
It contains a set of rules agreed by the parties which are automatically fulfilled on account on certain actions of the parties. The advantage with such a contract is that once it is signed, it cannot be cancelled. The parties need to conform to the same and the chances of committing a fraud are almost negligible since the computer would execute it in the way it was programmed.
Open Banking: Open banking allows the sharing of financial information through electronic media with the permission of the customer. With the use of APIs, the banks and financial institutions provide personalized financial services and products to its customers, and such services can be utilised through third party softwares made by those institutions. It can also be used to suggest schemes like a credit card, profitable loan terms or a new savings account according to the transaction data of the customers.
Cybersecurity: Cybersecurity and FinTech are interrelated due to a rise in cybercrimes and the decentralization of stored data. The threat of cyber attacks always hovers over the financial systems and must be managed collaboratively. Thus, FinTech can help in protecting such attacks through technology innovations like Multi-cloud data storage, AI fraud detection, Secure Access Service Edge (SASE) networks, Blockchain system and Regulatory technologies etc.
Unbanked and Underbanked Service: Underbanked are those who are not able to fully access the banking facilities, while unbanked are those people who don’t have access to banking and financing facilities at all. Such people generally resort to cash payments and do not opt for any pension or insurance schemes. But nowadays, FinTech technologies like UPI and API among others, help such people to pay digitally with the help of the internet and to access other financial services which were not previously accessible to them.
Case Study: Bank of America’s use of RPA
The Bank of America has invested around $25 billion since 2021 in technological innovations to increase its efficiency and to provide better services to its customers. One of such technological innovation is Robotic Process Automation that helps to do repetitive tasks automatically through the use of algorithms by processing a large amount of unstructured data.
Although there are several types of robots, the ones used by the bank are Meta and Task robots. The former helps in complex process actions and executes other multi stop processes, and the latter leverages API level integrations to create system to system automation. The combination of both types of bots is ideal for performing multi skill processes. The Bank deployed the robots to perform functions like providing services to customers for mortgages and card disputes, mortgage and vehicle servicing, global payment operations and enterprise shared services for exceptions.
The technology helped to improve the consistency and accuracy of the automated processes. Moreover, operational saves due to automations and self serving coding capabilities helped save $100,000 per code request and $350,000 per code change. Thus, the RPA helped the Bank to become cost efficient and increased the productivity which is expected to increase in the near future through the use of more advanced technologies.
Future of finance through the lens of FinTech
FinTech is expected to grow exponentially in the upcoming years as it helps in cost optimisation, providing better customer service and financial inclusion. It has the potential to become the fourth segment of Indian financial system. It can transform the financial market of the country by providing a cheap and broad set of alternatives without compromising the efficiency of such financial operations.
In future, there would be a significant rise in invisible payments, owing to convenience and speedy experience. This would also help the industries to collect the necessary data for providing new services to its customers. There is also a growing demand for platforms which can provide multiple services so the APIs are expected to become more diverse.
Critical analysis of FinTech
FinTech has been at the forefront in making financial operations easier for years by bringing in technological innovations. However, it faces several opportunities and challenges that are concerning.
Due to the excessive use of FinTechs, the issues related to data protection and privacy arise which need to checked by placing appropriate regulations on the service providers. These issues have been arising due to the increase in data that can be accessed online. Also, providing such data, including personal information and financial records, to third parties or customers in such a way that it does not cause breach of any obligations stills remains a challenge for the industry.
Another major issue is the inability to access FinTech services due to lack of internet facilities and trust in such services. In India, almost half of the population does not have access to internet which means they cannot access most of the services provided by FinTech. Furthemore, the lack of trust in online market also creates hindrance in creating more demand for FinTech services which needs to be tackled by the industry to expand its operations to the grassroot level.
Although FinTech is capable of revolutionising the finance industry, it comes with a lot of safety and security concerns which cannot be overlooked. Thus, it becomes imperative to communicate the ways through which they can avoid being hoodwinked. Also, there should be transparency in the system to gain the trust of the people which is necessary for consumer engagement for the industries.
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 Supra note 10.