In the next 10 years, seven key technologies will drive business model reinventions while shaping the competitive landscape of the financial industry.
Technology is the driving force behind fintech development and will continue to create new and innovative financial business models.
According to McKinsey analysis, seven key technologies will drive fintech development and shape the competitive landscape of finance over the next decade:
1. Artificial Intelligence will Drive Massive Value Creation
This estimate by McKinsey shows that AI has the potential to bring in one trillion dollars of value to the banking industry every year.
Banks and other financial institutions are expected to adopt an AI-first mindset that will better prepare them to resist encroachment onto their territory by expanding technology firms.
As machine learning advances, it will become more common for financial firms to automatically identify the factors that lead to Outperformance. This will help to improve financial modeling across the sector.
Graphs and graph computing will play a greater role in AI semantic representation.
The ability of artificial intelligence (AI) to help identify patterns and associations across complex financial networks, using a variety of data sources, will have a major impact in the future.
Analytics that protect privacy will encourage the use of only the relevant, necessary and appropriate sanitized information in the training of financial models.
Federated learning is a decentralized form of machine learning that mitigates the privacy risks associated with centralizing datasets by moving the computational power closer to the data itself, rather than the other way around.
Tools that allow for advanced encryption, secure multi-party computing, zero-knowledge proofs, and other privacy-aware data analysis will help create a new landscape of consumer protection.
The financial industry will be heavily relying on AI applications in the future, using it in various aspects of their operations including the front, middle, and back offices.
Applications that face customers include products tailored to them, analytics and user experience services that are personalized, service robots that are intelligent and chat interfaces, as well as market trackers, automated transactions, and robo-advisors. An alternative to credit ratings based on financial data is facial recognition authentication.
Middle-and-back office applications include processes that are designed to be more efficient, tools that allow for better organization of knowledge (such as knowledge graphs), and natural language processing in order to detect fraud.
While many financial institutions are beginning to use AI, it is often only in a limited way, and only for specific tasks or goals.
But bank industry leaders are systematically deploying AI across the entire digital operations life cycle. The financial industry is recognizing that the success of algorithms is reliant on the data used.
More and more companies are turning to using customer behavior data to get a leg up on the competition. This data was previously underutilized, but is now seen as a valuable asset.
This will allow for more efficient use of resources and financing, as well as unlocking the potential for customer experience in areas that have not been explored before.
By partnering with non-financial companies, banks and other financial service providers can create a smoother customer experience in areas that would otherwise be unavailable to them.
Banks that focus on artificial intelligence will be more efficient in their operations by automating manual tasks and using advanced diagnostics to replace or supplement human decision-making.
If we use AI technologies such as machine learning and facial recognition on large and complex customer data sets, we can improve our operational performance.
In the future, banks that prioritize AI will also be faster and more agile, like companies and users who are used to digital technology. The company plans to release new features much quicker than before, with new updates coming out within days or weeks instead of taking months or years.
In order to offer new value propositions, banks will need to collaborate extensively with non-bank partners. This collaboration will need to be integrated across journeys, technology platforms, and data sets.
Some of the use cases of AI in FinTech include the following:
- Purposing chatbots into virtual assistants to answer customer queries, offer suggestions, and complete repetitive tasks
- Deploying Natural language Processing (NLP) to enable human-like communication with virtual assistants and enhance customer engagement
- Using AI algorithms to detect suspicious activity to prevent fraud, such as flagging suspicious transactions or insurance claims
- Customer segmentation to offer tailor-made products based on risk score profiling and to facilitate faster loan approvals
Mordor Intelligence predicts that the global A? market will be worth $26.67 billion by 2026 as more and more companies cotton on to its potential as a business tool.
2. Blockchain will Disrupt Established Financial Protocols
Distributed ledger technology allows data to be recorded and shared across multiple data stores, and for transactions and data to be recorded, shared, and synchronized across a distributed network of participants at the same time. This allows for a more efficient and secure way of handling data and transactions.
Some DTLs store and transmit their data using blockchains. They use cryptographic and algorithmic methods to record and synchronize the data across the network in an immutable manner.
Maintaining financial transaction data in multiple locations will become increasingly important in the funding of ecosystems.
As cross-chain technology improves, it will allow different blockchain protocols to share data and value more easily, including for payments processing and supply chain management.
Technologies that are key to existing fintech innovations, such as smart contracts, zero-knowledge proof, and distributed data storage and exchange, will continue to play a prominent role.
The adoption of blockchain by traditional investors has led to an increase in investment in digital assets.
Many of the most cutting-edge financial technology solutions now have blockchain components to appeal to a group of crypto-currency fans and to allow them to access the rapidly-expanding crypto-currency markets.
Other financial organizations should also take notice of this growing trend in financial technology. central banks are exploring the idea of a digital version of their currency that would exist alongside cash
Another example is J.P. Morgan is improving transactions by reducing the time it takes to process and verify large payments.
As more institutional investors and funds begin to invest in digital assets, the potential for blockchain and distributed ledger technology to disrupt established markets increases.
DeFi is a form of finance that uses smart contracts to remove the need for a central intermediary.
The locked-up value of digital assets in the DeFi sector has surged by nearly 50 times in the past 10 months and is now worth $2.1 trillion.
This $15 billion in revenue from digital asset exchanges shows how much value blockchain technology has.
The effect of DLT is also being felt in government policymaking and regulation.
BIS found in a survey that approximately 60% of central banks are currently testing or studying Central Bank Digital Currency.
The People’s Bank of China has begun operational trials of a digital RMB to improve oversight of monetary policy and resource allocation at the macro level.
Other blockchain applications worthy of mention include:
Real-time transaction settlement
Banks are utilizing smart contracts to settle the collateral and cash component of a transaction simultaneously. Furthermore, Transaction processing, securities lending, and equity trades can be settled on the blockchain to improve the efficiency and scalability of cross-border sales.
Blockchain-based digital collateral can make capital management more efficient, transparent, and secure, as well as settle equity after transactions.
Digital asset support services
Institutional investors want to be able to use DLT for things like tokenizing unlisted companies or private equity funds, exchanging established currencies for cryptocurrencies on digital exchanges, and having services to keep keys safe for customers.
Authentication ecosystems based on zero- knowledge proof
Customers are sharing information with partner institutions to verify their identity, simplifying authentication procedures and offering streamlined access to health records and government services.
The trusted provider keeps all data safe on their server, and only shares information that is required for each specific transaction.
Decentralized finance (DeFi)
Instead of having a central authority manage financial applications, decentralized applications can do it automatically. This makes it possible to get loans, make investments, or trade financial products without having to rely on a central financial authority.
DeFi uses smart contracts that cannot be changed, which eliminates the risk of one party not holding up their end of the deal, and also cuts out the extra costs associated with using a middleman. DeFi also increases market efficiency by making information available in real-time.
The decentralized finance movement, based on blockchain technology, is creating new opportunities by overturning traditional value chains and structures. As financial policies and regulations change, DeFi is set to grow massively.
3. Cloud Computing Improves Security
Cloud computing provides enhanced security through automated and embedded security controls.
FinTech is associated with the risk of managing sensitive data and complying with industry regulations. Cloud data warehouses have shown to be more dependable than traditional IT systems.
Some of the ways that the cloud better protects against data leakage and fraud include data encryption and zero-trust verification.
As cloud technology becomes more accessible, it is changing the way we live our lives.
Any organization can use it to securely share data and create dynamic applications, which can be used in any industry!
Cloud technology will have a great impact on FinTech’s future scalability. A startup will need an adaptable infrastructure if it wants to experience growth.
Cloud infrastructure is easier and cheaper to upgrade. This allows businesses to more easily pivot when market changes occur, such as consumer demand, regulatory compliance, and the implementation of new technologies.
4. IoT Collects Customer Financial Data More Efficiently
IoT communication options are becoming increasingly popular among FinTech firms as they enable devices to communicate across connected networks, from wireless and end-point devices to centralized control management.
Additionally, embedded systems and smart technologies are rapidly improving, making it possible for different nodes to communicate with each other smoothly and effectively.
IoT is used in the financial sector to generate data about customers, reduce the need for human input to solve financial issues, detect fraud, and protect data.
As more insurance companies adopt IoT technology, they are able to more accurately determine risk, optimize customer engagement, and simplify the underwriting and claims process.
For example, car insurers have historically used factors such as the driver’s address, age, and creditworthiness to determine premiums.
5. Open APIs Drive Industry Growth
As the world moves toward an open banking system, access to banking data and services through APIs is becoming more common. APIs are important for creating a smooth user experience while keeping information safe on devices.
Open banking allows users to control which data third-party providers can access via APIs. This means that you can connect your favorite fintech personal finance management application to your bank account in order to more closely track your spending.
Banks have the opportunity to learn from and collaborate with FinTech companies rather than compete with them. In other words, this is a good solution for both parties involved because banks usually don’t innovate very quickly.
Whilst FinTech firms are quick to innovate, they lack the financial muscle so collaborating with traditional banks only benefits them.
A revenue-sharing ecosystem could be created where established companies offer services developed by third parties to their customers, and make money from referral fees, infrastructure usage, or subscription services.
API’s can not only be used within a company, but can also be shared with other companies or partners. This fosters ecosystem relationships, allowing for innovation.
The FinTech Ecosystem
The future of the FinTech ecosystem is reliant on different building blocks. Without these blocks, the sector would not be able to advance.
The addition of Artificial Intelligence, IoT, Open APIs, Cloud Computing, and Blockchain will have a huge impact on the ecosystem.
Forward thinking companies need to adopt FinTech innovation software solutions to stay competitive, improve customer experience, reduce risks, and meet regulatory requirements. These solutions have the potential to greatly shape the future of FinTech and offer many benefits.