The first chapter of our Fintech A to Z breaks down automation, banking, commerce, data and economy in terms of the fintech sector.
We’re welcoming the uninitiated to the exciting world of fintech with a comprehensive primer on all the key trends and terms in fintech.
Here you’ll find in-depth explainers on the advent of automation, the transformation of banking, changes in commerce, the potential of big data, and an emerging new economy.
Automation
Given the sheer amount of data generated in the financial industry, both by established banks and disruptive fintech start-ups, automation is becoming a crucial cog in this global machine.
Behind this automation lies the hunt for the ultimate algorithm, an artificial intelligence (AI) capable of taking raw data and turning it into high returns for investors in the blink of an eye. Perhaps the best evidence of the increasing importance of financial algorithms was the appointment of one such form of AI to the board of VC firm Deep Knowledge Ventures back in 2014.
These powerful algorithms give us teams of virtual ‘robo-advisors’ that are able to create financial portfolios for clients without human intervention, giving rise to fears among financial planners that their jobs are under threat.
While not believed to threaten investment managers, a recent Citi report estimates that bots now manage approximately $20bn of assets globally. Going by current trends, this could one day increase to as much as $13.5trn.
Additionally, in the increasingly influential area of cryptocurrency and blockchain ledgers, ‘smart contracts’ are continuously written and signed from one AI bot to another, to instantly articulate and verify every financial transaction. This practice has added considerable legitimacy to cryptocurrency transactions and, some speculate, could permeate into the legal world, too.
Banking
Banks are what most people picture when they think of the word ‘finance’. The best-known, most obvious and tangible financial institutions, banks have traditionally been secure places to save money and manage bills.
But, through digital transformation, banks’ services have dramatically changed in recent decades. Most dealings are now online or, at the very least, offsite. On average, we interact with banks 17 times a month, and only twice in branches.
Overstocked with branches and frontline staff, banks are busy restructuring their labour pool with software engineers and programmers to help drive the next wave of customers into their grasp. Sitting between two worlds, banks are essentially armed with both outdated bayonets and modern assault rifles, struggling to sell off the former while the latter are overused in action.
Last December, European research institute BearingPoint found that the vast majority (91pc) saw retail banking as the most important area to leverage digital technology, while only 17pc said they have achieved a high degree of digitalisation on this side of the business. Observing their own industry, banks will acknowledge the competitive advantage of being early adopters, but the majority describe themselves as ‘second movers’.
But if the banks can’t keep up with customers’ demands, somebody else will. And, for customers, tomorrow’s banking will be cheaper, quicker and, hopefully, require less ‘on hold’ music.
SEE ALSO: MOBILE, START-UPS, THREATS, YOUTH
Commerce
E-commerce is practically all-encompassing at this stage, with any internet-supported transaction (transferring funds online, wiring money abroad, buying items in-store with your bank card etc) falling under this broad heading. In truth, it’s now incredibly rare for any non-cash purchase to involve an entirely e-commerce-free route from buyer to seller.
Mobile, or m-commerce, pertains to buying and selling products over mobile devices. Various supports for this have emerged to provide consumers with easier ways to buy things, such as digital wallets like Apple Pay. Behind the scenes, these services handle all the information that travels from buyer to seller and back again.
Data
With estimates that one zettabyte of data was generated in 2015, the potential for this raw information to be harnessed by fintech firms is vast.
The big data technology and services market is forecast to have an annual growth rate of 26.4pc through 2018, reaching a value of $41.5bn, and access to the behemoth that is big data is replete with opportunities for industry overhaul.
When it comes to basing fintech portfolios on the results of big datasets, data aggregation (with much of the grunt work taken up by AI) takes this data and turns it into plain-language summaries for the sake of the end users. These same programs are recruited to join the dots between patterns that develop on both a consumer and market level, to determine what course of action would lead to the greatest financial reward.
This fintech-related data is typically stored in cloud-connected data centres rather than vast server rooms within the confines of the company. However, as we’re talking about sensitive financial information here, the security of this data storage is critical. William Fenick from Interxion recently commented that having a sound data infrastructure is more vital than ever, specifically for fintech companies.
SEE ALSO: AUTOMATION, HACKERS, JARGON
Economy
Economy is obviously a wide-reaching word, but one particular area in which fintech is having the biggest impact is the collaborative, or sharing, economy. With PwC predicting that the sharing economy will be valued at €335bn by 2025, this is an innovative area to watch.
This hybrid market model stems from initiatives based on the participation of a community, such as peer-to-peer sharing of access to goods or services co-ordinated through online means. Credit unions would be old-school members of the offline collaborative economy, while Lyft and Airbnb are two of the biggest members of the ever-growing modern sharing economy.
New and innovative entrants to the collaborative economy are also allowing companies to access finance through methods such as peer-to-peer lending and crowdfunding, effectively bypassing traditional banks.
Insurance is another area being affected by moves towards a more collaborative economy, with companies like Guevera allowing people to join a group of fellow car insurers with the aim of all making minimal claims in order to reduce everybody’s premiums for the next year.
The complete fintech A to Z
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Piggy bank image via Shutterstock
