Technology-driven pioneers are changing the face of finance

  • Established fintech players pose a real threat to traditional financial service providers, who must adapt or die.
  • McKinsey has identified seven key technologies that will drive competition and reshape business models over the next decade.
  • They include artificial intelligence, cloud computing and the internet of things.

For some of us, it’s an ugly abbreviation, but one that’s increasingly integrated into the modern lexicon of finance. Fintech – short for financial technology – has come to symbolize all things cutting edge financial products and services.

Fintech’s reach ranges from digital banking apps and payment processing to cutting-edge trading platforms and space-age robo-advisors that automate financial planning and investing without the need for human interaction.

And its established players are seen as the most potent threat to traditional financial services providers – banks, in particular – unencumbered as they are by tangled webs of legacy IT systems or customer portfolios with mortgages and submarine loans. Or, above all, expensive physical branch networks.

Fintech is one of the six themes Fix the future grouped under the megatrend of technological change. Its sprawling impact is evident in more than 1,000 companies around the world, from 30 different industries, whose fortunes we judged to be affected by the rise of fintech.

These companies range from the less surprising – banks, fund managers and insurers – to the less surprising, such as recruitment companies, advertising agencies and online retailers. All are owned by the world’s elite fund managers.

The justification

The thinking is pretty clear: the more consumers buy and borrow online and digitally, the less we need our branches to pay by checks and withdraw cash. And the more we expect our banking apps to be nifty, processing transactions and updating our balances in an instant, and allowing us to take out secured loans, securely, in minutes.

Behind the simplicity of the idea, however, lies an array of highly sophisticated technologies, pioneered by some of the newer players in the financial industry, but rapidly being adopted by incumbent banking giants.

In a report released late last year, consultancy McKinsey argued that seven key technologies would drive competition and reshape the business models of financial firms over the next decade.

Briefly, they are: Artificial Intelligence, Blockchain, Cloud Computing, Internet of Things, Open Source Software, Low- or No-Code Development Platforms, and Hyper-Automation.

Artificial intelligence

Specifically, McKinsey argues that the application of artificial intelligence and machine learning — identifying patterns in complex financial networks and disparate data sources, for example — is capable of generating $1 billion in added value to the banking industry worldwide, every year.

Artificial intelligence is already helping banks introduce digital assistants into their apps and websites, and protect customer data and privacy with tools like facial recognition. But McKinsey also highlights its potential to introduce smart elements into behind-the-scenes activities, such as transaction processing and fraud detection.

$1 billion

additional value AI could generate for the banking industry each year, says McKinsey

blockchain

Blockchains, sometimes used by so-called distributive ledger technology, seem complex, but they essentially allow transactions to be recorded and stored in many places at the same time. The simplest example is digital wallets on mobile phones; these may store our bank details and process transactions as if we were using duplicate cards.

This type of technology is also being used by central banks to explore the idea of ​​creating their own digital currencies – and McKinsey points to opportunities for blockchains to help improve monetary policy oversight. Essentially, this means controlling the supply of money in an economy by being better able to see how, when and for what it is spent, and therefore spot when more or less is needed.

The cloud

The ability to store data in the cloud is by no means unique to financial institutions, but McKinsey notes that this capability, and in increasingly advanced ways, frees banks from non-core computing and storage activities. of data. At the same time, it allows them to honor their security and privacy obligations to customers.

The cloud is helping to change the way banks operate, driving developments such as open banking and banking as a service. These models serve different purposes, but both involve banks providing their services to non-banking businesses, primarily through third parties. An example is an airline or retailer that can offer cards or loans to its customers without having to have a banking license.

Technical winners

In summary, the authors of the McKinsey report state, “These key technologies and trends are increasingly intertwined and integrated, giving a massive boost to fintech and financial industry innovation.

“As things stand, it is the niche financial sub-sectors that are most adept at harnessing technological innovations to launch applications, generate value and shape the competitive landscape. And that’s where the best players in fintech come in.

Ugly abbreviation or otherwise, fintech is here to stay. And investors are betting as much on its ability to transform anemic, age-old financial institutions as they are on new players emerging in their own right.



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