Over the years, the financial sector has been majorly influenced by technological and digital advancements through the adoption of innovative tools and processes in the products and services provided by this sector.
Financial Technology (Fintech) powered by technological advances has altered the traditional financial landscape, challenging corporate giants that once dominated the mainstream banking service offerings. This disruptive movement has paved a path for innovations that seemed inconceivable decades ago, but today, are influencing the way we pay, receive, and perform varied financial services with ease, convenience, enhanced products, and efficient service delivery.
The drive for financial inclusion by policymakers, coupled with the goal of reaching a large consumer base by sector players hasbeen the backbone for emerging technological trends. The progress made so far has been attributed by industry experts to a proliferation in the use of mobile devices and enhanced internet connectivity. Also, Covid 19 has been identified as another major driver of the transformations made by Fintech, as individuals and businesses fell on the products and services offerings of Fintech companies for their every day and operational transactions respectively.
This Article seeks to discuss the fundamentals of financial technology as well as the common terminologies associated with this development.
WHAT IS FINANCIAL TECHNOLOGY (FINTECH)?
Financial Technology (“Fintech”) connotes the infusion of technology into finance – integration of technological and digital tools in the delivery of financial products and services. Simply, Fintech involves the design, deployment, and adoption of software and applications to automate the delivery of financial services which either enhances the delivery of financial services of traditional banks or introduces new products and services beyond the banking halls.
Although traditional financial services are equally delivered with technology, Fintech has been revolutionary and disruptive in a manner that allows for greater consumer choice and freedom. Mainly, Fintech is democratizing financial services in the form of digital payment solutions, mobile money, lending, digital wallets, remittances, embedded financial services, blockchain, and artificial intelligence among others.
HISTORICAL REVOLUTION – A JOURNEY THROUGH THE YEARS
The incorporation of technology in financial products and service delivery dates as far back as the 19th century, through the adoption and investment in communications infrastructure – telegraph and transatlantic cable – which enabled the transmission of financial information across borders. This period is otherwise known as the financial globalization period. The period between the early to mid-twentieth century was characterized by the establishment of a centralized funds transfer service – Fedwire – as well as the adoption of credit cards to reduce cash payments.
The latter decades of the 20th century saw banks spearheading the development of Fintech, by switching from analog to digitalforms of service delivery. During the period, the first handheld calculator and ATM were introduced; followed closely by the formation of NASDAQ, the world’s first digital stock exchange, and later, SWIFT (Society for Worldwide Interbank Financial Telecommunications), a communication protocol designed to facilitate the movement of large volumes of cross border payment transactions between financial institutions. Also, online banking and e-commerce emerged because of the wide adoption of bank mainframe computers. This led to the transitioning of the financial sector into a digital era in the early years of the 21stcentury.
The disruption in the traditional banking system is reported to have escalated after the global financial crisis in 2008, which was characterized by retrenchment and a buildup in the financial sector’s regulations. The crisis exposed the frailties in the existing financial system and generated distrust from consumers in the banks’ service delivery; coupled with the wide range of access to information technology and an increase in the use of mobile devices, new-generation companies seized the opportunity to provide innovative ways of delivering financial services. During that period, the segments which were mostimpacted by these innovations were lending, payments, and cross-border transfers.
Moving on, the introduction of Bitcoin in 2009, had a significant effect on the financial world, and many different cryptocurrencies were also introduced. The current wave of fintech innovation is marked by the adoption of the blockchain and associated technologies. This wave according to the World Bank in its Future of Fintech report, leverages the increasinglysophisticated technology that is in the hands of increasingly sophisticated customers, along with innovations in business models, to disaggregate services and offer new reconfigurations of products directly to individuals and business users.
BENEFITS OF FINTECH
Despite its related challenges and risks, some benefits derived from the adoption and use of fintech include: –
▪ Customer Services and Revenue: The products, services, and solutions of Fintech companies are customer-centric, and the use and adoption of digitized financial processes like Artificial Intelligence and Big Data are helping enhance data analysis, which is used in understanding consumer patterns, managing risks, and improving products to suit consumer needs. This results in client retention as businesses are able to satisfy needs more accurately through the provision of varied tailored services andsolutions, leading to increased revenue for these businesses.
▪ Reduced Costs: Operational costs of businesses are reduced to a considerable minimum through the combination of both physical and digital payment services on a consolidated platform – using a single interface. Incidentally, these digital channels enable businesses to reach a broader market without the need for high-cost physical infrastructure. Likewise, the ease of access to digital banks through increased connectivity and cloud-based computing coupled with customer access to digital search enables businesses to locate and serve a dispersed niche of customers.
▪ Convenience – Fintech provides a better and more reliable customer experience by streamlining products and services to meet customer needs by enabling the use of historical data, as well as securing customer transactions through the use and adoption of digitized modules. The delivery of financial services via mobile apps, web-based sites, etc. is facilitating the ease of use of financial services – mostly, customers no longer need to visit bank branches to perform a wide range of financial services with the advent of Fintech.
▪ Efficiency – A feature of Fintech lies in the automation of financial services. For instance, the digitized mode of operation allows for the analysis of the profiles of credit applicants, storing data in the cloud, as well as streamlining payment methods. As noted by the World Bank Group, automated data-driven processes can serve low-value/high-volume segments efficiently and profitably. Products can be configured and tailored to meet specific needs of a particular consumer or business segment…”
▪ Accessibility – There is the ease of access to a wide range of financial services through the increased use and patronage of mobile and internet-connected devices. Also, new opportunities for the removal of geographical and physical barriers to services have been created, thereby making information more widely available to consumers and providers alike.
SOME RELEVANT TERMINOLOGIES
Below are some relevant terminologies associated with Fintech:
▪ Artificial Intelligence (AI): It is the ability of machines and devices to demonstrate human intelligence in executing human-like tasks through the study and analysis of individuals’ behavioral patterns from their activities on a network or platform. AI has been adopted across various sectors and industries because of its speed, precision, ability to predict market trends, improve customer experience, fraud detection, low-cost services, etc., and has aggressively beendeployed in the design of many Fintech products and services.
▪ Alternative Finance: It is the funding provided outside the traditional finance system. Thus, financing products – including venture capital and debt – address gaps in the mainstream financial markets.
▪ Big Data: This refers to large volumes of data gathered and processed by businesses and industries on consumers which are used to generate information for analytical projects – machine learning and predictive modeling. This data is used by stakeholders for evaluative and predictive purposes – consumer preferences, spending patterns, investment behavior, marketing strategies, fraud detection, etc.
▪ Blockchain: It is essentially a distributed ledger of transactions shared across a network of computer systems, with each transaction forming a secured encrypted block in a chain form. It operates on the Distributed Ledger Technology which is a decentralized database managed by multiple participants.
▪ Central Bank Digital Currency (CBDC): this is the digital version of a country’s fiat. An example is the eCEDI.
▪ Crowdfunding: It describes the process of raising money for a new project or venture on a platform from a large group of people, where each contributes a quota of the required funds. It has proven to be one of the effective modes of raising funds to support several purposes – charity, equity, and debt financing.
▪ Cryptocurrency: It is a digital asset of a decentralized network operating on cryptography, and can be traded, utilized as a medium of exchange, and used as a store of value.
▪ Decentralized Finance (DeFi): It mostly operates on a peer-to-peer network and eliminates intermediaries and permits decentralized banking to achieve an open, trustless, and permissionless financial market.
▪ Deep Learning: It is a technique that teaches a machine to process inputs to classify, infer and predict outcomes. In essence, it provides AI with the ability to mimic the functioning of a human brain.
▪ Digital Assets: These are non-tangible assets that are created, traded and stored in a digital format.
▪ Digital Currency Exchange: A digital currency exchange (DCE), also known as a crypto exchange, is a marketplace that allows for the purchasing, exchanging, and selling of digital currency as a legal tender.
▪ Distributed Ledger Technology: It is an infrastructure that allows a database to be distributed across a network of nodes, removing the need for a central authority.
▪ Embedded Finance: It generally refers to integrated financial services on a single platform without recourse to conventional banking services. It enables consumers’ access to in-appfinancial offerings.
▪ Fiat Currency: This refers to a government-issued currency that is not backed by a commodity.
▪ Internet of Things (IoT): IoT refers to the collective network of connected devices and the technology that facilitates communication between devices and the cloud, as well as between the devices themselves.
▪ Machine Learning (ML): This relates to the automatedprocess where a machine draws inferences and decisions based on users’ past experiences, to arrive at possible conclusions through identified patterns and an analysis of these patterns. ML has proven effective and efficient in the operational activities of businesses, firms, and industries.
▪ Neobanks: Unlike physical banks, these are platforms designed by Fintech firms to provide online financial services to customers using software, apps, and related technology for reduced transactional costs to customers.
▪ Peer-to-Peer (P2P) Lending: This is a form of direct lending of money between individuals and/or businesses without the requirement of an intermediary – financial institution. The process involves matching lenders with potential borrowers on online platforms.
▪ Robotic Process Automation (RPA): This refers to the process of assigning manual task – transaction management, data collection, regulatory compliance management – to robotics to streamline workflows.
▪ Sandbox: It is a digital framework designed to serve as a regulatory testing ground for unregulated/unsupervisedinnovative financial products or services to align them withinthe compliance stream.
▪ Smart Contracts: These are programs that use codes to define and enforce contracts on a blockchain. Typically, they are used to automate the execution of an agreement to provide certainty on expected outcomes without the need for an intermediary.
▪ Virtual Currency: It is a digital representation of value used as a medium of exchange, a unit of account, or a store of value, but has not attained the status of legal tender.
▪ Wallet: It is simply a digital storage unit for money and digital assets – cryptocurrencies, public and private keys, etc.
▪ Web 3.0: It is the next generation of the internet which usesArtificial Intelligence (AI), Machine learning (ML), and blockchain technology in assembling and handling information.
CONCLUSION
Innovations have come to stay, and the Fintech ecosystem is fast evolving across the globe. With each passing day, we are experiencing a build-up on existing innovative trends to better serve the changing demands of consumers in a competitive market. Individuals, businesses, and policymakers can leverage the many benefits provided by these innovations to access efficient and cost-effective services, boost revenue, and promote socioeconomic growth. Hence, understanding the fundamentals of Fintech is imperative for its useful purposes.
ABOUT THE AUTHOR
CECILIA ANTWI KYEM is a Trainee Associate at SUSTINERI ATTORNEYS PRUC (www.sustineriattorneys.com). Cecilia has an interest in Financial Technology and Innovations, Startups and SMEs, Commercial Transactions, Company Law, and Contracts, as well as ADR. She welcomes views on this article and is reachable at cecilia@sustineriattorneys.com.
