Industry Sectors FinTech Is Disrupting and Improving

In this article, we look at some business types in more detail to see how traditional financial firms are being shaken up — and improved — by FinTech disruptions.

What is FinTech? FinTech is an overarching term for the combination of finance and technology. However, within FinTech, many subcategories apply to specific sectors of the financial world. Here’s a quick summary of them:

• Capital Markets Tech, in which companies leverage newer technology such as artificial intelligence, machine learning, and blockchain, is led by seasoned capital markets veterans and is both collaborating with and disrupting the financial services incumbents.
• WealthTech unites wealth and technology to provide digital tools for personal and professional wealth management and investing. This sector includes brokerage platforms, automated/semiautomated robo-advisors, and self-directed investment tools for individual investors and advisors to navigate the changing landscape in wealth management. For more information, check out The WealthTech Book, edited by Susanne Chishti and Thomas Puschmann (published by Wiley).
• InsurTech is a combination of insurance and technology. It refers to innovations that generate efficiency and cost savings from the existing insurance industry model. For more information, see The InsurTech Book, edited by Sabine L. B. VanderLinden, Shân M. Millie, Nicole Anderson, and Susanne Chishti (published by Wiley).
• RegTech is a community of technology companies that solve regulatory challenges through automation. The increase in major regulatory policy and the rise in digital products have made it imperative for companies to check for and implement compliance issues, and this can be difficult with old, manual processes. For more information, refer to The RegTech Book, edited by Janos Barberis, Douglas W. Arner, and Ross P. Buckley (published by Wiley).
• PayTech refers to the combination of payments and technology. Innovative payment services now form part of the PayTech ecosystem and have dominated the early days of the FinTech revolution through mobile, cross-border, peer-to-peer, and cryptocurrency payments. Financial institutions have had to digitize their current offerings to create new channels linked to a digital platform. For more information, see The PayTech Book, edited by Susanne Chishti, Tony Craddock, Robert Courtneidge, and Markos Zachariadis (published by Wiley).
• AI in Finance refers to how artificial intelligence, machine learning, and deep learning are applied across financial services companies today and how they could be used in the future. For more information, see The AI Book, edited by Ivana Bartoletti, Susanne Chishti, Anne Leslie, and Shân M. Millie (published by Wiley).
• LegalTech combines the nature of legal technologies and their relationship with data, the Internet of Things (IOT), cybersecurity, and distributed ledger technologies as well as ethical considerations of the technological advancement. For more information, refer to The LegalTech Book, edited by Sophia Adams Bhatti, Susanne Chishti, Akber Datoo, and Drago Indjic (published by Wiley).

Banks

Some larger financial institutions have adopted the phrase “We’re just a technology company that happens to have a banking license.” This is mostly a marketing gimmick, although it’s perhaps partially true for some of the new challenger banks that are attempting to disrupt the incumbent banks. However, with customer acquisition costs high and increasing regulatory hurdles to surmount, new challenger banks need to decide whether they will build their technology stack themselves or work with FinTech partners to develop the innovation required to topple the incumbents.

The financial institutions that are effectively managing this move to become FinTech companies are those that understand how to move quickly to deliver what the consumer needs in an industry on the verge of further change. Most of those who succeed have taken a hybrid approach, focusing on partnerships, acquisitions, and internal initiatives.

Several incumbent banks are known to be developing new digital-first products in a bid to keep the new wave of challenger banks and providers in the background; an example is Bo from the Royal Bank of Scotland. They are also gradually adopting much more ambitious cloud-based platforms (despite their paranoia about their data being hacked) on which they can offer or launch numerous products. These initiatives are being supported by the likes of Amazon, Google, and Microsoft, which provide cloud hosting services and enable banks to develop core banking Software-as-a-Service (SaaS) platforms with the required encryption security.

Asset management

Traditionally, serious investors have valued personal investment advice from human experts, and they haven’t minded paying for it. However, the asset management industry has been attacked from two different angles:

• One of these is the march toward passive investments (such as exchange traded funds, or ETFs) over active asset management. ETFs are traded like stocks where the holdings track to some well-known index, such as the Standard & Poor’s (S&P) 500.
• The other is the rise in popularity of robo-advisors, which use ETFs as a strong part of their strategy. A robo-advisor is an investment selection tool that uses algorithms and machine learning to offer investment advice and management to users.

The trend toward passive asset management has been apparent for some time in the retail/business-to-consumer (B2C) space, but we’re lately also seeing it with the larger business-to-business (B2B) investors as the stock market index returns continue to rise and they are looking to cut costs to further enhance returns for their clients.

WealthTech firms are enabling investors to self-manage their portfolios by offering users technology-enabled tools to help make investing decisions. These tools can include full-service brokerage alternatives, automated and semiautomated robo-advisors, self-service investment platforms, asset class specific marketplaces, and portfolio management tools for both individual investors and advisors. They consider not only investment opportunities but also factors such as a user’s goals, income, marital status, and risk aversion to differentiate on their offering. They enable those who can’t afford a traditional financial advisor to have similar — if not more informed — advice at a lower cost.

Insurance

If the banking and asset management firms think they have it tough with the rise of FinTech firms, there are many that believe that the insurance industry is even more prone to disruption — and innovation.

InsurTech firms initially started to explore offerings that large insurance firms had little incentive to pursue. For example, they offered customers the ability to customize their policies, and they used internet-enabled devices to collect information about behavior (such as driving habits) that could be used to dynamically price insurance premiums.

Traditionally, the insurance market has worked with relatively basic levels of data to group respective policyholders together to generate a diversified portfolio of people. However, InsurTech firms are tackling their data and analysis issues by taking inputs from various devices, including GPS tracking of cars and activity trackers on wearables so that they can monitor more defined risk grouping and therefore allow certain products to be more competitively priced.

In addition to better pricing models, InsurTech firms are using highly trained artificial intelligence (AI) to help brokers find the right mix of policies to complete an individual’s insurance coverage and credit score. In some cases, they can replace brokers entirely, further disintermediating the process (and saving costs). Apps are also being developed that can combine contrasting policies into one platform for management and monitoring. Some of the benefits of that might include enabling customers to purchase on-demand policies for micro-events and enabling groups of individual policyholders to become part of a customized group that is eligible for rebates or discounts.

Insurance is also a highly regulated industry. Major brokers and underwriters have survived by being both prudent and risk averse. They are therefore suspicious of working with InsurTech start-ups, particularly those that want to disrupt their stable industry. Many InsurTech start-ups require the help of traditional insurers to handle underwriting issues, so the incumbent players here are likely to collaborate with and invest in their junior partners.

Regulation and legal work

RegTech is the management of and compliance with regulatory processes within the financial industry, using technology to address regulatory monitoring, reporting, and ongoing compliance. The predominantly cloud-based, SaaS offerings to help businesses comply with regulations efficiently and more cheaply act as the glue between the various sectors of the financial services industry described earlier.

LegalTech describes technological innovation to enhance or replace traditional methods for delivering legal services across financial services and beyond. This innovation includes document automation, predictive artificial intelligence, advanced chat bots, knowledge management, research systems, and smart legal contracts to increase efficiency and productivity and reduce costs.

With the use of big data and machine-learning technology, RegTech and LegalTech firms reduce the risk to a financial institution’s compliance and legal departments by identifying potential threats earlier to minimize the risks and costs associated with regulatory breaches and any legal work.

RegTech firms can combine information from a financial institution with precedent data extracted from prior regulatory events to forecast probable risk areas that the institution should focus on. LegalTech firms can help financial institutions draft documents, undertake legal research, disclose documents in litigation, perform due diligence, and provide legal guidance.

These analytical tools can save institutions significant time and money, including saving them from having to pay fines levied for misconduct. The institutions also have an effective tool to comply with ongoing rules and regulations specified by financial authorities, which are constantly prone to amendments.

Payments

From banknotes to coins to plastic cards and mobile devices, payments have evolved over the centuries to include a number of ways to help financial transactions take place between individuals, institutions, and governments. Payment technologies and global infrastructures that facilitate payments around the world also are changing.

Over the last few years, mobile money has helped millions of people in developing countries get access to the financial system and tackle the goal of financial inclusion. Digital and cryptocurrencies such as Bitcoin, Ripple, and Ether have also entered the payments sector, which is innovating more rapidly than ever with the goal to move value cost-efficiently in real time and at near zero cost. As a result, the PayTech sector is booming; established players closely work with newcomers as there is no end to the creativity of the PayTech and payment industry.