In human history, crisis always brings new changes. The global financial crisis in 2008 paved the way for fintech companies to grow to an extent to which it is now. The crisis due to the coronavirus could bring potential opportunities to accelerate the growth of FinTech companies.
Global investment in fintech companies has reached $135.7Billion [5]. It is expected to grow further due to involvement of big tech companies in fintech, the increasing focus on open data opportunities and evolutions in recent technologies such as Machine Learning, Artificial Intelli-gence, IoT and blockchain [5].
The most important technologies and infrastructure that aid in providing various financial services effectively, and the combination of such financial activities and relevant technologies used will be discussed further in segments [6].
Source: (Value of Fintech, KPMG, Oct 2017)
Fig 1: Financial sectors broadly covered by Fintech
2.1. Fintech in Payments
Payments are financial instruments that are used by customers and corporates worldwide to transfer funds. Payment systems are considered to be getting very complex and extensive as there many payment systems every country and every payment system has unique processing techniques. Also, they have to comply with the regulatory requirements of the country in which it is used [7].
Fig 2: Payment system classification
2.1.1. Digital Payments
Cash payments and banking with cash was a convenient system 25 years ago where the popula-tion was not enormous and when there was no technological advancement. After the population grew enormously, payment operations started getting a bit cluttered and electronic payments be-came the new face of payments with advancements in IT. Later Digital payments and e-payments became popular and further they evolved into e-wallets where people can load money into their e-wallets and then make payments to anyone with a tap, or by using NFC/QR codes [8].
Source: (Ghosh, et al., 2017)
Fig 3: Classification of digital payments
The payment ecosystem has both public and private firms that include Financial institutions, Technology companies, payment processors, credit card companies, e-commerce companies, and communication enterprises across many countries. In the past, payment models were dominated by banks and card networks, but in recent years, Fintechs are providing more efficient and faster payment framework and in the future, it is anticipated that the blockchain technology will drive the payment system by reducing all intermediaries [9].
In the current payment business model, there are four categories that work together to pro-cess the transaction.
Source: Financesonline.com/payment-gateway-processor-difference
Fig 4. Overview of the digital payment process flow
Payment gateway – payments were sent as online transactions to and from customers and banks. The transaction data then goes from the vendor’s website to the processor for validation and fulfilment. Examples – Apple Pay, Google Pay, Square
Payment Processor – involves processing equipment like card readers/terminals to make trans-actions between customers and banks. Example: Square, Stripe, Adyen
Credit card Networks – These firms dictate fees, guidelines, and oversee transactions between banks as they act as sponsors of their specific brand and clearinghouse. Example – MasterCard, Visa.
Card Issuers – Banks distribute cards to their customers and verify the balances and approve transactions. Example: Deutsch Bank, JP Morgan Chase.
The current Fintech payment companies are extensions from one of these four categories [10].
BIG BANKS BIG TECH PEER-TO-PEER PAYMENT PRO-CESSING CROSS- BORDER REMIT-TANCE CREDIT CARDS BLOCK-CHAIN
Bank of America, JP Mor-gan Chase, Citi, Wells Fargo Apple Pay, AliPay, Google Wallet Square Cash, Venmo Stripe, Pay-Pal, Square Western Union, MoneyGram, Xoom Visa, Mas-terCard, American Express Ripple, Cir-cle
Table 1: Some leading Fintech payment companies in different categories of payment process.
Artificial Intelligence (AI) has been used in the payment sector to detect fraudulent activities. Now they are been used for enhancing customer experience in payment sector by providing personalization service and also for driving transaction in stores without cashiers [11].
Application Programming Interfaces (APIs) enables integration of merchant application with payment process. This helps banks, Fintechs and merchant platforms to successfully collaborate and improve client services [9].
Big data and analytics helps improve internal efficiencies such as fraud detection, risk scor-ing, forecasting, merchant analytics, cross selling, and upselling [11].
Tokenisation helps in securing the new generation of digital solutions for mobile payments and e-commerce. Payment tokenisation is a security technology that helps in preventing data security risks by combining encryption and cryptography. In this the actual card details (PAN) are re-placed with unique digital identifiers [11].
Internet-of-Things (IoT) make it possible for merchants and customers to experience a fric-tionless payment process. Instead of cards, customers can pay through any device like phones, wearables, cars, or voice-activated devices.
Blockchain is considered to drive the future of payments. It is been rising in popularity as the next disruptive technology. It uses distributed ledger technology (DLT) infrastructure and it enables transactions to be initiated, verified, processed, and completed in an efficient, cost effec-tive manner within a single platform. The best use case for blockchain companies like Ripple are in cross border transactions involving many foreign currencies. They help remove intermediates such as clearing banks for transactions at low cost since the current wire transfers involves high processing fees [11].
In blockchain, every user transaction creates a block, which is added to a chain of transactions. This creates a trail of blocks linked to each other. Every block is broadcast and added to the ledger. As the user transactions are linked as a block to other blocks in the chain, it is extremely difficult to change their data, so this is a very secure way to exchange financial data.
Source: PwC Digital Services
Fig 5. Blockchain technology flow
2.1.2. Cryptocurrencies
A cryptocurrency is a digital or virtual currency. It is impossible to counterfeit as it is secured by cryptography. Many cryptocurrencies are decentralised networks that are based on block chain technology. A defining feature of cryptocurrencies is that they are generally not issued by any central authority [12].
Today, the aggregate value of all the cryptocurrencies in existence is around $214 billion [13].
These digital currencies have contributed to a shift in the online banking sector and Fintech sec-tor. Cryptocurrencies are affected only by a minimum extent compared to normal currencies; thus enabling businesses to make secure and fast payments at a consistent rate. Businesses such as Shopify and Microsoft have adopted this currency and we could expect many other busi-nesses to adapt these currencies in the near future.
Source: Bitpay.com
Fig 6. Overview of Payment process flow using cryptocurrency
Apart from payments, cryptocurrencies can also replicate trade patterns using online trading platforms. Etoro is one of such trading platforms that helps in close monitoring of investments [14]. Cryptocurrencies are increasing the accessibility to digital payments, money transfer, banking, and other similar services. With the help of FinTech Apps in mobile phones, crypto-currencies can be used to pay bills, transfer money, access loans, and even purchase insurance. For Fintechs, using blockchain and cryptocurrencies would help in improving transaction speed and security [14]. Some of the top Fintech companies that use blockchain and cryptocurrencies include We.trade, Circle, Robinhood, Veem, Ripple, Stellar, etc [15].
One of the world’s largest banks in the world, J.P. Morgan has recently announced its own cryptocurrency development and implementation of instant transfer over blockchain. Facebook has proposed to come with Libra. Cryptocurrencies and blockchain technology are now being taken seriously by governments and other financial institutions. This technology is said to have massive beneficial impacts on Fintech companies and would have massive potential to trans-form the Fintech and banking sector in the future [16].
2.2. Fintech in Banking
The FinTech for banking has impacted various applications and revolutionized the way con-sumers access their finances. There are many start-up financial firms that leverage financial technology as they step into the market. New entrants see opportunities in disaggregated com-ponents of traditional banking. Traditional banking services usually provide more emphasis on the products they provide than using technology for customer centric services. Whereas, Fintech companies provide products and services that are more customer centric, but they have to invest more in availing banking license and compliance expenditure [17]. Thus, Competition between banks and new entrants would give way to collaboration across the Fintech and banking indus-tries [18].
Banks used to be vertically integrated but due to the trends in technology and fintech companies, the integration turned into an ecosystem with many layers.
Source: PWC’s Digital Services, Platform banking and Digital Ecosystem
Fig 7. Vertical Integration of Banking services
Digital Banking services basically concentrated on Networks (network, security, stability etc) , Intra & core banking systems (Banking software accessibility, connectivity to various services) and Aggregators (Customer experience, new data insights for customers, network of financial resources) [19].
Source: PWC’s Digital Services, Platform banking and Digital Ecosystem
Fig 8. Integrated Ecosystem of Banking services
The integration ecosystem emerged due to innovations by Fintech companies and other non-financial entrants which tried to capture opportunities in disaggregated components of traditional banking systems. The orientation to this ecosystem include services by Fintechs such as Trans-formation functions (ALM, KYC), API providers (Data infrastructure and security, pricing model), API integrators (innovations in new data solutions, value added services, network of databases), Robo-Advisors (Added value of service, customer experience, customer acquisi-tion) [19].
2.2.1. Personal Financing
The changes in the personal financing sector is due to the key players like fidor bank, N26, So-larisBank, Revolut and many more. These are new and completely digital banks that were set up after 2000, mainly offering selected banking services [19]. These are fully online platform with no attachment to a physical bank. They replaced the bank tellers with chatbots, and customers can have a personal touch by contacting customer service people, thus reducing the hassle of bank appointments.
Customers who work internationally are also benefited through these services as they have the option for online banking services anywhere across multiple countries. These mobile apps of Fintechs make it easy to send money, check balances and analysing budgets and expenses. They also provide services like financial products comparison like fixed deposits, loans, credit cards and bank account.
2.2.2. Lending
Fintech has made inroads in business lending process while disrupting other facets of banking business. The way in which businesses access loans and funding has been drastically changed due to the influence of technologies like AI, progressing mobile technology, online business lending marketplaces, digital applications and Big data on alternative credit.
Marketplace lending is a nonbank lending industry that uses Fintech to provide loans to con-sumers and SMEs. Although it is small compared to traditional lending, it has improved drasti-cally in recent years due to Fintech. Incumbent lenders including banks and nonbanks are also extensively adopting some of the technologies and practices of marketplace lending creating an ecosystem [20].
Source: (Marketplace lending 2.0, Deloitte, 2017)
Fig 9. Lending fintech ecosystem
P2P lending will take some market share away from banks; however, it will not replace bank lending and loans in the near future. P2P lenders are likely to support risky borrowers (SMEs), who lack collateral thus providing financial inclusion which is encouraged by governments to support SMEs which are the backbone for many developing economies. Eventually, banks will either build their own online lending platforms or will try to acquire P2P platforms or partner with P2P platforms [21].
The P2P lending platforms works as follows. When borrower applies for loan, the P2P plat-form does a preliminary credit analysis [using AI, Big data analytics and cloud technologies] and assigns a “loan grade”, which is a risk classification. Then lenders or investors will make a bidding on the listing with loan amounts and interest rates. The platform analyses and combines qualified investors bidding into a single loan. The P2P platform just mediated the loan process, therefore there is no claims as in the case of a bank loan that is financed with debt and equity. Thus, P2P lending are said to have no intermediated finance [21].