Digitalization kick-started during last years in all businesses. "The share of digital or digitally enabled products in their portfolios has accelerated by a shocking seven years", finds McKinsey. This life-changing growth is particularly remarkable in the fintech industry. Novel needs of compliance, safety, banking, and digital transfer of value are turbocharging remarkable solutions. After impressive growth during 2021 number of fintech companies worldwide doubled. It was to them that 20% of all venture capital's investments in the first 3 quarters of 2021 went.
According to a McKinsey&Company report, digitization is one of the biggest challenges nowadays and the process has accelerated by as much as 7 years as a result of the pandemic. This is particularly evident in the financial industry. As many as 15,000 FinTechs were created in 2021 and because of that their number has doubled. In total, they raised as much as $134billion, or 20% of total Venture Capital funding. That's 177% more than a year ago and twice the average funding growth for all industries.
This flow of capital is largely the result of problems brought to light by the pandemic. The lockdowns, the shift to remote work and the fear of face-to-face interactions have caused to move online businesses, and this raises a lot of new challenges. Also, there is a need to adapt services to the generation of digital natives, or to facilitate access to financial services for millions of people, who don't have bank account, around the world.
The development of technologies i.e., AI & Machine Learning, Big Data or Cloud Computing is helping to create new forms of insurance, innovative solutions for new banking, managing digital payments, moving business online, or simplifying complex processes, among others. In this article, we will look at the most important trends and innovations that are developing in the fintech market, try to explain the causes, and identify the most important technologies that will drive them.
RegTech Digital identity and business process automation
RegTech is a rapidly growing segment, employing the use of technology to meet regulatory requirements. In 2020, this market was valued at US$15.68 billion, and according to Verified Market Research, will grow as much as fivefold by 2028.
The development of technology in this area is primarily driven by increasing security requirements. The European Banking Authority (the EBA) published in June 2022 an article entitled "EBA Analysis of RegTech in the EU Financial Sector," in which it recommends the improvement of RegTech knowledge and competences among supervisors and regulators, striving for consistency in supervisory practices across the EU, and harmonizing legal and regulatory requirements. What is more, it relates to the development of a roadmap based on the European Forum for Innovation Facilitators and pays attention to the need to improve common international approaches and eliminate barriers standing in their way. In a longer-term perspective, it is possible that the market will move toward creating a central solution base and introduce certifications for providers. So, regulators will demand an increase in precision requiring the use of the latest technology, big data processing and advanced analytics.
Globalization and international trade have an influence on the development of RegTech. They force the creation of standardized tools to navigate the maze of regulations to facilitate the circulation of documents and verify the correctness of business processes. Data protection and employee surveillance has also become a major challenge, boosted by the COVID-19 pandemic and the shift to remote work in industries subject to AML (anti-money-laundering).
As a result, platforms that help companies to operate internationally, provide secure documents’ workflow by validation and rationalize their business processes are playing an increasingly important role. This can be achieved, among other things, by applications that operate in the Internet cloud that enable electronic signatures from anywhere in the world via any device. A great example is the DocuSign platform, which operates in 189 countries and in 48 languages. The California-based startup makes it possible to enter contracts remotely, and sign documents by touch.
Several projects in conjunction with FINGO are developing in similar a direction. For example, Penneo is an application from a Danish company that has gone from a garage-developed startup to a US NASDAQ listing in less than a decade. It allows one to sign by either electronic ID or touch, while it restricts access to sensitive information and solves the problem of secure document storage. Users can also automate the process of signing documents, save time, and reduce associated costs.
Developments in technology also facilitate fulfilling due diligence requirements. It is difficult, time-consuming, and expensive to verify potential counterparties operating in different markets. To make this easier, the Umazi application allows companies to create a digital identity. Thanks to the standardization and use of distributed registry technology, it facilitates verification of the data and documents, simplifies procedures, and allows its users to screen potential counterparties for possible links to illegal activities.
It happens sometimes that regulation leads to creative solutions. There was a situation from Switzerland when a financial supervisory body ordered financial institutions to specifically protect their clients from rash investment decisions. Not knowing enough, succumbing to emotions, and being susceptible to advertising are common problems. That's why Hypothekarbank Lenzburg AG, recognized as Switzerland's most digital bank, has created an app to select the optimal investment portfolio based on an analysis of the emotional profile and knowledge of economics and finance.
Insurtech, a market segment that uses technological innovations to improve insurance models, is also growing rapidly. Customers prefer the digital experience because of the ubiquitous development of technology and fast pace of life. This is especially true for Generation Z (those born in the period 1995–2010), which is now entering adulthood, as well as Generation Y (born in the period 1980–95), which is accustomed to on-demand services that operate 24/7 and can be accessed from a smartphone. In the insurance industry, there is even talk of a race to digitalize. According to Roi Agababa, CEO of cloud solutions provider Novida, as many as 82% of customers consider "multi-channel interactions with their insurance provider" as an essential standard. "This has led to the development of self-service digital portals through which customers can manage their account, buy products and handle claims, a trend that is only likely to intensify in 2022," says Agababa.
Increasingly, digitalization is crucial for insurance companies. According to a June 2020 PwC survey, as many as 41% of customers are willing to switch insurers due to a lack of digital capabilities.
What is more, the economic development of recent decades has contributed to an increased awareness of one's own life and health and knowledge of options for securing them financially at least. The average person in the world is now 4.4 times richer than in 1950, and with wealth comes a growing awareness of the need to insure assets and family. Indeed, the growing global middle class is thinking about additional property or health insurance after basic needs are satisfied. This need has been exacerbated by the Covid-19pandemic and recently by the war in Ukraine. Concerns about health, the possibility of sudden flight cancellations or job losses have resulted in the desire to purchase insurance. According to the "World Insurtech Report2021" prepared by Capgemini Research and Efma, it has increased by 7%.
Modern insurance companies satisfy this need quickly, conveniently, and digitally, as the insurance market has been moving toward robotization, automating sales and customer contact processes for years. Chatbots are equipped with artificial intelligence, and they are replacing insurance agents, answering customers' questions, dispelling doubts, and helping to select policy. Insurance policies are concluded over the Internet without too much formality, and they are proving to be an increasingly practical solution.
Customers wishing to insure with Ladder Life Insurance no longer need to go to the doctor. Instead, users answer questions from a questionnaire about gender, height, age, weight, tobacco consumption or fatal cancer in the family, among others. Based on this, artificial intelligence algorithms and predictive data analysis determine the premium, sum insured and duration of the contract. The entire procedure takes only five minutes. Just as quickly, insurance can be adjusted to changing life circumstances e.g., loan repayments. Special flexibility also characterizes policies taken out for specific days or even hours. For example, Tempcover offers car insurance for a minimum of one hour with minimal paperwork. The customer can choose the start of the policy down to the minute and adjust the duration exactly to his/her needs. Car insurance by the hour proves to be particularly important if we lend our car to our friend. It allows legal driving and provides peace of mind for both the driver and the car owner.
Intelligence and Big Data
In addition, AI and Big Data help to personalize offers and offer comprehensive solutions. After all, insurance companies collect huge amounts of information on customers. For example, The Blue Cross Blue Shield Association brings together 36 health insurers that have agreed to participate in an initiative called Axis. It provides access to the data of 106 million people and has covered 92% of all doctors and 96% of hospitals across the United States. The result is a tool that allows detailed comparisons of healthcare prices and procedures, as well as ratings of doctors' work and the quality of health facilities.
What is more, Artificial Intelligence helps create comprehensive offers covering several products. Obviously, AI software can predict the chances of successful cross-selling, based on health insurance data. These insurance offers include demographics, (gender, age, location), policy information (such as customer tenure, sourcing channel, premium) and car information. Based on this, the algorithms predict the chance of adding car insurance to an existing health policy. Among other things, the analysis shows that the chance of cross-selling increases with age and attachment to the company, so far.
AI Jim is another fascinating example of the use of Big Data and AI, which is an insurance claims settlement bot at Lemonade. In recent years, there was a story in the media about a man who applied to the company for compensation. He described a real case where a thief stole his camera. The bot performed several tests and decided to pay compensation of US$677. However, after another month, the customer tried again. This time, in an attempt to fool the company, he put on a gold wig and used an altered name and provided fraudulent contact information. He informed the bot that he had lost a camera worth US$5,000. However, the algorithm detected the fraud and reported the case to the company's security department, which reported it to the police.
"This helped us catch millions of dollars' worth of potential losses incases that range from individual fraud like the one above, and business fraud coming from fake affiliate networks and ad partners. FGN's ability to identify traces of fraudulent behavior from enormous amounts of data is equivalent to providing our human team with a sixth sense," writes Shai Wininger on the Lemonade site.
Another trend is the use of telemetry by insurance companies to calculate insurance risks and premiums. This makes it possible to monitor, for example, the driving style of drivers and adjust motor insurance premiums accordingly. Drivers who drive more carefully can expect lower premiums, and conversely, bad and dangerous drivers can expect the opposite. Road insurance provider Metro mile points out that its solution that tracks a driver's driving style saves money by an average of 47%.
Using technology to estimate risk can be even more precise. John Hancock's company uses wearable Fit Beat or Apple Watches to collect data on the details of customers' lifestyles and habits. The result is a reliable profile to personalize offers and offer comprehensive solutions, including other products. In turn, Aetna, the Attain app, will help set individual health goals, choose the right diet and take care of sleep, regular immunizations or medical appointments. Their implementation is monitored by a smartphone or smart watch. For health-promoting activities, the user receives points which he/she can later exchange for gift cards. In this way, the customer takes care of him/herself, the insurer pays claims less often, and the employer reduces the cost of absenteeism for health reasons.
In addition, it is also worth mentioning the influence of social trends on the emergence of community insurance, also known as peer-to-peer insurance. These involve premiums being paid into a common pool by a group of friends or strangers, but who trust each other. The aforementioned trust and the threat of deteriorating relationships protects against fraud. An additional benefit is the freedom from an institution interested in receiving premiums and not paying compensation. In the motor insurance system offered by Teambrella, this arrangement allows the premium to be raised or the potential payout reduced if the community deems a member to be a bad driver. Teambrella's pool members do not have to be friends but come from Facebook referrals. Those belonging to the pool bear no more risk than the amount they contribute.
New generation of banking
New banking solutions are developing as fast as those in InsurTech. This can be seen, for example, in the case of digital banks. In a decade, 320 of them have been established around the world. Their main advantage is that they operate exclusively online, allowing them to provide services that are still beyond the reach of a large part of the population.
According to the World Bank, as many as 1.7 billion people did not have a bank account in 2017 for this reason.
Digital banking, which uses mobile and internet technology, offers an opportunity for reaching the financially excluded and underserved segments of the population, particularly in remote regions and communities. It has the potential to transform the financial inclusion landscape by offering cost-effective and easily accessible financial services. - explains Khalid Umar, Head of the Strategic Planning Division in the CAREC Institute on "Development Asia."
In many regions of Asia or Africa, traditional banking services are often beyond the reach of people living in the provinces. By using cloud computing, digital banks are offsetting infrastructure costs by up to60–70%. Savings from the lack of physical branches, fewer employees and up to75% lower customer acquisition costs, make it possible to provide much cheaper services to people who previously could not afford them. This problem is solved by, among other things. Tonik Bank, founded in 2021 in the Philippines and regarded as the first digital bank in Southeast Asia.
"Tonik is an excellent example of a bank built in the cloud. It consumes microservices around the digital engagement layer while payment functions have been outsourced to Radar Payments, which is exposing a number of APIs to ensure smooth digital onboarding with the instant availability of an e-card linked to an account." - explains Oleg Patsiansky from Radar Payments.
The average income in the Philippines is only $180, 1/3 of the population is made up of millennials, and 70% of them are unbanked. Access to micro-credit via smartphone makes it easier for them to meet more than just basic needs. It also makes it easier for many people working in the informal economy to start their own businesses and purchase the necessary equipment.
Brazil has a similar problem, where high social stratification translates into a reluctance to use traditional banks. Tight controls and suspicious security make many Brazilians uncomfortable, and high fees make them seen as places for the wealthy. That's why Nubank made here its market debut, issuing an annual fee-free credit card that can be managed entirely from a smartphone. It then entered more niches, developed a loyalty program, as well as consumer loans.
Next-generation banks (both completely digital and unlicensed neobanks; and challenger banks with few branches and a banking license) are of interest especially to the younger generations entering the market: Millennials (born in the 1980s and 1990s) and Generation Z (born between 1995 and 2010). Growing up with the Internet, "digital natives" dislike queues and tedious paperwork. Instead of this, young people love smartphones and the opportunities they offer. Neobank Current addresses its offer to the youngest members of "Generation Z". Formally, it is not a bank, but an application providing services as a debit card, a budgeting tool, a favorable interest-bearing savings account, or a payment card for teens.
"Digital institutions" often operate under the subscription model that has become popular in recent years. Under the banking-as-a-service principle, basic services (e.g., a debit account and debit card) are free, while other services are charged monthly. This type of model is implemented by the UK's Monzo, as well as Germany's N26, which already operates in 25 markets.
Angela Strange, a former Google employee and financial innovation expert describes this solution interestingly on page16z. She compares traditional banking to a building that has to reach successive floors of development: license, core systems, payments, data, regulatory, anti-fraud and user interface. It takes a tremendous amount of time, money, and effort to reach the level required by regulators on all of them and maintain it. The transformation taking place is causing fintech to specialize in one of these levels (which is much simpler from a regulatory and economic standpoint) and offer it as a service (banking as a service).
Next-generation banking would also not exist without artificial intelligence and machine learning. A significant number of next-generation banks are using a platform developed by the US-based Kasisto. It provides an AI platform where banks can create their own chatbots and virtual assistants. The platform is rooted in AI reasoning and natural language processing. This allows it to answer even complex financial management questions. In turn, the Varo Money AI application created by Varo Bank's developers can predict future cash flow based on information about past sources of income, consumer habits, customer characteristics or expense tracking.
Moving with the times, challenger banks are not only more user-friendly, but are also adapting to users' views. Spain's Mitto, for example, is famous for its openness to environmental supporters. It not only shows the amount of CO2 emitted in connection with a given transaction, but also helps you receive discounts on goods and services created with concern for the environment of companies and offers to support "green" initiatives.
Digitization also relates to payments, and this is a segment that has been growing particularly strongly in recent years, and the pandemic has only speeded up the process. Closures of stationary branches, reduction of interpersonal contacts, the shift to remote work have naturally reduced the use of traditional payment methods. All this has forced the search for new solutions. In 2021 only, as many as 15,000 companies were created and raised as much as 20% Venture Capital funding. The largest funding was obtained by companies dealing specifically with digital payments.
The liquidity problems mentioned, openness to technological innovations and the growth of e-commerce, among other things, have contributed to innovative solutions in the consumer payment segment. One example is the BNPL (Buy Now, Pay Later) option, which allows the immediate purchase of a product with postponed payment without having to pay interest and card fees. Thanks to this option, on Black Friday2021 the volume of transaction sales in Pay Pal's "Pay in 4" service increased by 400% compared with last year. As many as 750,000 transactions occurred there in a single day. The same was also true on other platforms.
The move away from cash also goes together with the maximum simplification of purchases, the pursuit of convenience and security. All this has contributed to the development of biometrics as a method of identity verification and payment authorization. In 2021, three Russian companies, Vision Labs, Ntechlab and Tevian, created a system that allows you to pay with your face – Face Pay. After installing the Moscow Metro app, all you have to do is upload a photo of your face, add your payment card information, walk up to the appropriate gate and look into the camera. Amazon, on the other hand, already allows payment via the hand, specifically the skin and blood vessels.
On the one hand, Biometrics raises legitimate concerns about privacy and surveillance, while on the other hand it is regarded as the fastest payment technology and much more secure than cash or card.
A related trend is the increasing use of wearables (according to Global Data, this technology will dominate the consumer segment of the Internet of Things). What is more, by 2025 the number of people paying via QR codes will reach more than 2.2 billion people, or nearly a third of the world's cell phone owners. Already, companies are increasingly putting QR codes on products and influencers on social networks. The Global Payments report reads, to enable instant payments.
The desire to minimize the effort behind making payments is also behind other innovations, such as those aimed at reducing the need to give giving credit card details. Instead, Apple Pay or Google Pay subscriptions are sufficient.
Innovation is not bypassing stationary stores either. Self-service checkouts are becoming the standard, and disruptive solutions are entering the conscious, in which the moment of payment becomes almost imperceptible. A good example is Amazon's Just Walk Out technology underdevelopment to solve the problem of queues. Upon entering the store, the customer only needs to scan the phone, card or palm associated with his Amazon account. He or she can then freely select products, put them in and out of the shopping cart, and leave the store without paying. Cameras and sensors deployed in various areas of the store and machine learning algorithms ensure that the shopping cart is accurately inspected and charged accordingly. So far, Amazon is using the technology mainly in the United States and the United Kingdom but plans to make it available to other companies as well.