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How are Modern Technologies Changing the Financial Services Industry?

Modern technologies are playing an increasingly important role in the lives of humans, businesses and industries. They are augmenting, even restructuring, the functioning of traditional industrial activities; industries are rapidly adopting technology to boost their growth and development. The financial services industry is no exception. Global FinTech funding was about 137.5 billion USD in 2019. Venture capital (VC) backed FinTech funding in India is estimated at an encouraging 689 million USD. The overall transaction value in the Indian FinTech market is estimated to rise from about 65 billion USD in 2019 to 140 billion USD in 2023. It is clear that as efficiency, affordability and privacy become the core priorities of the financial services industry, FinTech is set to grow in both the Indian and global markets. As mentioned previously, several elements make up FinTech, some of which are artificial intelligence (AI), big data, machine learning, deep and thin learning, robo-advising, peer-to-peer lending, and crowdfunding. Each of these elements plays a distinct role - often in different sectors of the financial services industry - to enhance the delivery of financial services.

Robo-advisors are financial advisory business models that use algorithms, protocols, and often apply machine learning, to advise a client on their investment decisions. The role of a robo-advisor is not only limited to determining the profitability of investing in a particular asset; robo-advisors can assist their clients with managing their personal finance, choosing retirement plans, and organising their portfolio as a whole.

AI comes into play in a variety of areas to reduce rates of error, increase speed (and therefore output), while simulating human behaviour. One example is automated customer support wherein AI chatbots are being used to mimic human behaviour to solve clients’ problems. Another example of an AI use case is in the InsurTech (Insurance Technology) space wherein it is used to replace an underwriter - evaluating claims and making decisions based on a given set of rules and standards.

Crowdfunding is another element of FinTech that is growing both in popularity and value. It allows for a more straightforward and convenient approach to fundraising for entrepreneurs and investing for investors. Crowdfunding uses the internet, allowing a large number of people to invest relatively small amounts, reducing cost for both parties involved. These are just a few elements of FinTech; today, numerous other technologies are directly or indirectly contributing to the simplification and augmentation of financial services in the market.

As with most technologies, FinTech has several benefits but significant limitations too. As for the positives, FinTech is living up to its expectations. The use of technologies in the provision and distribution of financial services is significantly reducing transaction costs for business and customers. For example, most robo-advisors charge an annual flat fee of 0.2% to 0.5% of a client's total account balance. That compares with the typical rate of 1% to 2% charged by a human financial planner. Additionally, using algorithms or machines to perform repetitive, high-volume tasks - such as managing accounts - minimises calculation or reporting errors and increases speed. This allows for greater output. Finally, using FinTech potentially ensures significantly greater transparency. In the case of robo-advising, the power of the advisor is generally capped at the provision of informed suggestions and relevant data. Contrary to this, it was traditionally the broker or financial advisor used to perform a transaction on behalf of their client - which makes the process relatively opaque. Even in the case of cryptocurrencies like Bitcoin, the decentralised nature of the blockchain system allows for greater privacy and transparency.

However, the usage of FinTech has its disadvantages. One of the most important disadvantages, or rather barriers, to the growth of FinTech, is the regulation that governs it. Among the 2,035 Indian fintech startups, only 58 work in regulatory technology and cybersecurity. There are, thus, complex fiduciary standards surrounding FinTech to minimise data breaches and cybercrime, which acts as a barrier to the growth of the industry. Moreover, trust is an integral component of a financial service provider. 69% of clients in the US believe that trustworthiness is the most important trait in a financial advisor. However, research shows that in general humans trust and prefer humans as advisors over an algorithm, which is both a disadvantage and a barrier for FinTech. Finally, several elements and aspects of FinTech contribute to the widening of the digital gap globally. For access to FinTech services, people must have basic technological access and be technologically literate. However, in many developing countries, this access is not feasible for many. Some 1.7 billion adults worldwide still don't have access to even a bank account. The inability of FinTech to reach these people accentuates the global digital gap.

FinTech has great potential for growth but the barriers to its growth are clear. The industry must find ways to build trust and comfort among users, allow for greater accessibility and meet regulatory standards without incurring significant losses; only then will FinTech replace the traditional approaches to the provision and distribution of financial services. References Blockchain, Fintech, and Islamic Finance: Building the Future in the New Islamic Digital Economy, Hazik Mohamed, Hassnain Ali, 2018

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