In recent years, Fintech has brought about a big change, disrupting many business verticals, especially in the financial industry. It has improved many aspects of finance, such as money lending, payments processing, insurance and more. This switch has resulted in a seamless and unique experience for users, helping customers understand and embrace Fintech without much effort.
But, the majority of customers still choose more traditional financial institutions. Fintech, although making a technological revolution, has some issues and challenges ahead of itself. Some of the bigger problems are lack of trust, low transparency, security breaches and certain customer habits. In this article, we will review these problems in detail and try to figure out how to overcome them.
What Is Fintech?
Financial technologies (Fintech) were created to replace traditional financial methods or to augment them. These include software, algorithms, processes and business models. Major areas of almost any Fintech app include personal investments, trading, banking services and insurance.
According to Market Screener, the global Fintech market will be worth $ 26.5 trillion by 2022, with an average annual growth rate of 6%. Some of the reasons for this rapid growth are global economic growth, increased need for credit and insurance and rising interest in investment.
Major Challenges in 2021
Fintech is facing four key obstacles. To ensure long-term success, companies need to do everything within their reach to address these challenges.
Security Problems and User Privacy
In Europe, the use of financial technology increased by 72% during 2020, accompanied by massive Fintech investments. However, such an improvement can be followed by unintended consequences, the biggest of which is new security concerns. Cybercrime is on the rise, with new attacks occurring every 39 seconds. And unfortunately, Fintech companies are one of the hackers’ most common targets.
It should not come as a surprise – people rely on managing digital money increasingly more often, so fintech companies now have more valuable data to protect than ever before. Because of this, even large reputable institutions, such as national credit bureaus and leading Forex brokers, might suffer from data leaks. That was the case with Pepperstone, a leading Australian brokerage whose customer data was stolen in August 2020.
Keeping Up with Modern Technologies
According to a 2019 Gartner CIO survey, more than 50% of financial services CIOs believe that most businesses will operate through digital channels, and digital initiatives will generate more revenue and value, which highlights the importance of Fintech trends in the future.
However, organizations that use outdated business management applications or disparate systems will not be able to keep up with an increasingly focused world on digital technologies.
In other words, digital transformation is not just a good idea, it is necessary for survival.
Technologies like cloud computing, artificial intelligence, big data and machine learning offer significant benefits for organizations looking to reduce costs. At the same time, they increase customer satisfaction and the share of wallets. However, the initial switch to such technology comes with additional costs and risks.
Software-as-a-service and platform-as-a-service cloud computing enable companies previously burdened with disparate legacy systems to simplify and standardize their IT infrastructure. This way, banks and credit unions can reduce costs and improve data analytics while using cutting-edge technology.
Artificial intelligence (AI) offers a significant competitive advantage by providing a deep understanding of customer behavior and needs. This gives financial institutions the ability to sell the right product to the right customer at the right time. In addition, AI software and big data in finance can provide essential organizational information needed to determine operational capabilities and maintain flexibility.
Quality of Software
Financial institutions that use the latest business technologies, particularly cloud applications, have a significant advantage in the digital transformation race: they can innovate faster. The power of cloud technologies lies in their flexibility and scalability. With no system hardware limiting flexibility, cloud technologies allow systems to evolve along with your business.
However, digital transformation makes companies more dependent on their software products, shifting focus to Fintech innovations and development. Some purely technical factors start to make a huge impact in business, namely:
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- Quality of application code, its flexibility, maintainability and scalability;
- Overall performance of the system;
- UX design and quality of customer-facing features;
- Security and scalability of infrastructure;
- Software development and bug fixing speed.
There are many more factors in play, and any of them can make a new product stand out from the competitors or sink. Successful Fintech startups cannot exist without strong IT resources.
Regulatory compliance has become one of the most significant banking industry challenges due to the dramatic increase in regulatory fees relative to earnings and credit losses since the 2008 financial crisis.
From Basel’s risk-weighted capital requirements to the Dodd-Frank Act, and from the Financial Account Standards Board’s Current Expected Credit Loss (CECL) to the Allowance for Loan and Lease Losses (ALLL), there is a growing number of regulations that banks and credit unions must comply with. Compliance can significantly strain the resources of a Fintech bank and is often dependent on the ability to correlate data from disparate sources.
There is no panacea that can help you overcome all the mentioned above challenges. However, here are some working solutions facilitating Fintech startup evolution to consider.
Implementing Innovative Authentication Processes
Imagine a world where users participate in the client authentication process only on the periphery: no login, no passwords, no text confirmation codes. Customers open the app or log in to the mobile bank and conduct their daily banking operations.
However, in the background, complex algorithms work continuously to ensure that the person using the device is who they say they are.
The algorithms test the patterns of keystrokes on the keyboard and examine how the user swipes across the screen when using US bank apps. It measures the pace at which the user is walking, the height at which they are holding their phone, the rate at which they speak. It looks at the last few places the user has been and where they are now. It conjures up dozens of other data points about the user and determines if anything is out of the ordinary, for example, in terms of Fintech payments.
If the number of data points seems suspicious, the algorithm activates the authentication process. The user may be asked to take a selfie so that facial recognition software can verify their identity. They may be asked to provide a thumbprint. At this point, you can always use two-factor authentication to add a layer of security.
In this world, user experience should be frictionless and smooth. The security and confidence in customer authentication are high and continuous. The number of cases of fraud and theft is reduced. And with that, user satisfaction goes way up. However, it of course comes with new privacy concerns.
Outsource Application Development to Experts
Creating an outstanding Fintech solution, including banking software, with excellent functionality and a high level of security, requires a lot of experience and dedication. Not all companies can put together a strong in-house team to build an app. Thus, more and more companies choose to outsource financial technology software development to get well-functioning and user-friendly applications.
A premade team of professionals allows you to start developing your application immediately. Moreover, you will not have to spend your budget on recruitment, training of new employees, as well as on vacation payments. Outsourcing allows you to significantly reduce costs in the long run, save on operating costs and, at the same time, achieve your goals and complete tasks quickly and efficiently.
Hiring a Legal Consultant
The consultant you hire should be your Fintech evangelist. They are responsible for training, understanding and collaborating with you to ensure that the solution meets your needs as an organization or a client company. Consultants have a deep knowledge of technology and markets, and they can pick up trends in the Fintech landscape. And, this insight helps them understand possible solutions and identify opportunities on behalf of customers.
The future of Fintech is clear. Financial technology is going to take a large market share. In fact, we already see the growing popularity of Fintech, which may soon enter a hype cycle as a blockchain technology once did. However, building a functioning financial solution that will be among the top Fintech examples to look up to requires more than just an excellent idea. You need to promptly overcome the barriers we discussed not to slow down progress. Therefore, relying on professional help is a strategic move to enhance risk management and smooth development.
Timothy Partasevitch is Chief Growth Officer at Smart IT.