Three major trends will continue to shape the future of digital financial services:
- Many legacy financial institutions will embark on the digital transformation journey, as they have all now realized the need and importance of leveraging technology to improve their operations in an ever-competitive environment.
- The number of partnerships between fintechs and banks in emerging markets will continue to grow, helping banks to faster innovate, achieve better outreach, and include more people into the formal financial sector (foster financial inclusion).
- Artificial Intelligence and Machine Learning will have a larger and significant role in digital finance. Innovative technology without the data, and data without AI/ML to derive insights is not of much use. Without AI/ML and the data being organized, there will be no innovation, especially in the areas of security, data analytics, and privacy. But the use of AI/ML has to be undertaken very responsibly, otherwise the emerging regulatory frameworks may be so stringent as to stifle innovation.
Innovation hubs around the world are growingThere are two ways to look at innovation hotspots – in terms of (a) geography, and (b) types of technologies.
Nowadays, almost all jurisdictions have innovation hubs. The regions/countries which have the highest concentration of innovation hubs are the UK, Singapore, China, UAE and Bahrain (and several others). I believe that all geographies are becoming hotspots for innovation. However, the regulatory frameworks and eco-systems vary significantly, which effects both the growth of these hubs and the speed and use of innovation.
Considering the types of technologies, most of the initial innovation has been in the payments sector. This came about owing to the huge market opportunity related to remittances. Other areas that are now being developed are credit processing, both back office, and front-end, KYC/onboarding the unbanked, cyber-security, etc. Technology is at the center of these innovations, as it empowers financial institutions with faster outreach, shorter processing times and improved customer services, to name a few advantages.
The three important issues that any innovation in financial technology should address are:
- An issue/customer pain point – for example credit and risk assessment, KYC, payments, etc.
- Available resources – have the right mix of skills and resources
- Scalability – the technology/innovation should be able to scale-up very fast to achieve profitability. This means looking for bigger markets, many times across borders.
Technologies with the greatest impact on financial inclusionTechnology now plays a huge role in speeding up financial inclusion globally. Areas such as payments and remittances have significantly improved through the use of technology, and created a huge difference for the financially excluded.
The ability to onboard unbanked clients and undertake KYC is already being used in several countries. This contributes hugely to increased outreach and improved organizational efficiencies.
The third technology with the greatest impact on financial inclusion is related to processing credit faster. This addresses the biggest concern faced by small and medium enterprises (SMEs), as they have always suffered from untimely availability of credit. This alone has made a big difference to the working of SMEs.
Use of technology for Digital identity, such as e-signatures, is also evolving. Some countries in Eastern Europe such as Serbia and Ukraine already allowed the e-signatures and credit officers can use them without the need for the client to visit the bank.
There is still need for regular on-going dialogue between the regulators and the innovators on ensuring that any innovation is developed and rolled out responsibly without harming the system or the customers.
Both innovators and regulators should always keep in mind that the ultimate goal of using technology in the financial sector is to make the lives of consumers easier and ensure discipline in the financial markets.
Regulations such as open banking are here to stay because customers do not want to be restricted to one financial institution. They are open for this transition and banks should be able to embrace this change and open their platforms and data to all service providers. At the end of the day, only those institutions that are able to meet the demands of the market will be able to sustain their business over time.
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