Tech has had a great impact on every branch of industry. One point where it's especially disruptive is the financial industry. Financial Technology (FinTech) solved a lot of problems. It brought us digital banking. AI chatbots. Biometrics. But with solutions, it also brought certain challenges that we need to address if we're to reap full benefits of FinTech.
Here's my take on top 5 FinTech industry challenges in 2020.
1. Security and cyber crime
A main challenge for 2020 is to improve security. Data breaches involving financial service firms increased by 480% from 2017 to 2018, which costed companies millions.
Let's recall for a moment a huge data breach in Equifax Inc. in 2017 when hackers compromised 143 million of accounts in the US and stole more than 200.000 credit card numbers.
Or MasterCard in 2019 when hackers exposed data of 90000 users: names, email and home addresses, credit card data and date of birth.
Businesses are massively pivoting to online space. The FinTech industry tries to come up with adapted solutions amidst crisis.
It's time we accepted the fact that blockchain is the holy grail for security. Financial institutions should focus in 2020 on implementing distributed ledger technology (DLT) if they want to improve security.
First, it allows decentralized database handling.
Second, DLT allows for storage of all information in a secure and accurate manner using cryptography. Users access information using "keys" and cryptographic signatures. Once the information is stored, it becomes an immutable database and is governed by the rules of the network. (Source: Investopedia)
2. Financial & technological literacy
What's the point in having tech when people don't understand what it does or why it exists in the first place?
According to insights from the S&P Global FinLit Survey, financial literacy is a great worldwide challenge.
For example, Norway has the highest rate of financially literate people (71% of adults) while the United States is around 57%. The lowest rates are in South Asia, with only 25% of financially literate adults.
Those are the average numbers, but there are also disparities inside the country and their regions.
Aside from financial literacy, technological literacy poses a huge challenge as well. Millennials may not know how to pay taxes or stay afloat, but they're born with smartphones attached to their hands.
Startups are targeting them and developing tech for them.
Click, click, click – and you're done.
But what about seniors? It took them a great deal of time to start using smartphones and the internet. Today, 70% of seniors are using tech but for example, they also don't see the added benefits for the cost of smartphones.
In 2020, FinTech startups should take into account the wider demographic and their education.
3. Harnessing the power of AI without losing a "human touch"
AI promised three things in financial industry:
1. Open banking
2. Faster and more accurate credit assessments and decisions
3. Optimization of costs and better risk management
Yet, by letting AI into the industry, we met a well-known Terminator scenario – where robots really take your job.
They're faster. They calculate and analyze complex data, more than any human will ever be able to do, while saving billions.
According to the study published in Bloomberg, robots will cut 200,000 jobs in the U.S. banks in the next decade.
And what happens when everything turns to screens and clicks?
Millennials and Zoomers will enjoy that, I'm sure. But as I mentioned in point #2 of this article, it was tough to sell seniors on the idea of screens with additional bells and whistles.
How are you going to explain to your parents that they don't need to call a bank? That they should click on a "troubleshooting and finance wizard" and wait for a reply from a machine?
Enterprise clients surely won't give up on the idea of having a personal account manager 24/7. At least not easily.
The solution is to improve Customer Experience in every segment.
Quite a buzzword these days, but let's not forget that at the end of the day – there are people behind the screens, not machines. Cater to their needs.
4. Big Data and infrastructure
"Big data" is a term that describes large volumes of structured and unstructured data. Companies in the financial industry already collect data from news feeds, social media, newsletters... and many more resources.
They use them to make better decisions and lower business risks.
But it's not about the volume of data.
The challenge is in using and analyzing that data effectively.
Yet, it's easier said than done.
To succeed and reap actual benefits, you need strong (and costly) analytical tools, but also infrastructure.
There are 3 problems:
- Keeping costs at bay
- Providing sufficient space
- Training, maintenance and employees
If you migrate to cloud, which is also a pretty viable solution, there are security challenges as well.
Hopefully, 2020 will see more FinTech startups focused on affordable data analytics.
5 startups you should check if you're into data analytics: Sota Solutions, Prognostic, Terracotta, Wavefront, Prevedere.
5. Regulatory Compliance
Regulations and laws are a huge obstacle for FinTech. Regulatory bodies are exerting a huge pressure on banks and other financial institutions.
Especially after the European Parliament implemented the MiFID II legislation in 2018 that requires companies to execute complex compliance tasks.
Luckily, that's where RegTech or Regulatory Technology steps in. In a nutshell:
Regtech, or RegTech, consists of a group of companies that use cloud computing technology through software-as-a-service (SaaS) to help businesses comply with regulations efficiently and less expensively.
The way I see it, the financial industry should invest more in RegTech and initiatives that work on easing regulations.
Some of the RegTech companies that are worth looking at are:
IdentityMind Global, PassFort, Trunomi
In the end, one thing is for sure – there are many challenges to overcome with technology. Let's see what 2020 holds for us in store.
Further reading recommendations:
Let FinTech Help Jumpstart The Economy
How blockchain applications can transforming society
Problems, trends, and growth points in FinTech
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Also, feel free to leave a comment, I'd like to hear your opinion!