The rapid development of digital technologies has the strongest impact on all spheres of the economy. The financial markets are no exception in this regard—and analyzing the changes that have taken place—it can be argued that digitalization is currently the dominant driver determining its further development. At the same time, the introduction of digital solutions is the reason for the reorganization of not only the mechanisms of interaction between the market and end users, but also the financial markets themselves, their infrastructure, institutions, and rules of operation. Financial innovations have been a distinctive feature of the financial sector for decades, being embedded both in the form of products, such as new types of securities, in technologies, such as credit scores or ATMs, and the form of institutions, such as mutual funds or venture capital funds. The current wave of financial innovations is driven by the development of several technologies, including smartphones, the internet, data exchange technologies between information systems (API) and distributed ledger (DLT), artificial intelligence, and Big Data.
A New Wave of Innovation
The latest wave of fintech innovations focused on digitalization’s possibilities came about mainly from outside the financial system. These were represented by new financial service companies—either competing with banks or collaborating with them, but at the same time carrying some destructive potential:
- Among the main trends of digitalization in the financial sector, it is necessary to note the active transition of financial entities to remote customer service within their systems. In the banking segment, this is manifested in the ever-increasing number of internet and mobile banking users. You can remotely open a bank account and make almost all the necessary payments, including for budgets in online mode. The volume of payments compared to the population through remote channels has long significantly exceeded payments at physical points of sale.
- Smartphones, the Internet, and APIs provide faster data exchange, new distribution methods, and improved use of scale economies. This contributed to the abandonment of the conventional model of physical offices and branches and the entry into the industry of innovative money transfer suppliers—from mobile communication businesses offering mobile funds to fintech firms providing e-Wallets.
The internet has also contributed to increased competition, giving clients the ability to compare goods and costs of various financial solutions from different providers. And thanks to the platforms—customers have been able to move deposits between banks.
- The IT revolution, such as cloud technology, has made it easier to create, process, and utilize Big Data, as well as apply statistical data to evaluate and handle financial risks. ML and AI for finance make it possible to improve screening and tracking models in comparison with existing methods, such as standard credit scoring concepts.
Multiple research has revealed that Big Data is more beneficial for forecasting defaults than common methods using credit registry information. In addition to assessing creditworthiness, AI and Big Data can also play a major element in operating processes as well as risk assessment and management, such as keeping track of fraud and cyber cases, combating money laundering, and verifying compliance with regulatory requirements.
- The emergence of Distributed Ledger Technology (DLT), the most famous of which is blockchain, presented as a method of confirming ownership of bitcoin, attracted the interest of numerous investors to crypto assets. In response to the growing value of private crypto assets, a lot of banks worldwide have begun to explore the possibility of issuing their virtual currencies for commercial clients.
What Will Happen Next?
- The development of systems of fast transfers. This way customers save time and banks increase the availability of their services and can take another step towards reducing paper document flow. One-click payment is fast, simple, and convenient.
- The development of a digital platform in internet banking. Such a platform implies everything from servers and licenses to code reuse. Now it is a new intangible asset of the bank.
- Financial planning for clients. Development of welfare products and helping clients realize their long-term life goals with the help of investment products.
- Paperless banks. Banks are already using this technology, but it has not yet received active development. The main difficulty with the transition to paperless document management is that the electronic digital signature is not yet fully legally approved. There are problems with getting it on a flash drive, and the ability to use it for signing documents. As soon as this issue is resolved, there will immediately be explosive demand for this service. In this case, it will be possible to say that an electronic digital signature will replace the client’s input of an SMS or push message to confirm their actions.
Another important nuance is that banks with longer have huge archives of customer dossiers, such as where various documents are stored—which are attractive targets for advertising newsletters. Translating all this information into digital format is a tedious and costly task—both in time and resources. Therefore, many organizations are in no hurry to do this.
- Corporate IoT is becoming more prevalent. The development and implementation of smart devices from banks, such as set-top boxes and smart displays, is another way to generate Big Data. At the same time, special attention will be paid to cybersecurity.
- ESG banking is a concept of banking activity based on environmental, social, and corporate responsibility.
The digitalization of the financial sphere makes it possible to manage the financial resources of both state and commercial organizations, doing it transparently as well as legally. The modern digital economy is based on new rules and methods, including new directions, such as Big Data, data analysis, and various mobile technologies. The fundamental factor influencing the development of financial technologies is the development of the Internet and digitalization.
Looking back at the very beginning of its development, the financial technology market was limited only to money transfers and bank cards with electronic money. But now several different new services that can solve consumer issues and requests of varying complexity are becoming the most widespread. At the moment, companies can operate remotely with the help of digital technologies that allow organizations to become mobile in modern conditions.
The coming era of digitalization of the economy in its further development shortly promises us a uniquely high quality of financial transactions, provided that direct physical contact between financial institutions and their clients is reduced—if not made totally obsolete.