What got the FinTech industry talking through 2019

As the year comes to an end, we take a look back at the significant developments of 2019 that have the potential to change the face of the FinTech ecosystem FinTech: a word that represents the union of two worlds – finance and technology – and the evolution of the use of technology in financial services. With smarter phones and cheaper internet, things have become a lot easier, with companies fighting to cash in on the underbanked and customers looking for cheaper, yet better options. But this union comes with both disruption and synergies. In the last year, the ecosystem has changed considerably, with governments and incumbent financial companies also getting into the game. Let’s revisit the top trends of 2019…

Crypto boom

Some European countries have been more accepting of cryptocurrencies, with Switzerland even offering special financial impetus to startups working to set up their operations in the country. On the other hand, Asian countries such as India and China are cooking up their own variety of cryptocurrencies, in order to safeguard their economy from any frauds.

Reports suggest that China’s officially named Digital Currency Electronic Payment is set to be powered partially by blockchain technology and will be dispersed through digital wallets. Meanwhile, India is in early stage discussions around issuing official virtual currency to replace private cryptocurrencies, although trading in cryptocurrency is currently illegal in the country. Early in 2019, global investment bank JP Morgan tested its digital coin “JPM Coin”, which is based on blockchain-based technology. The bank claims the coin, which represents US dollars, will enable instantaneous transfer of payments between institutional clients.

Another digital currency proposal that created a real furore is Facebook’s Libra. It was claimed that Libra will make money accessible to anyone with an entry-level smartphone and an internet connection. But regulators around the world – including the US – concerned about persistent financial risks, jointly denounced Libra. The concept of cryptocurrency may be the future of the financial industry, but there is indeed more need for transparency, safety and stringent regulatory standards for worldwide acceptance.

Making moulds for new FinTechs

With the advent of technology and cheap smartphones, accessibility of just about anything has become easier, faster and cheaper. That’s what new-age technology has given us – money at your fingertips. But most governments and regulatory bodies have been wary about the risks and chances of rampant frauds involved with such technologies. So, to keep a check on these financial technology firms, many governments and regulatory bodies are coming up with programs to provide these startups with an environment where they can be moulded within a framework decided by the respective governments, making it easier for the regulators to keep a check on them.

The Reserve Bank of India, in April this year, released a draft framework for live testing of products or services by FinTech startups in a controlled environment before a commercial launch. Insurance regulators and some private lenders such as Yes Bank have also launched similar initiatives in the country. Singapore’s market regulator, in a bid to be more inclusive towards startups, said that it will relax specific legal and regulatory requirements, which a sandbox entity would otherwise be subject to, for the duration of the program. South Korea’s Financial Services Commission has a similar program, under which it has so far inducted about 60 companies. Meanwhile, the UK, which has been more open to FinTechs, had started a similar program in 2015. The Financial Conduct Authority, the UK’s financial regulator, also teamed up with several global financial regulators to form the Global Financial Innovation Network (GFIN), a global FinTech sandbox. Even as governments across the globe are working towards safer and more inclusive financial regimes, the real challenge still lies in reaching the underbanked segments.

Open banking

Open banking, the inspiration behind PSD2, was supposed to go live in September 2019. Banks were given the deadline to comply with relevant requirements for PSD2 API and strong customer authentication (SCA). However, less than a quarter of the published APIs complied with the regulations with the rest being completely faulty or unavailable. The European Banking Authority, acknowledging the complexities of the requirements along with the lack of readiness, pushed back the deadline to December 2020, thus giving a 15-month extension for implementation.

However, the adoption of open banking has been increasing worldwide with the Australian Parliament passing the Customer Data Right legislation on 1 August 2019. Thereafter, the big four banks in the country were asked to enable the availability of the required financial data for beta testing.

The system is expected to come into force from February 2020. Southeast Asian countries have been at the forefront of the open banking revolution with Singapore setting the groundwork since 2016 with the establishment of the API Exchange as well as the Monetary Authority of Singapore’s Finance-as-a-Service: API Playbook.

While open banking aims to encourage competition and collaboration between banking providers, certain challenges that plagued incumbent banks in the last year included issues related to security, liability and the regulatory aspects of monitoring banking operations.

Cybersecurity breaches

Among the hustle and competition between FinTechs and incumbent banks, the importance of an efficient cybersecurity system occasionally gets overlooked, giving rise to the potential for security data breaches.

FinTech solutions provider Fiserv was sued by a Pennsylvania-based credit union Bessemer System FCU, on grounds of a vulnerable security system and billing errors. Similarly, Capital One Financial Corporation fell victim of a data breach that affected 106 million of its North American credit card users. Among central banks, the European Central Bank had to shut down its Banks’ Integrated Reporting Dictionary (BIRD) website after it reported a breach in the website’s security systems, which went undetected for six months.

A data breach in Australia exposed a chunk of records at several large domestic banks including Commonwealth and Westpac, among others, after PayID flagged a breach at its New Payments Platform (NPP) database, following which sensitive information linked to PayID were accessible to the public.

Cybersecurity startups have benefited from the growing interest in this sector with a spike in fundraising in identity authentication and startups including KnowBe4 ($300 million), SentinelOne ($120 million) and Onfido ($50 million).

The boom in PayTech

The past year witnessed a lot of movement in the payments sector from the innovations in payments technology (PayTech) to large-scale mergers and acquisitions (M&A) in the sector. Payment innovations through the year have been largely all about mobile e-wallets and contactless payments. PayTech firms also focused on ensuring the security of transactions leveraging artificial intelligence (AI) and machine learning (ML) technologies.

PayTech firms not only took the FinTech industry by storm with new innovations but also dominated the M&A sector with some of the largest deals in 2019. In terms of volume, North America led payments industry M&A deals globally while Europe and APAC region stood second and third respectively. Leading the chart in Q2 2019 was the US with 19 deals, followed by Sweden and the UK with five each, according to an industry report.

Among the largest payments M&A deals for the year were Global Payments’s and Total System Services’s $21.5 billion merger at the end of May; Fiserv’s $21.79 billion purchase of First Data in July; Mastercard’s acquisition of the majority of the corporate service businesses of European PayTech firm Nets for $3.19 billion at the beginning of August; and Fidelity National Information Services’s acquisition of Worldpay for $43.6 billion.

The emergence of AI in FinTech

The application of AI – particularly in the banking sector – is said to have a bright future as there are estimates of aggregate potential cost savings for banks from AI applications of $447 billion by 2023, with the front and middle office accounting for $416 billion of the total savings.

With many banks across the globe swiftly treading the digitisation path, AI adoption is not far behind. About 80% of banks are reported to be highly aware of the potential benefits presented by AI-powered technology. Certain AI applications have already been implemented across banks’ operations such as chatbots in the front office and antipayments fraud systems in the middle office.

Other forms of AI applications in the financial insurance sectors include the use of digital assistants

transactional bots that can be built using Natural Language Processing (NLP) and will assist customers in financial planning, savings and spending. The bots can also take over crucial financial activities such as contract analysis, claims processing, underwriting, pricing and credit risk assessment, assessing the client risk profile, churn prediction and attrition rates of clients, algorithmic trading, research and valuations of assets.

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