Recent studies have projected that the financial services market will reach $225.1 billion by 2027, growing at an annual average growth rate of 12.9%. The global financial industry is evolving as digital technologies become more ubiquitous and customer demands increase.
In 2023 and beyond, the sector will need to focus on digitalization, especially in terms of providing more value to customers via individualized, customized services.
Banking institutions and credit unions are attempting to keep up with customer expectations, drastically changing how they do business. From establishing new deposit and loan agreements to how they manage payments, financial institutions must undergo an internal transformation to stay competitive.
Digital Transition for FinTech Industry
Let’s explore technological advancements and changes that companies in the financial industry need to consider to remain ahead of the curve and future-proof their business.
1. The rise of fintech innovations:
FinTech innovations represent a paradigm shift in the financial sector, driving constant changes in traditional models and systems.
One of the most prominent changes is the advent of digital payments, mobile wallets, and challenger banks which have displaced physical cash and cards for a large portion of consumers. Companies such as PayPal, Square, and Apple Pay have led this charge, accelerating the adoption of contactless transactions, peer-to-peer payments, and real-time transfers.
In parallel, the rise of blockchain technology has opened a whole new realm of possibilities for the industry. It has pushed the boundaries of how we perceive and use money. Despite its uncertain future, blockchain's ability to facilitate secure and transparent transactions still holds immense potential for reshaping the financial sector.
FinTech's influence has not been restricted to traditional banking alone. Alternative funding methods have grown, courtesy of crowdfunding and peer-to-peer lending platforms, offering new avenues for people and businesses to raise capital. This evolution has seen the rise of popular platforms such as Kickstarter, GoFundMe, and Indiegogo, significantly democratizing access to funding.
FinTech's reach has also extended to the insurance sector. InsurTech startups are harnessing technology to revamp distribution channels, refine underwriting processes, personalize pricing models, and streamline claims processing — creating a more efficient and customer-centric industry.
Finally, FinTech innovations have been instrumental in fostering financial inclusion. They have made financial services more accessible to previously unbanked and underbanked populations, particularly in developing countries. By democratizing access to financial services, FinTech is helping bridge the economic divide, bringing more people into the fold of the formal economy.
With this continued momentum, this sector is poised to transform further, making financial services more inclusive, efficient, and customer-centric.2. Data analytics and AI in the financial sector: Artificial Intelligence (AI) is rapidly becoming a cornerstone in the financial sector, transforming how financial institutions operate, interact with clients, and shape their future strategies. Powered by the ability to learn and adapt, AI offers unrivaled opportunities to manage and analyze vast amounts of data, paving the way for enhanced decision-making processes and personalized customer experiences.
How does that manifest in practice? Here are a few examples:
- Financial institutions are leveraging AI to automate routine processes and tasks, resulting in significant time and cost efficiencies. This automation spans multiple facets of operations, from loan processing to fraud detection, where AI's ability to quickly analyze patterns and predict outcomes helps in identifying and preventing fraudulent activities.
- AI-powered robo-advisors are also providing customers with personalized financial advice based on their financial goals and risk tolerance, revolutionizing the field of wealth management.
- Intelligent chatbots and virtual assistants can now handle customer queries around the clock, offering quick and accurate responses. They learn from each interaction, constantly improving their conversational abilities and comprehension of customer needs.
- Machine learning models help financial institutions unearth hidden insights from their data, driving predictive analysis that can inform strategic business decisions. These models can forecast market trends, consumer behavior, and credit risks, allowing financial institutions to make proactive decisions.
- AI-driven regulatory technology (RegTech) solutions are being used to streamline compliance. These systems can interpret and adapt to changing regulations, assess risk, and generate reports, aiding institutions in meeting their compliance obligations while also identifying potential regulatory breaches before they become problematic.
As with many other industries, AI brings a transformative potential that is set to redefine the future of the financial industry.
3. Cybersecurity as the primary focus:
According to Flashpoint research, the financial sector was the second most breached in 2022. The finance and insurance sector recorded 566 data breaches, which amounted to over 254 million leaked records. Cybersecurity threats have a big influence on companies. Forty-two percent of interviewed organizations claim that digital fraud hinders their ability to innovate and expand into new avenues.
Financial organizations are disproportionately vulnerable to cyberattacks. Their customers' financial and personally identifiable information (PII) is valuable to hackers, and security breaches might cause a substantial loss of clients and revenue.
This means that data security must be a top priority for financial institutions. They should not only engage with shareholders that share the same piety to data privacy and security but also streamline their internal procedures. That’s why staff training is vital: personnel must follow protocols, and continual training in know-how and legal ramifications is crucial.
4. Moving outdated systems to the cloud
A recent study by McKinsey found that 13% of financial executives comprise at least 50% of their IT infrastructure on the cloud. However, more than half of poll participants revealed that within the next 5 years, they anticipate moving 50% of their workloads to the public cloud.
Leading banking institutions continue to adopt cloud-native solutions. HSBC, for instance, inked a long-term agreement with Amazon Web Services in 2020 to migrate their current conventional services to new virtualized alternatives. In addition, Deutsche Bank collaborated with Google to provide a "fully managed environment for apps" on the cloud.
But Why is Cloud Computing So Crucial?
IBM claims that using cloud-based technologies helps businesses be more flexible, save money on IT and logistical expenditures, and play a critical role in ensuring that workers can be productive while working remotely.
The last statement is crucial. There will be more and more hybrid work arrangements in the future: research by Loom shows that 90% of workers happily accepted the option to work remotely. The research showed that they are happy with the greater flexibility that working from home provides.
Employees can access vital financial data at any time and from any location by utilizing cloud-native technologies, and institutions may consistently deliver excellent productivity and significantly raise satisfaction among employees and clients by adopting cloud computing technologies.
Cloud-native frameworks and technologies also allow for speedier major feature innovations and automated upgrades, avoiding unnecessary disruption and maximizing service availability.
Tapping the Future
The financial services industry is in a state of rapid evolution. The sector's trajectory is being significantly influenced by technologies that are not only reshaping the present landscape but also setting the pace for future transformations.
To continue thriving, financial institutions should be strategizing toward service consolidation and digital capability expansion, with a strong focus on technological investments.
The future might not look like what we are accustomed to, but it promises a highly digital, efficient, and customer-centric landscape that's equipped to manage the complexities of tomorrow's financial needs.
