Financial technology, or Fintech, is currently disrupting economies around the world. At the beginning of 2020, many named artificial intelligence (AI) as the topic of the year. AI certainly carries enormous potential, which lots of financial service providers recognized and implemented early as part of their success strategy. In the investment sector, the topics of MIFID2 (European legislative directive for investor protection), digitization, and automation of financial consulting and asset management – often through virtual assistants are highly relevant and continue to raise discussions about innovation possibilities.
From my experience working in a bespoke software development company, I have the chance to observe how technology, combined with a passion for innovation, drives progress forward. Each type of modern business nowadays is inevitably dependent on technology to grow and thrive. The digital era we live in is fast-paced and demands adaptation and relevance from business owners. Recent years showed that the dominant tendency for individual clients and small-to-medium sized enterprises (SMEs) is to have access to open banking as a modern way to manage personal finances and to save operational costs.
Without further ado, here is the ultimate short guide to Fintech:
What is Fintech?
The term fintech is an abbreviation derived from the initial syllables of “financial services” and “technology”. Fintech describes the industry in which the delivery of financial services is changed and automated through technology. Companies that are called Fintechs often begin as startups, providing additional value for their clients. They disrupt traditional banking by setting their aim to deliver highly personalized and conveniently accessible financial products and services for everybody with access to the Internet and a digital device of some kind.
Fintech companies disrupt traditional financial services by using specialized software and complex algorithms that run on digital devices. They basically open the gates for the general public and SMEs to financial services that used to be reserved for industry insiders. Ecommerce, accelerated and cost-effective financial services, access to stock and cryptocurrency market trading are just some of the critical areas that benefit from the emergence of Fintechs.
Open banking plays a vital role in the Fintech sector and refers to “open bank data”. Essentially, open banking provides end-customers with the possibility to model their preferred financial services and money-related data. Thus, businesses can offer innovative financial services and appeal to each potential client individually with customized ad placement and tailor-made flexible offers. On the other side, customers are satisfied with the availability of countless possibilities for them with a higher degree of personalization achieved than ever before.
In technical terms, open banking relies on open application programming interfaces (APIs) that allow third-party software developers to build applications for the Fintech industry. Fintech also revolutionized service transparency because it enables account holders to opt for open data or private data management. During the last couple of years, industry incumbents around the world faced the inevitable digital progress in the face of Fintechs as a real threat and kept trying to find a way to stand their ground and remain relevant. By far some of the biggest European banks allow licensed Fintech startups direct access to their transaction-accounts.
The Role of AI in Fintech
AI bears a huge potential to change our lives for the better. Its efficiency is multifaceted and it has numerous applications in different areas that are all significant both for big enterprises and for individual market players, e.g. as a tool for regulatory authorities and relevant research that can provoke power shifts through this new technology. When it comes to the financial sector, Fintech companies successfully fostered the power of AI early on and managed to benefit from relational databases and mainframe computers to elicit more value from data and craft modern financial solutions.
As it turns out, Fintechs utilise AI capabilities to minimize human-made errors, better interpret large amounts of data, and enhance the efficiency of services by providing customized financial solutions to cover every client’s need. AI enables Fintechs to offer cost-effective and high-speed solutions exactly because of the complex insights it gains access to thanks to AI. These companies’ client-centered approach is evident in services like personal digital financial advisors, analysis of potential risks, and bespoke service recommendations.
Financial Data Ownership
Data ownership is still a sensitive and trendy topic and raises serious ethical questions about how big organizations handle personal data. One of the leading public concerns is that corporations and even small startups can frivolously monetize their client’s data without their explicit consent or without their awareness of how their personal information is being handled. So what happens with personal data and who has the right to regulate financial data?
Throughout the years, there have been numerous debates on data privacy and data ownership, which produced robust initiatives and as an outcome, provoked legislative changes and nationwide standard practices to assure personal data security. To guarantee the highest data privacy level, European regulators oversee who is an eligible third-party Fintech provider. If so, their company appears on the Open Banking Directory or the FCA’s Register. In case their Fintech provider is not enlisted, end-customers are more exposed to risks, including data misuse or financial frauds.
AISP & PISP
If a company offers open banking, it must provide these two main authorizations through the Financial Conduct Authority (FCA). To become an eligible AISP or PISP, a Fintech company has to pass the rigorous application process. The first type is the Account Information Service Provider (AISP), and this kind of Fintechs are authorized to retrieve account data provided by traditional financial institutions and banks. These providers include apps that offer money management tools to understand their financial situations better and cultivate new spending habits like budget setting and monitor spending. The loan application is another service provided by AISP, which allows end-customers to share their data with finance brokers and lenders as a way to streamline the application process.
The second type is the Payment Initiation Service Provider (PISP). The way it differs from AISPs is that PISPs can not only view, monitor, and provide clients with financial insights, but they are also eligible to make purchases on their behalf. Being their financial representative, PISP directly initiates money transfers to or from the payer’s bank account using the bank’s own tools. The other service types offered by PISP are business-oriented solutions created to enable secure real-time payments and immediate money collection as well as to increase payment visibility. Those usually have built-in data privacy compliance that runs in the background and requires explicit user consent to allow seamless user experience and secure data management.