The Future of Finance by Tech?

financial technology (FinTech)?

FinTech relates to anything that uses technology within the financial industry to move us away from time-consuming run-of-the-mill manual tasks and processes with paperwork to having our finances at our fingertips. It involves the innovative use of technology for a wide range of applications, from digital payments and online banking to blockchain-based solutions and artificial intelligence-driven financial tools.

It enriches the customer experience and this is a driving force for financial companies choosing to invest in financial technology. FinTech is all around us, deeply woven into our daily lives. We use FinTech to make online food orders for when we can’t get to the shops, to quickly check our bank balance in seconds, or to use our phones to pay when we forget our bank card. Financial technology is in its infancy, and the continuous rollout of innovations shows us the future is bright for the financial sector!

The impact of emerging technologies in the financial industry

Various emerging technologies and examples of their applications in the financial sector exist. Many R&D tax credit claims for FinTech may involve innovations using a mixture of these technologies, such as:

Internet of Things (IoT)

IoT involves connecting physical devices and objects to the internet, allowing them to collect and exchange data. In the financial industry, IoT devices can provide real-time information and enable better decision-making. This technology enables smart payment terminals. They can provide data on customer behaviour, and peak transaction times, and even monitor device health. Financial institutions use this data for optimising operations, improving customer service, and preventing fraud. For instance, monitoring transaction patterns can help identify unusual activities that may indicate fraudulent transactions.

Artificial Intelligence (AI)

AI refers to the development of computer systems that can perform tasks that typically require human intelligence. In finance, AI is used for data analysis, automation, and decision-making. For example, through chatbots that you’ll see on banking apps and websites. Many financial institutions employ AI-powered chatbots to handle customer inquiries and provide support. These chatbots use natural language processing and machine learning algorithms to understand and respond to user queries. By automating routine tasks, such as checking account balances or explaining transaction details, AI-driven chatbots free up human resources, reduce response times, and enhance overall customer service.

Blockchain technology

Blockchain is a decentralised and distributed ledger technology that ensures secure, transparent, and tamper-resistant record-keeping. It is the underlying technology for cryptocurrencies like Bitcoin and Ethereum. It enables secure and transparent peer-to-peer transactions without the need for intermediaries like banks. Beyond cryptocurrencies, blockchain is explored for applications such as smart contracts, which automatically execute and enforce contractual agreements.

Machine learning

Machine learning involves training algorithms to learn patterns from data, enabling them to make predictions or decisions without being explicitly programmed. One way the financial industry is incorporating blockchain is through machine learning credit scoring models. Financial institutions use machine learning algorithms to analyse a vast amount of data and assess the creditworthiness of individuals and businesses. These models consider various factors, including transaction history, spending patterns, and non-traditional data sources, to provide more accurate and dynamic credit scores.

What are the current trends in FinTech?

The FinTech industry is emerging at a rapid pace; the COVID-19 pandemic catalysed the adoption of digital technology with outside-the-box thinking. People sought contactless and remote financial transactions. However, the first half of 2023 posed significant challenges for the global fintech market, including expected issues like inflation, rising interest rates, and geopolitical conflicts, alongside unexpected events such as the collapse of several US banks. Despite these obstacles, the fintech industry in the UK continued to adapt. These financial industry trends stand out: with trends like the rise of decentralised finance (DeFi), a growing focus on sustainability, and ongoing integration of Artificial Intelligence and blockchain technologies for enhanced efficiency and security in financial transactions.

Decentralised Finance (DeFi)

Decentralised Finance (DeFi) refers to a financial system built on blockchain technology that operates without traditional intermediaries, enabling decentralised and automated financial services such as lending, borrowing, and trading. It allows people to lend and trade with each other without needing a middleman offering users increased accessibility, transparency, and control over their assets through smart contracts and blockchain technology. This innovative approach resonates with a growing demand for financial inclusivity and efficiency in an increasingly digital and interconnected world.

A priority of sustainability

Sustainability has become a top trend in FinTech as businesses and consumers increasingly prioritise environmentally responsible and socially conscious financial practices. FinTech companies are integrating eco-friendly initiatives, such as promoting paperless transactions and investing in green technologies, aligning financial operations with broader efforts to address climate change and contribute to a more sustainable future. For example, some FinTech platforms are incorporating ESG (Environmental, Social, and Governance) criteria into investment decisions, encouraging responsible and ethical investment practices.

An example of sustainability in FinTech is found in the work of our client who introduced veganism to banking. Their vegan payment method provided a sustainable option for socially conscious consumers in every stage of their banking. This project met the eligibility criteria for R&D tax credits, so we helped our client receive a 12k tax benefit for their innovative efforts of embarking on a challenge and succeeding over technical uncertainty.

Cybersecurity innovation

As the FinTech landscape continues to expand, the need for robust cybersecurity measures has become increasingly critical. FinTech companies are investing heavily in innovative cybersecurity solutions, including advanced encryption technologies, biometric authentication, and behavioural analytics, to safeguard financial transactions and protect sensitive customer data. AI and ML algorithms are used to continuously analyse vast datasets, detect anomalous patterns, and proactively identify potential security breaches, enhancing the overall resilience of financial systems. For instance, adaptive authentication systems powered by machine learning algorithms can dynamically assess user behaviour, enabling the identification of suspicious activities and providing an extra layer of protection against unauthorised access and fraudulent transactions.

Embedded finance integration

Embedded finance is characterised by the seamless integration of financial services into non-financial platforms. This trend allows businesses in various industries, from e-commerce to healthcare, to offer integrated financial solutions like payments, loans, and insurance directly within their platforms. For example, some e-commerce platforms now provide customers with instant access to financing options during the checkout process, streamlining the overall consumer experience.

Central Bank Digital Currencies (CBDCs)

The exploration and development of Central Bank Digital Currencies (CBDCs) are gaining momentum as central banks worldwide explore the potential benefits of digital forms of national currency. CBDCs could enhance financial inclusivity, reduce transaction costs, and provide more efficient tools for monetary policy. Countries like China have already launched pilot programs for their digital currency (Digital Currency Electronic Payment — DCEP), ushering in a new era of government-backed digital currencies.

Integration of robotics with traditional financial processes

The integration of robotics in FinTech is a prominent trend driven by the pursuit of increased automation and efficiency in financial processes. Fintech companies are deploying robotics to streamline tasks such as customer service, data entry, and fraud detection, enhancing operational speed and accuracy. For example, robotic process automation (RPA) is being employed to automate routine and rule-based tasks, allowing financial institutions to optimise resource allocation and focus on more complex aspects of their services. Robo-advisors are growing in popularity, offering consumers automated and algorithm-driven investment strategies.

What industry challenges does financial technology solve?

FinTech plays a crucial role in reshaping the financial landscape, making it more accessible, efficient, and secure for individuals and businesses alike. Here are the challenges it solves:

• Access to financial services: FinTech facilitates financial inclusion by offering services and tools for individuals who are underserved or excluded from traditional banking systems.
• Operational inefficiencies: Automation and digitisation in FinTech streamline operations, reducing manual processes and enhancing overall efficiency.
• High transaction costs: FinTech solutions often offer cost-effective alternatives to traditional financial transactions.
• Fraud and cybersecurity: FinTech companies invest heavily in cybersecurity technologies to protect financial transactions and sensitive customer data. Enhanced authentication methods and fraud detection systems contribute to a more secure financial environment.
• Limited innovation in traditional banking: FinTech fosters innovation by challenging traditional banking models. Startups and established FinTech companies introduce new and creative financial products and services, encouraging traditional institutions to evolve and adapt.
• Slow and complex payment systems: FinTech introduces faster and more efficient payment solutions, such as real-time payments and instant fund transfers. This addresses the issues of delays and complexity associated with traditional payment systems.
• Financial literacy and education: FinTech applications often come with user-friendly interfaces and educational resources, contributing to improved financial literacy. This empowers individuals to make informed financial decisions.
• Regulatory compliance: Regulatory Technology (RegTech) within FinTech automates and simplifies compliance processes, helping financial institutions adhere to complex regulations and avoid penalties.

What are the predictions for financial technology (FinTech)?

As R&D tax credit specialists, we work closely with lots of FinTech companies, some of which are startups with brand-new success and others are larger and more established, perhaps just conducting R&D on the side of their main business operations. We witness FinTech trends in real time and find out from the experts what they’re going to be working on next. Our team has put together what we believe are the FinTech trends of the year ahead:

An acceleration of biometrics adoption

Biometric technology is a form of identification and authentication that uses unique physical or behavioural characteristics, such as fingerprints, facial features, or voice patterns, to verify and grant access to individuals. It’s more cyber secure than passwords and PINs. The latest smartphones use face recognition to unlock them so it’s no surprise that the financial industry will also use this tech to increase the protection of highly sensitive data.

An increased usage of biometric technology in the financial industry will revolutionise security measures, replacing traditional authentication methods and mitigating identity theft risks. This shift towards biometrics not only bolsters transaction security but also enhances user experience by providing a seamless and efficient means of authentication.

There has been a big recent push for advancements in biometric scan technology that we will see adopted in the financial industry. Cloud computing giant, AWS, announced at their annual conference in December 2023 a new identity security solution that enables individuals access by palm recognition technology, called Amazon One Enterprise. Perhaps this is what we’ll use to make payments in future as opposed to bank cards or our phones.

The gamification of finance

Gamification is the application of game-design elements, such as point systems, challenges or rewards, to non-game contexts, fostering engagement and participation. It provides a sense of achievement for customers and keeps them engaged. It removes a sense of intimation around topics of personal finance and investment and functions as educational too, helping people make informed decisions with their money.

This is something that is already in digital banking such as virtual piggy banks where the banking app will tell the user how much they need to top up every week to meet their savings goal. It tracks their progress and helps bring their savings to life; they can see in real-time the impact their contributions are making. Another example is Monzo’s badges that you can unlock when you set a savings goal, split a bill with a friend and more. These badges can provide exclusive perks, offering an incentive to be more involved in your digital banking.

We can expect to see more financial institutions incorporating game-like elements into their applications, ultimately fostering a more informed and active user base.

Buy now pay later (BNPL) initiatives

This is another prediction that is already emerging as a current and is expected to grow and adapt in the next year. Buy now, pay later initiatives allow consumers to make immediate purchases and defer the payment over a specified period, often through instalment plans without incurring traditional credit card debt.

Due to the cost of living crisis, more and more people are relying on these payment plans which is why we believe they will grow in 2024. Generation Z is using BNPL schemes such as Klarna and Clearpay the most to keep up with fashion and technology trends.

This will continue to emerge however we believe it will be more regulated to stop unconstrained borrowing that people can’t afford. Hopefully, there will be new laws around it.

This broader adoption of BNPL is likely to be accompanied by innovations such as personalised instalment plans, enhanced user interfaces, and partnerships between fintech firms and a wider range of businesses, contributing to a more pervasive and user-friendly BNPL landscape.

Cloud adoption in finance will rise along with appropriate cybersecurity

Many of the technologies discussed in this article rely on cloud computing. Continued FinTech equates to increased cloud adoption. The cloud helps financial companies to achieve simplified and cost-reduced scalability. However, to take advantage of the cloud, cybersecurity measures are needed to manage and control emerging FinTech security issues.

The pursuit of operational efficiency, scalability, and enhanced collaboration will drive the rise in cybersecurity. Concurrently, organisations will place a heightened emphasis on cybersecurity measures specifically tailored for cloud-based financial systems. This includes increased investment in advanced encryption, threat detection, and secure cloud infrastructure to ensure the integrity and confidentiality of financial data stored and processed in the cloud.

FinTech will revolutionise everyday operations

We anticipate businesses across various industries increasingly embed financial technology solutions directly into their processes. This trend will involve the seamless incorporation of FinTech services, such as payments, lending, and financial management tools, into non-financial platforms and applications, providing users with a more integrated and streamlined experience. Think of how we can pay for a car ride directly on the Uber app. Expect to see a broader array of services incorporating FinTech functionalities, ranging from e-commerce platforms to healthcare systems, as the industry continues to prioritise user convenience and efficiency.

Data Analytics

In 2024, the utilisation of big data and analytics in the FinTech industry is expected to surge, playing a pivotal role in decision-making processes, personalised financial services, and risk management. FinTech firms will increasingly harness the power of expansive data sets to derive actionable insights, enhance customer experiences through targeted offerings, and refine predictive models for assessing financial risks. The heightened integration of big data and analytics is poised to revolutionise how financial institutions operate, fostering a more data-driven, efficient, and customer-centric landscape in the evolving fintech ecosystem.

Conclusion

FinTech has come a long way since its first breakthrough of credit cards back in the 1950s. We look forward to future innovations as part of the digital transformative journey of the financial sector. From the increased adoption of biometrics, gamification, and cloud computing to the rise of sustainable practices and decentralised finance (DeFi), FinTech is poised to revolutionise traditional banking and reshape daily financial interactions. As the industry emphasises seamless embedding into everyday operations and harnesses the power of data analytics, FinTech stands at the forefront of creating a more accessible, efficient, and customer-centric financial landscape.