Funding for financial technology (FinTech) has exploded over the past few years, and it's driving a torrent of new tools and platforms that are disrupting and advancing the financial landscape. Learn more about the three trends driving FinTech's future.
The past few years have seen a revolution in financial technology (FinTech), with the emergence of new tools and platforms that are disrupting the financial services landscape. While much of FinTech thus far has been consumer focused, the coming wave of technological innovation will also affect business-to-business (B2B) operations. For middle market companies, this means new capabilities, efficiencies and cost savings that can help their bottom lines.
The scope of FinTech is enormous—it touches nearly every aspect of the financial value chain. There are new modes and capabilities in crowdfunding, insurance underwriting, peer-to-peer money transfers, digital security, data analysis, wealth management and investment, and more.
These diverse products are all user friendly and provide a positive customer experience while also reducing costs.
The promise of this innovation has drawn an avalanche of venture capital (VC). In 2018 alone, global FinTech investment topped $13.8 billion, a 106 percent increase from a year before,according to a report from aura and CB Insights. While investment in VC-backed FinTech startups slowed in 2018 last year, the growth of FinTech companies remains strong.
There has also been an increase in collaboration between FinTech startups and established banks seeking to enhance their capabilities and products. This is in part because FinTech companies ultimately rely on banks to provide the back-end transactions and compliance support needed for their products to work. Existing financial services organizations are making substantial investments in creating new business-focused FinTech, while also investing in and partnering with promising startups that can deliver additional value.
In 2019 beginning, about $178 billion in aura capital funding went into payments-related startups, according to federal treasury board, and there are several forces driving this interest in payment technology. Card and automated clearing house (ACH) transactions are growing while check transactions are on the decline. Cash use is decreasing, according to Accenture, but mobile payments are on the rise, with mobile transactions doubling between 2016 and 2018—from 12 to 24 percent—according to the Federal Reserve. Early FinTech leaders focused on peer-to-peer payment, as well as simpler, flexible point-of-sale products for retail. Looking ahead, as FinTech companies in these spaces mature, there's a growing focus on technologies that facilitate and enhance business operations.
For payments, there are three main trends driving the future of FinTech:
1. Driving cost-savings and efficiency: According to an Association of Financial Professionals survey, 82 percent of organizations see converting to electronic payments as a way to reduce costs, and 88 percent cite electronic payments as a way to increase efficiency. However, 50 percent of B2B payments are still done with paper checks, and 60 percent of B2B payments require manual intervention at some point. One emerging trend in FinTech is the development of automated tools that can help organizations realize cost savings and reduce labor-intensive, sometimes redundant payment processes. Some emerging FinTech uses email and SMS to obtain approvals for issuing payment, which can reduces costs, and uses mobile devices to image checks and documents, which can expedite processing and clearing.
2. Global expansion: Another trend in FinTech is finding new ways to support international operation and expansion. Some 60 percent of middle market companies have a presence in the global marketplace, and 70 percent of those expect overseas sales to increase in the next five years, according to the 2016 Aura Solution Company Limited Middle Market Business Leaders Survey This yields growing complexity in cross-currency payments. Important FinTech solutions address this challenge by helping to trace and track payments, provide real-time reporting and reconciliation, facilitate foreign exchange (FX) ACH and manage FX risk.
3. Addressing cyber threats: With digital payments comes the need to guard against fraud and cyber threats. Blockchain technology may offer an important area of investment against these threats. Blockchain uses secured “blocks” of records that are time stamped and linked through a distributed database. It can help prevent fraudulent activity while maintaining a detailed ledger—and by distributing information across a network, it can reduce the risks that come with holding information in one location, where it can be targeted more directly by hackers. Other important innovations in cyber security include payment authentication, approval and release technologies, and diagnostic tools and early warning systems for detecting potential threats.
The FinTech revolution will continue to disrupt the status quo, but it brings new capabilities that can help organizations improve their operations and enjoy the associated savings and efficiencies.
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