Financial Innovation and Technological Advancements in Finance
Be it fast cashless transactions or depositing money online, today, everything is possible with access to technological advancements in finance. In fact, Hedge funds, exchange-traded funds, digital currencies issued by central banks, cardless ATM services, and QR code payments are symbols of financial innovations.
But why are these advancements necessary when the risk factor is constant concerning monetary loss?
Here is an overview of the need for financial innovation and technological advancements -
The 3 Types of Financial Innovation
The first thing that needs focus is the types of financial innovations. One cannot apply any type of modern techniques anywhere. Instead, here is what you must know -
Sustainable Process Innovations:
The approach of effective financial business processes can improve customer service and increase operational efficiency.
New business practices that increase productivity and expand the market are a few examples of these innovations.
Here, the Internet banking system is the most appropriate example.
Financial Institutional Innovations:
Without a doubt, innovation is necessary for the financial system to evolve, which is a requirement for economic growth.
Examples can include starting a new business that offers innovative products or services.
It is difficult to develop a regulatory framework that fosters innovation, globalisation, and the expansion of the financial industry while keeping a proper balance between societal and private incentives. However, when the methods are acknowledged by financial institutions like banks, investment firms etc., these innovations get credited.
Innovations in Products:
This approach is very trendier and closer to the common mass. It introduces new financial products or tools, such as weather derivatives and family wealth accounts, specifically for risk management strategies.
Moreover, product innovations are released to boost efficiency or better react to shifting consumer demand.
Example of Financial Innovation
The Power of M-Pesa
Due to the tech-based payment system of M-Pesa, Kenyans with and without bank accounts who live in remote areas can deposit, transfer, and withdraw money and use their mobile phones to make transactions.
In fact, customers can use this branchless banking service to save money in an account that can be accessed through only a text message and a PIN.
Innovations through PayPal
Due to its huge market share, PayPal is a well-liked choice for companies wishing to increase their online and contactless payment alternatives.
In addition to its partners, PayPal is also targeting ageing financial infrastructures.
Nevertheless, PayPal has demonstrated throughout COVID-19 that it is a quickly developing fintech by offering a number of solutions like 'Buy Now, Pay Later' (BNPL) financing and PPP money delivery, positioning the company as a serious competitor to traditional banks.
The Reasons to Initiate Financial Innovations
Financial innovations can be initiated to a number of factors, including:
- Innovations in payment systems and technological developments.
- Competition in global markets
- Globalisation of financial systems
In fact, the necessity for innovation initiatives is sparked by factors including market failures, financial instability, domino effects, possibly large systemic risks, and the list can go on.
That’s why, to embrace various digital channels, digitised financial services, and digital communications opportunities, many traditional banks are rethinking their business models.
Here, the major goal is to compete with venture-backed disruptors and offer clients better service.
The Impact of Technological Advancements on Finance
Due to the exponential rise of information technology, businesses are now utilising banking technology digitalisation to change the financial services sector through customer experience management.
Moreover, because of competition from consumer brands like Amazon, Facebook, and Google, the financial services sector is focusing on enhancing online customer service.
Importantly, the majority of financial services executives believe that enhancing the client experience is the primary force behind banking digitisation.
With the development of smart analytics, financial services organisations can now better understand and serve their clients by utilising vast amounts of consumer data.
Apart from the positive impacts, what happens is, certain organisations suffer challenges due to the introduction of improved payment systems.
Now, the prospect exists that robo-advisory will play a big role in society in the future. Similarly to this, Blockchain based services will also become more widespread in the years to come. Hence, there is rarely a threat that can harm businesses.
Innovations for the Betterment
Today, a revolution in financial services is being brought about by the very popular term you all know as digitisation.
Through this, businesses can either integrate innovation throughout their entire organisation or make it the focus of a separate organisation.
Also, organisations in the financial services sector can use the cloud's promise to improve cooperation and make processes more transparent.
What one must know is that the core of attempts to better serve consumers through customer experience management is technical evolution. Therefore, for financial services organisations to succeed, adopting innovative banking technology is extremely essential.
Trending Technological Advancements in the Field of Finance
Banking operations are substantially more convenient and error-free with a cloud-based design. For seamless international payments, peer-to-peer transfers, and contactless payments, cloud banking is the best option.
Machine learning (ML) and artificial intelligence (AI)
Artificial Intelligence (AI) and Machine Learning (ML) have improved the banking sector. They have helped banks make quick decisions by enabling them to examine real-time patterns, which has enabled them to handle enormous amounts of data and form conclusions. This has resulted in multiple banking processes taking less time and money.
By making banking accessible, neo or digital banks have destroyed the monopoly of a few big brands in the banking industry. Due to the lack of physical branches, these banks would be less expensive than current banks.
Bank offices can still continue to play but in a limited role because the majority of transactions will be completed online.
A concept called embedded finance enables non-financial systems to incorporate payments for investments, insurance, loans, and debit cards.
For e-commerce businesses, in particular, embedded financial services are advantageous since they increase customer loyalty by speeding up transactions.
In the past, customers would apply for loans at the bank, have their applications reviewed, and then wait for approval. Customers may now purchase whatever they need with a few clicks on a store's website.
Robotic Process Automation (RPA)
Automated back-end office tasks, including customer on-boarding, security checks, credit card and mortgage processing, etc., use robotic process automation.
RPA will gradually be used by the financial services sector to complete activities more rapidly, save money, and increase organisational efficiencies while freeing up staff to concentrate on other important responsibilities like customer service.
Big Data must be mentioned while discussing new technological advancements in the financial services industry.
Big Data, as used in finance, refers to vast quantities of organised and unstructured data that banks and other financial institutions can use to predict consumer behaviour and develop business plans.
Structured data is internal corporate information that provides critical facts for quick decision-making. Every second, the financial industry produces and receives enormous amounts of data.
High-Tech Cyber security
The significance of cyber security will never diminish, and it has become one of the most important industry trends. Financial data is vulnerable to cyber-attacks. A data leak can cost financial companies a lot of money.
The COVID-19 pandemic is altering how people see data security throughout the world. The use of industry-specific biometric solutions is expected to increase. For instance, financial institutions are increasingly taking into account multi-factor biometric authentication for mobile banking.