Fintech

The Nature of Fintech

Discuss about the Operation and Governance of Financial Markets.

The main purpose of this assessment is to analyze the concept and nature of fintech which is a computer program used by banking institutions. The assessment is based on a similar bank which is ABC bank for which the analysis is to be conducted. The assessment will be further analyzing the impact of fintech on the financial markets which can be positive or negative. As per the assessment, ABC Global Banking plc is a multinational bank which operates in various regions wants an opinion on the nature of fintech and how the same will impact the overall business of the bank. The analysis will also be covering the specific opportunities and threat which fintech possess for the businesses in financial market.

Fintech is a short version of financial technology which describes an emerging financial sector which is continuously developing in the current era. Financial technology which is nowadays more commonly known as Fintech states a business which uses modern technology and software for providing financial services to its clients (Mackenzie 2015). In todays world Fintech companies are direct competitors of banks for providing and selling financial services and solutions. The term when it was originally developed was applied to trade and retail by financial institutions (Chishti 2016). In recent times the meaning and the scope of the concept has widen significantly and the same includes technological developments in financial sectors which includes innovations in financial literacy, retail banking and even in technologies which are at its initial stages such as Bitcoin.

Fintech is a concept which was coined to explain the diaspora of It enterprises in the banking and financial sectors. It was during 2008 financial crisis when the leading IT businesses sensed that banks were unable to cope up with the risks and regulatory changes and figured it was an opportunity and such IT businesses started providing banks with facilitates such as data management system, governance and compliance (Gabor and Brooks 2017). The scope of Fintech can be recognized to be vast and it is not just due to the size and growth of businesses in the particular industry but also due to the potential such an enterprise holds for future prospects. The main aim of Fintech is to improve the existing financial services by using technology. The use of Fintech can bring about significant improvements in the business structure which can reduce the overall costs of the business, speed up certain processes or automate an entire process by cutting down man power (Tsai and Kuan-Jung 2017). The application of Fintech can direct impact banks, consultancy and auditing firm, insurance companies and it is expected that Fintech will bring about improvements in the overall business structure of such industries. The overall scope of Fintech can be summarized in points forms which is shown below:

1. Blockchain and Cryptocurrency can be supported by fintech business and also provide facilities like cryptocurrency and digital cash, smart contracts.
2. Fintech can facilitate open banking concept which states that the third-party developers would have access to bank data to build their own applications.
3. Fintech can be used to further improve the insurance industry
4. Innovative approaches which has been undertaken in fintech can bring about better access to customer data and thereby promote the cybersecurity which will come into prominence in the coming years.

The Role of Fintech in the Business Development

Fintech is bringing about innovative development to banking, lending and capital markets and it is not just the small business which are adopting the technology but also the big banks are undertaking the technology for bring about improvements in the overall banking structure. Large banks are investing heavily in Fintech and small and medium are doing the same in order to facilitate their customers with the best technology (Koffi 2016).  The introduction of Fintech can be regarded as the fourth industrial revolution which is brought by convergence of physical and Cybernet. This means using of advance technologies and system for the development of the business. The term of Fintech can apply to any innovation process and also in the way in which people can transact in business. Fintech can be applied universally which can be related to the invention of digital money to double entry. As per EY’s Fintech Adoption index, one third of the consumers in most of the countries utilizes at least one or two fintech services and such consumers considers Fintech services as a part of their lives. In addition to the vast support which Fintech technologies provides, the innovation process is further increasing the scope of the technology and the applicability of the same in business environment. In addition to this, the innovation process in Fintech can bring about widespread changes in the technologies which are used by business and such new technologies which can be included is machine learning, artificial intelligence (Carney 2017). Thus, from the above discussion it can be understood that Fintech plays a vital role in the business development in recent times.

Financial Market is a broad term which is used for describing a market where securities are traded which includes equities, bonds, derivatives. In order words financial markets provides businesses a scope to trade their respective securities in a market where the same can be openly traded among potential buyers (Valdez and Molyneux 2015). The overall improvement in the financial market is due to the overall technological changes which have taken place in the market.

The technological transformation which is taking place can be referred to as fourth industrial revolution. It is common fact that technological advancement can bring about tremendous changes in many businesses and also makes a business more efficient. One of the advancements which is brought due to technological developments is the introduction of artificial intelligence in business and even in computers (Arner, Barberis and Buckley 2015). More examples of Artificial intelligence can be given of Amazon’s Alexa and Apple’s Siri (Russell and Norvig 2016). In the today’s world, financial markets have become more and more sophisticated and personnel needs to rely on algorithms not only for execution of trades but also for analysis and advice for the same (Rom?nova and Kudinska 2016). With the introduction and implementation of fintech, the business operating in financial markets can become more efficient. Moreover, with the introduction of Fintech, it is anticipated that it would lead to increased automation of complex transactions which in turn will help businesses to reduce the overall errors which is related to manual errors and inefficiencies. In addition to this, Fintech will also bring about reduction in the overall costs of the business.

The Impacts of Fintech on the Financial Markets

An example of the impacts which are brought about with the implementation of Fintech can be given for banking firms. The overall development of Fintech in European union is basically on domestic functioning and is not much in international functioning. An example can be given for Visa and Mastercard which have mostly been dominated the market of payments digitally. The global mobile payments as per research have increased with the development of fintech. The global mobile payments was $ 450 billion in 2015 and the same increased to about $ 780 million in 2017 and the same is further expected to rise in 2018 and 2019. In addition to this, the region through which most mobile payments are initiated and carried out is the Asia/Pacific region followed by Africa and other regions are also close by which suggest the reliance on mobile banking facilities of the business.

In order to implement the changes in financial system, the management of companies need to play a vital role. The management needs to lead from the front and educate the stakeholders that the changes are positive in nature and will bring about growth and development of the entire business. An example can be given of the Australian Securities Exchange which is in the process of developing and testing of a system in order to replace the current system of recording with a new technology which is based on distributed ledger technology (He et al. 2017). These are the efforts which needs to be supported in order to bring about the desired changes in financial markets.

The main core of Financial Markets are the banks who provides funds to various businesses for financing the activities of the business and banks are also responsible for maintain the customer’s data as well as perform all the key functions (Shim and Shin 2016). The changes in regulatory framework and inadequate structure of the banks for maintaining customer data has paved the way for Fintech companies to capture market shares of banking industry and is able to provide services such as payments, lending, investments and financial planning. It has been seen that business which have no financial base or banking legacy or even proper infrastructure have made significant impacts and are competing with other banking businesses. Fintech in the capital markets is driven by the need of market participation and also use of alternative business models for businesses. The fintech technology is centered around innovative approaches and appropriate funding requirements which can impact core of trading, security servicing and even the entire value chain of capital markets.

The Role of Management in Implementing Fintech

In general terms, Fintech is defined as a new generation of cloud and mobile technologies which can impact the processes which are associated with financial services. Fintech is closely related to open services architecture which utilizes artificial programming interface along with business models which are found in internet economy. In the initial stages of introduction of Fintech and implementation of the same, the technology was seen as a disrupter for large established financial companies (Chishti and Barberis 2016). The introduction of Fintech provided IT companies to enter the financial markets and cause problems for the financial businesses which were already established in the market. Another impact of implementation of Fintech in businesses can lead to better capital flows and fintech investments which is evident as the investments in Fintech has increased sixfold. In addition to this, another direct impact of fintech business development is the emphasis on innovation and developments. Many businesses in this sector has developed innovation centers, research labs so that the business can further develop. In addition to this, businesses have also developed new technologies which is a byproduct of Fintech such as the artificial intelligence, smart contract options, Smart analytics and similar other innovations as well. The application of Smart analytics and artificial intelligence have affected the capital markets and provides essential tools to mine financial data across value chains. A financial market organization at its core is basically a data company and implementation of Fintech has brought about widespread changes. New methods of data mining and tools for delivery and predictions will help businesses to make accurate predictions and also help in the decision-making process of the business. Moreover, the impact on investments in financial markets have also increased as new technologies are being developed for promoting and supporting investment prospects (Haddad and Hornuf 2016). Investment technologies have gained relevance as most of the businesses continue to move towards automation in asset allocations and rebalancing as well as development of new technologies for selecting alternative sources of investments for businesses. Thus. in a nutshell it can be said that introduction of technology in financial services has widen the scope and efficiency of the services which are covered by finance businesses.

Fintech is nowadays used in most of the businesses in financial sectors and the technology is capable of providing serious competition to banks and other financial institutions due to the effectiveness of the services which is provided by Fintech companies. Most of the Banking sector industries are of the opinion that Fintech is a potential threat to their business but the same is not the case as Fintech can also provide opportunities to businesses and help in further development of these sectors. With the introduction of Fintech in banking businesses, it provides a scope of the business to establish collaboration with such Fintech companies in order to improve the business structure and the quality of services which is offered by the business to such banks and the consumers. Fintech businesses mainly specializes in providing payments, lending and settling services which is through digital banking system. Therefore, it is clear that overall development of the financial sector can be faci9litated if banking businesses work in collaboration with fintech businesses. The collaboration will be reducing the costs off operations for banks and also help in providing quality and fast services to the consumers thereby attracting more consumers to the business. Thus there are various opportunities which is present in the application of fintech for the business of banking sector. The opportunities which are associated with the introduction of Fintech in financial services are explained below:

• Many of the banks view fintech as a potential threat to the business but it should be realized that Fintech has the potential to provide support to community banks and also restore the health of community banks by improving their overall performance also improving the profitability and return on equity of such banks to expected levels.
• Fintech can bring about desirable level of competition in the banking industry which at present is dominated by the larger banks. The smaller banks or the community banks are not even in the frame when competing with larger commercial banks. This can change effectively with the introduction of Fintech by the smaller community banks (Micu and Micu 2016). Therefore, there is an opportunity for smaller banks to raise the level of their business and operations and there is also an opportunity for the larger banks to deal the competition positively which can also bring about developments in the banking structure of even larger banks.
• It has been seen that the major difference which arises and sets apart the larger banks from the smaller community banks is not the net interest margin but the non-spread revenues which is earned more by the larger banks in comparison to smaller banks. There is also the case of lower interest expenses for the large banks and the same is not the case with the smaller banks. This situation can be reversed with the implementation or support of Fintech and there is an opportunity to further develop the business and increase overall competitiveness of the banks.
• Fintech can offer significant amount of support to community banks in several areas which is generally a weakness for community banks. The support can bring about an improvement in the non-interest income and efficiency area of the business. The innovative approaches in fintech can bring about improvements in the concerned areas of the business by making improvements in payments, wealth and insurance. The innovative approaches which can be brought about by Fintech support can widen the scope and services which is provided by such community banks.
• Fintech can bring about improvements in efficiency ratios of banks and also reduce the overall costs which is associated with the operations of banks. The overall costs which is associated with the operations of banks is considerable huge when it comes to traditional banking approaches. On the other hand, in case of digital banking solutions which are facilitated by fintech, the overall cost of operations of such banks are considerable reduced and therefore such a factor acts to the advantage of the banks. In addition to this, with the help of digital banking solutions, banks are able to reach and cover wide areas and sever maximum of the customers of the banks. Thus, in an overall estimate, the reduction in operational costs of the banks and the widespread reach of the banks provides a significant opportunity to increase the operational capacity of such banks.
• Another opportunity which is presented by Fintech business is that it can reach wide spread markets and also connect with the modern consumers who wants minimum cost and quick transactions. The management of companies can bring about more profitability and growth in the overall business of banks. The fintech business development will bring about business development and is appropriate at the time of fintech revolution.

How Fintech is Disrupting Established Financial Companies

The threats which are related with the introduction of Fintech in businesses are explained below in details:

• The outsourcing of IT services for support to financial services posses a serious threat of data loss and thus there is a serious threat of security and also challenges to governance and control. Cybercrime has recently increased in recent times and therefore such posses as threat to the entire system and affects the integrity of the entire financial system. This is one of the reason due to which financial institution are unwilling to accept and implement Fintech in business. In addition to this, banks often lack the capacity and infrastructure to safeguard against such cybercrimes which have become common in today’s environment.
• As per a recent survey to look into the working of fintech businesses which are mostly engaged in payments, clearing and settlement services. In payment services, retail and wholesale payment also comes into consideration (Nicoletti 2017). This should be considered that Fintech also posses a variety of risks which is related to the operations of the financial sectors. Therefore, banks should consider all the risks which is associated with the application of Fintech before taking assistance from the same.
• One of the major threats which banking enterprises faces due to such fintech companies is related to unbundled services which are provided by such fintech companies. Consumers can find alternatives of services which are provided by banks due to such Fintech companies and therefore such are hampering the business of banks (Puschmann 2017). This is a direct risk to the profitability of the banking businesses and also threat of new entrants in the market which can provide fast services to the customers and also at a reasonable price. This affects the business of banks and other financial institutions adversely.
• Another critical area which the management of banks need to consider is that due to the support of fintech to banks more players are getting involved who are offering the same financial products and services as is offered by the banks. This increases the competition in the market and a key challenge for banks is to monitor operations and risk management of business. Then there is operational risk which the banks face due to the such fintech businesses (Gomber, Koch and Siering 2017). The rise of Fintech creates more interdependencies between the financial players who are existing in the markets. Then there is a risks of system failure which will affect the business of banks but also question the efficiency of banks.
• Another threat which is faced by banks and financial institutions is that with the new services and facilities which are provided by such Fintech companies are not only fast but also at a reasonable price. This will lead to difficult in management and control over the activities of the business enterprise. Then there is also the issue of data privacy which is very difficult to maintain due to the intervention of such fintech companies and this often leads to cybercrimes which is a serious threat for the consumers and the institution taking the services of such fintech companies.
• The prospect of fintech also has serious risks of potential abuse and therefore, fintech needs to be managed effectively and proper governance and control measures are to be implemented for the same. The application of fintech technology can encourage risky behavior such as taking excessive borrowings and personal debt accumulation which is very much risky in nature.

As per the case study which is provided in the question shows that ABC Global Banks are engaged in providing services in different regions and the business follows traditional approach in the banking services which is provided by the business. It is recommended to the management of the bank that it should take assistance from fintech companies in order to further improve the services which is provided by the bank. The implementation of fintech in the banking business will improve the efficiency of the bank and also develop the banking structure of the business.

The introduction of fintech in the business of ABC Global Bank will not only improve the business structure of the banks but also bring about development in the process of the business. In addition to this, the various services which are provided by Fintech will help the management of ABC Global Banks to establish the supremacy of the bank in the banking industry and also help the bank to effectively face competition in the market. The implementation of Fintech program in the business of ABC Global Banks will help businesses to offer more services to its customers at a reasonable price and at a better response time. Th overall development of the business environment with the introduction of fintech support services in financial industry has been enormous and the business environment has been highly competitive in nature.

Conclusion

Thus, from the above analysis of the Fintech businesses, it is clear that Fintech has the potential of bringing about rapid changes in the financial markets and also development of banking sectors. The above discussion shows the relevance of the new technology and innovation in the financial markets. The discussion part of the assessment shows that ABC Global Banks should take assistance from Fintech businesses to further improve the overall structure of the banking business. The application of Fintech will bring about growth and development in ABC Global Banks.

References

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