Cloud computing revolutionizes banking by enabling direct connections between bankers and users. Through digital services powered by the cloud, customer relations can be maintained anytime and anywhere. The internet facilitates seamless storage, management, and access to information, benefiting both bankers and consumers.
The advancement of cloud computing has empowered banks to prioritize customer-centric models and digitize trading and wealth management. Cloud computing establishes a multi-channel relationship with customers, encompassing every aspect of the service. It facilitates efficient storage, backup, and recovery of large volumes of company data.
In addition to data storage, cloud computing simplifies software delivery, data transfer, and updates, as well as data recovery processes. By integrating cost-effective cloud solutions, banks can enhance their turnover and operational efficiency. Cloud computing revolutionizes the banking industry, enabling seamless and scalable solutions for improved customer experiences.
The Fintech wave is reshaping the financial services industry
Within a span of only twenty years, fintech, a combination of "finance" and "technology," has rapidly emerged, completely transforming the landscape of the financial services industry. This thriving sector has been driven by a series of groundbreaking innovations that have revolutionized the way we perceive financial services, with each advancement appearing more groundbreaking than its predecessor.
The fintech sector, currently representing only 2% of global financial services revenue, is projected to achieve annual revenue of $1.5 trillion by 2030, accounting for nearly 25% of all banking valuations worldwide. The Asia-Pacific (APAC) region, particularly emerging Asia (China, India, and Southeast Asia), is expected to be the largest market, capturing 42% of incremental revenues and contributing to expanded financial inclusion. North America, the current leading fintech market, will follow APAC and continue to serve as a crucial innovation hub. Europe and Latin America will also experience robust growth, supported by favorable regulatory environments, while Africa has the potential to leapfrog and establish a new financial ecosystem free from legacy infrastructure.
In the upcoming era, B2B fintech (serving small businesses) and B2B2X fintech (B2B to any user) are anticipated to take the lead, surpassing the previous dominance of payments. Fintech's catering to B2B enterprises have significant opportunities to disrupt, as there is an estimated $5 trillion credit gap for small to mid-sized enterprises (SMEs) globally. With businesses across various industries expanding their financial service offerings and traditional incumbents struggling to keep up with innovation, B2B2X fintech, including embedded finance, is expected to meet the growing demand for fintech solutions. Spread businesses, such as lending platforms and neobanks, may face substantial challenges in developed markets, where they will need access to stable and low-cost sources of deposits to reduce their cost of capital.
On the other hand, emerging markets will likely continue to see disrupter models dominate, particularly in underpenetrated segments like insurance and wealth management. While disrupter models in these areas may face challenges, B2B2X fintech enablers will have significant opportunities to seize. It is important to note that this expected growth is not without risks, including regulatory, reputational, and macroeconomic factors.
Therefore, it is crucial for all stakeholders to seize this opportunity. Regulators should take a proactive approach and lead the way in developing policies that foster a collaborative, secure, and inclusive financial ecosystem. This may involve establishing pathways for intermediate financial licenses and investing in digital public infrastructure. Fintech firms can capitalize on the moment by playing offense while also implementing cost-saving measures to ensure their sustainability, accelerating their own digital transformation and meeting the evolving expectations of consumers. Some investors recognize the long-term potential of the sector and are taking positions as fintech valuations undergo a correction.
The Evolution of Fintech Industry
Based on a BCG’s Global Fintech Report 2023, the Fintech’s chronological evolution is divided into 4 phases, including: digital disruption, mobile and social adoption, relevance and scale, looking ahead.
1. Phase One: Digital Disruption (1998 - 2008)
The rise of internet-connected devices has paved the way for the digitization of financial services, posing a significant challenge to traditional systems employed by national and regional financial institutions. This digital shift has brought forth enhanced convenience and accessibility for consumers, addressing their pain points effectively. Online banking, lending, and e-commerce, particularly through popular marketplaces like Amazon and eBay, have seamlessly integrated into our daily lives. Amongst these advancements, online payments, like PayPal, have emerged as the frontrunners, disrupting the transaction-banking industry. Digital lenders, such as Capital One, have spearheaded a wave of innovation in lending, leveraging data and analytics to transform the landscape.
2. Phase Two: Mobile and Social Adoption (2009 - 2014)
In the aftermath of the 2008 financial crisis, incumbent banks faced increased regulatory scrutiny and changing consumer behaviors, leading to an opportunity for fintech startups to emerge. This shift, coupled with a credit boom and rapid advancements in mobile and cloud technologies, enabled consumers to access financial services in real-time, fueling the rapid growth of disruptive players in the industry. Fintech companies focused on enhancing the user experience and interface (UX/UI), and leveraged APIs to streamline the onboarding process and create a seamless digital journey for customers. Additionally, the integration of social media and data analytics played a crucial role, allowing companies to gather detailed information and offer highly personalized solutions. The success of fintech was driven by its ability to provide digital-first solutions tailored to individual needs.
3. Phase Three: Relevance and Scale (2015 - 2021)
The fintech industry experienced rapid growth, particularly during the COVID-19 pandemic, fueled by widespread smartphone adoption. Consumer expectations shifted, with the demand for round-the-clock availability of online financial services. Fintech's capitalized on expanded customer access to financial services, the emergence of new demand-generation channels, improved user experience and interface (UX/UI), and cost reductions. Funding in the fintech sector skyrocketed to $440 billion between 2014 and 2022. With a favorable low-interest-rate environment and readily available capital, valuations soared, leading to a surge in the number of companies and an influx of talent into the industry. This growth also brought increased competition for market share, resulting in a flurry of mergers and acquisitions (M & A) activities.
4. Phase Four: Looking Ahead (2022 and Beyond)
Experts anticipate the regulatory environment is more proactive, fostering investments in supportive infrastructure such as digital public goods, and encouraging innovation in regions that aim to enhance financial inclusion. Additionally, we are witnessing the emergence of new technological disruptions like Generative AI and Distributed Ledger Technology (DLT), which are already making their mark. Despite facing significant challenges, CEOs in the fintech industry maintain optimism for the long-term future.
Why is Cloud Computing important in Banking and Fintech Sectors?
The banking industry is facing increasing demands for data processing and management. Exploring non-disruptive systems that allow for infrastructure modifications without relying on like-system migration is crucial. While there have been concerns about reliability, regulatory compliance, and security risks, the adoption of cloud computing in the banking sector is gradually reshaping the way consumers engage with banks.
Cloud technology has played a significant role in the sustained growth of fintech. By reducing capital expenditure (CAPEX) and operational expenditure (OPEX) budgets, it expands the service portfolio and enhances the user experience. One of the key benefits of cloud computing is the mitigation of risk factors associated with data centers and infrastructure, ensuring the complete security of confidential data. Additionally, it enables effective risk analysis for businesses, allowing them to prioritize their core operations while safeguarding critical information.
Fintech has embraced cloud computing as a transformative trend, delivering significant benefits to the financial sector and opening up vast growth opportunities. According to Expert Market Research, the global fintech market reached a value of around USD 194.1 billion in 2022, and it is projected to expand at a compound annual growth rate (CAGR) of 16.8% during the forecast period of 2023-2028, ultimately reaching USD 492.81 billion by 2028. The integration of cloud computing has played a pivotal role in driving this growth and enabling fintech companies to innovate and thrive in the evolving financial landscape.
The banking industry must address the increasing demands for data input. Exploring systems that allow infrastructure modifications without disruptions, regardless of like-system migration, is necessary. While banks have been cautious in adopting cloud computing due to concerns about reliability, regulatory compliance, and security risks, cloud technology is gradually transforming the way consumers engage with banks.
10 Key Technology Developments That are Shaping the Future of Fintech
Cloud computing has revolutionized data storage and sharing for businesses, providing a cost-effective solution with numerous advantages, including secure storage, interoperability, scalability, and uninterrupted availability. In the fintech sector, these benefits are amplified, enabling operations across multiple platforms and apps, as well as the creation of personalized experiences for clients.
We have listed 10 key technology developments that are shaping the future of fintech below:
1. Geo-redundant Cloud Data Centers
Events such as storms, power outages, or hardware failures have the potential to disrupt regular business operations, leading to downtime and data loss. To ensure operational continuity in the face of such calamities, businesses can rely on geographic redundancy. This approach enables them to seamlessly migrate critical applications and data to secondary locations that are geographically distributed. By doing so, businesses can mitigate the impact of disruptions and maintain uninterrupted operations.
2. Regulatory Compliance & Data Security
Identity theft and data breaches are significant challenges faced by the fintech sector. To safeguard the payment system, fintech businesses employ various authentication methods, including multi-factor authentication. However, despite these measures, hackers continue to find ways to infiltrate systems and compromise sensitive financial and personal information. With cyberattacks growing increasingly sophisticated, achieving absolute security in the digital realm is a daunting task. Financial institutions constantly face the risk of data breaches, as it is challenging to eliminate the possibility of data leaks entirely.
All cloud service providers must comply with regulations specific to the banking and fintech sector, such as PCI DSS and PCI 3DS. Adhering to the minimum security requirements outlined by PCI DSS is crucial for financial institutions and consumers alike. By doing so, they can ensure that the risk of loss resulting from fraud and cyberattacks is effectively managed and kept at an acceptable level.
3. Self-Service Applications
With the exponential growth of financial data, managing it without the support of cloud services would have been challenging. Cloud technologies have played a pivotal role in enabling fintech companies to securely and efficiently store and manage their data.
Moreover, cloud technology empowers businesses to leverage intelligent loan, payment, and fraud prevention techniques. By providing a highly secure platform, advanced engineering capabilities, and configurable services, cloud technology allows businesses to deliver exceptional customer service.
4. Machine Learning
Leveraging machine learning (ML) algorithms is a crucial aspect of predicting financial trends for businesses. In the fintech industry, the adoption of ML algorithms can aid in forecasting market risks, identifying potential business opportunities, mitigating fraud risks, and more.
To train their machine learning models, businesses can utilize vast amounts of data encompassing various aspects such as financial transactions, loan repayments, company shares, customer interactions, and more.
5. Cloud Native
Cloud-native architecture enables businesses to develop applications using microservices, eliminating the need to build entirely new environments. This approach reduces dependency on specific vendors and enhances application portability.
The inherent flexibility of cloud-native applications empowers fintech organizations to drive innovation, rapidly introduce new services, and ensure seamless user experiences even under high traffic loads.
6. Quantum and Edge Computing
Quantum computing is gaining recognition in the fintech sector for its ability to address crucial issues like cybersecurity. It plays a significant role in protecting customers' financial data by employing advanced cryptographic techniques. Quantum cryptography ensures a higher level of security for financial data compared to current digital security measures.
The qubit, or quantum bit, possesses unprecedented power and speed, making quantum computing capable of solving highly complex problems in a fraction of a second. Quantum computers operate with qubits existing in a superposition of states (1 and 0), and their output is determined only upon measurement. This technology holds great potential in various applications, such as portfolio selection, asset allocation, and overall business optimization programs. Quantum computing can also be utilized for advanced underwriting, real-time anti-money laundering efforts, neural networks for anti-fraud systems, analysis of massive global datasets, and the development of next-generation encryption as well as financial cybersecurity technologies.
7. Generative AI
The advent of artificial intelligence has ushered in a transformative era in the human-digital interface, particularly in the realm of natural-language processing. This innovation not only enhances customer service to a higher level but also empowers traditional financial institutions to overcome their technical limitations. For example, Stripe is already leveraging GPT-4's enterprise beta version to streamline user experience, prioritize customer inquiries, and combat fraud.
In the future, generative AI will enable the development of digital financial assistants capable of performing tasks like bill payments, remittance transfers, budget checks, dispute resolution, and more, without the need for human interaction. Generative AI can also be utilized to simulate cyberattacks and generate decoy data to train models in safeguarding financial institutions. This technology will enable highly personalized financial products and services, analyze vast amounts of data to uncover patterns, and facilitate human decision-making processes. Additionally, it will bring significant efficiencies to customer service and administrative centers in labor-intensive industries such as insurance and wealth management.
8. API-Based Open Connectivity
Open banking 2.0 holds great promise in establishing a smooth and modular approach, enabling standardized interfaces for banks, corporations, and government entities. Through application programming interfaces (APIs), these stakeholders can seamlessly connect to gather customer data, offer advanced financial services, and foster collaboration among financial institutions on a global scale. APIs can also serve as a means to aggregate data from diverse sources such as social media, news platforms, and personal devices, thereby facilitating precise risk assessments for applications like credit underwriting, fraud detection, credit scoring, insurance underwriting, and more.
9. Distributed Ledger Technology (DLT)
Distributed Ledger Technology (DLT), as a global infrastructure based on blockchain technology, has the potential to establish a worldwide platform for transactions and settlements using stablecoins, serving as an alternative payments network. This platform is expected to be efficient, cost-effective, transparent, borderless, and secure, eliminating the need for intermediaries and reducing the time and expenses associated with payment settlements.
DLT also offers a secure and immutable global identity verification system that safeguards individual privacy while facilitating Know Your Customer (KYC) authentication. This technology supports the development of a decentralized supply chain platform that enables businesses to access financing more efficiently by leveraging a shared ledger of transactions, thereby reducing the risk of fraud. Tokenizing complex real asset classes, including regulated digital currencies, is a key advancement made possible by DLT. Additionally, self-executing smart contracts can verify and enforce the terms of agreements between buyers and sellers. Lastly, when built on top of DLT, Central Bank Digital Currencies (CBDCs) are standardized and interoperable that can be utilized across different countries and currencies. CBDCs have the potential to pave the way for real-time settlement infrastructure, enabling instant Account-to-Account (A2A) and cross-border payments.
10. Embedded-Hardware IoT and Biometrics
The Internet of Things (IoT) enables the networking and communication of objects and devices through the Internet, opening up possibilities for personalized financial products. For instance, IoT can facilitate the development of energy-efficient mortgages and home insurance by leveraging data from connected fixtures and appliances. Advanced smartwatches can monitor health statistics, allowing for the customization of health insurance policies based on individual behaviors and specific disease risks. Additionally, IoT devices can trigger automatic financial transactions, especially when combined with smart contracts. Facial recognition technology is also being widely used, such as in supermarkets where it is integrated with consumers' bank and credit card details for seamless checkout experiences.
What Are The Top Payment Trends in Fintech?
We must have heard a lot about mobile payments, cashless payments, e-wallets, etc. Here are the top payment trends in the fintech industry:
1. Cross-Border Payments
According to a report by JP Morgan and Oliver Wyman, large corporations move over $20 trillion across countries each year, resulting in transaction costs of around $120 billion. This market is both extensive and intricate. International remittances, for example, involve managing large amounts of physical cash, dealing with multiple currencies, and engaging various financial institutions (FIs). While the existing SWIFT and Visa/Mastercard legacy systems have demonstrated resilience and dependability, it remains crucial to explore new and innovative payment infrastructures that can enhance accessibility, reduce costs and complexity, and improve security. Cross-border remittance businesses have played a significant role in expanding access to international money transfers.
With the continuous advancement of globalization, the demand for improved cross-border payment solutions is expected to grow. It is also crucial to establish backup systems in case the primary payment channels encounter issues. DLT has the potential to greatly disrupt this field. Companies in the blockchain industry, like Ripple, are already collaborating with financial institutions and payment providers globally to enable real-time, cross-border payments through their RippleNet payment network.
2. Real-Time Payments
Real-time payments (RTPs) are experiencing significant growth as they enable wire transfers to be credited to the recipient's account within seconds. This emerging trend in the payment industry is gaining popularity due to its speed and efficiency. With RTPs, individuals and businesses can enjoy the convenience of instant fund transfers, eliminating the need to wait for traditional payment processing times. This development is revolutionizing the way transactions are conducted, providing faster and more seamless payment experiences for users. As technology continues to advance, real-time payments are expected to play a crucial role in shaping the future of the financial industry.
In Vietnam, RTPs are also gaining traction. We have witnessed significant advancements in its payment infrastructure, allowing for faster and more convenient transactions. The National Payment Corporation of Vietnam (NAPAS) introduced its Interbank Electronic Payment System (IBPS) to enable real-time fund transfers between banks. This system enables individuals and businesses to make instant payments, including person-to-person transfers, bill payments, and online purchases. Additionally, mobile payment providers such as MoMo, ZaloPay, and VTCPay offer real-time payment services through their digital wallet platforms, allowing users to make quick and secure transactions using their smartphones. These advancements in real-time payments are streamlining financial transactions in Vietnam and providing greater convenience to individuals and businesses alike.
The enhancement of infrastructure to support A2A real-time payments will result in a substantial increase in data collection from consumers and SMEs. This vast amount of data will serve as a valuable resource, enabling the development of personalized credit models and the provision of improved financial services. As consumers increasingly engage in online transactions and direct interactions with each other, the prevalence of reliable RTPs will become widespread, becoming an integral part of everyday financial transactions.
3. Payment-Plus
In the Payment-Plus model, payment processors have a distinctive advantage in utilizing two-sided marketplaces to generate a flywheel effect, providing omnichannel services. This allows payments companies to not only facilitate transactions but also offer additional value-added services or subscription-based offerings, including billing and invoicing, tax automation, revenue recognition, and Banking as a Service (BaaS). These extended services can encompass treasury capabilities, card issuing, and business financing. Consequently, this model has the potential to establish a comprehensive ecosystem of financial services, resembling a mini-superapp.
4. B2B2X
B2B2X is a term that encompasses three key elements: B2B2C, B2B2B, and financial infrastructure players. In the B2B2C model, businesses enable other players to enhance their services and cater to consumers more effectively. In the B2B2B model, businesses facilitate other players in improving their offerings and meeting the needs of other businesses. Financial infrastructure players play a crucial role by providing technology solutions that are not limited to specific customer segments. Instead, they offer versatile solutions that support the operations of FIs and enable the efficient delivery of financial services.
Due to challenges such as cumbersome legacy processes, outdated systems, talent gaps, and competing priorities for technology funding, many banks struggle to innovate rapidly. This presents an opportunity for fintech companies to step in and help incumbents enhance their competitiveness. In response to lower economic growth, incumbent C-suite executives will prioritize cost reduction. Fintech enablers, on the other hand, can specialize in addressing specific needs that incumbents are unable to meet on their own, offering valuable solutions. The collaborative model of fintechs working with incumbents reduces risk for investors and increases their willingness to invest. The B2B2X segment is already experiencing rapid growth and still has significant potential. It is projected to achieve a 25% compound annual growth rate (CAGR), reaching $440 billion in annual revenues by 2030.
5. Embedded Finance
Embedded finance is expected to witness exciting new applications in industries adjacent to finance, such as transportation and healthcare, as well as in harnessing the potential of emerging hardware innovations related to the Internet of Things (IoT). To ensure secure transactions and data, biometric authentication methods like facial scanning may become more prevalent. There will be broader adoption of point-of-sale-embedded lending, embedded insurance, and similar offerings, resulting in increased cross-selling opportunities. Uber, for example, already offers a range of services to its drivers and couriers through its app, including a debit card, cashback rewards, and real-time earnings tracking. Fintech companies will play an increasingly significant role in facilitating these use cases.
6. Financial Infrastructure
Infrastructure-as-a-service (IaaS) companies that operate across multiple segments, particularly in areas such as cybersecurity, customer acquisition, lead generation, underwriting, KYC, UX (User Experience), data analytics, and risk management, will experience increased prominence. These companies will facilitate a range of use cases for both fintech startups and established financial institutions. However, it is worth noting that emerging markets like Southeast Asia may still lean towards traditional models as incumbents in these regions have not faced the same level of disruption as their counterparts in more mature markets and may have yet to make substantial investments in IT infrastructure.
Final thoughts
The integration of modern technologies has transformed the fintech industry, enabling innovation, enhancing customer experiences, and improving operational efficiency. The cloud has provided a scalable and flexible infrastructure for fintech companies to develop and deliver their services, while also ensuring robust security measures and compliance with regulatory standards. The utilization of cloud-native applications, machine learning algorithms, and advanced analytics has empowered financial institutions to gain valuable insights, streamline processes, and mitigate risks. Additionally, the cloud has facilitated the seamless integration of financial services across platforms, enabling convenient and personalized experiences for consumers. As the business landscape continues to evolve, the partnership between fintech and cloud technologies will remain pivotal in driving further advancements and shaping the future of finance.