FinTech Innovation 2.0
Sunil MishraSenior Industry Principal, Infosys Finacle
In our banking trends forecast for 2019 released in January, we predicted the rise of industry cross-overs that would create differentiated value in ways never seen before. We were talking about the likes of Grab, a ride-sharing service in Singapore that is also South Asia’s largest non-banking financial service provider now. Not surprisingly, seven months later the likes of Jakarta’s Go-Jek that’s developing digital wallet solutions in partnership with DBS and VietinBank, and UK’s Kwit-Fit insurance services have joined the fray. Grab on its part is stepping up its game by becoming an everyday app for customers in South East Asia and is in early discussions with Ant Financial and PayPal. On the ecommerce front, Indian ecommerce giant Flipkart is following in the footsteps of giants such as Alibaba’s Ant Financial and its Indian peer PayTM to launch a payments bank in the country. The company is allegedly in talks with the Reserve Bank of India to secure a banking license.
FinTech innovation in the sector, although teeming with activity, has largely been limited to the last-mile services such as payments. Twelve out of the fifty FinTech companies on the Forbes FinTech 50 for the year 2019 are payment companies. According to a report by CBI Insights, payment deals constituted about 15% of the technology funding deals in the U.S. in 2018.
However, after the sizeable action in last-mile services, the FinTech innovation engine is likely to shunt deeper into the value-chain in areas such as risk management, fraud management, and credit appraisal to name a few. As innovation in the payments space continues to accelerate, we expect AI and Open Banking to be the other key trends fueling FinTech innovation over the next six to twelve months.
After a chequered past, AI is not only here to stay in banking but is finding wide application even beyond the front-office. One such area is fraud management. The days of rule-based checks for balance and transaction limits to flag potential fraud are clearly over. With the exponential rise in digital transactions, banks have effectively used FinTech capabilities to create machine-learning models with complex algorithms based on transaction patterns of customers. FinTechs have built solutions around classification and regression to determine potential fraudulent activity. And now, a multi-layered deep learning model that can dynamically accommodate numerous attributes such as KYC, IP location, user behavior is taking the evolution of AI from the self-learning stage to the self-optimization stage for high accuracy fraud detection.
The innovation potential also visibly reflects in the valuation of tech start-ups that are increasingly becoming attractive acquisition targets for their larger peers. Consider the California-based AI start-up Simility that recently got acquired by PayPal. By bringing Simility’s AI-based risk management solution into its fold and allowing merchants to easily integrate the technology, PayPal has strengthened its play in the payment solutions market.
In the wake of the new revolutionary mandate, FinTechs innovation seem to have spotted the value-chain gaps that prevent banks from delivering services at the desired levels of security and agility. Moving beyond chatbots and other AI solutions for the front-office, FinTechs are now making headway into the middle office with solutions that augment the capability of banks to deliver on the demands and evolving expectations in the new open world. One such capability is identity management. Tech start-ups such as Ping Identity, having identified the dire need for thorough identification and certification of third parties in the open world, are making security and identity management more robust for banks. Integration of data from multiple sources and API enablement solutions are the other key areas where FinTechs are creating value in the emerging space between the customer experience layer and the underlying process layer as the two decouple and drift apart. In the 2018 UK Fintech Open Banking Snapshot by Ernst&Young, 94% FinTechs surveyed reported Open Banking as a major area of opportunity with about 16% focusing on API-enabled enhanced creditscoring solutions for the middle office.
As stated earlier, the payments revolution was among the first to follow on the heels of the Open Banking mandate, and continues to be at the forefront of innovation in the open world. AISPs and PISPs are heralding banking into the next phase of Open Banking innovation. Price comparison websites and applications are some of the few propositions already enhancing decision-making and finance management for customers, but the space is poised for more action on the back of the API frameworks that several countries across the world have introduced. We expect the popularity of invisible payments to soar in the coming six to twelve months with adoption and introduction of more applications such as Barclaycard’s Dine&Dash in the retail space. Another key development will be the proliferation of providers such as Bud that offer and allow financial institutions to offer an array of financial and non-financial services on a single interface.
FinTechs have long been known to provide exceedingly agile but narrow point solutions, one of the fundamental drivers for bank-FinTech collaboration. As they advance towards innovation in more areas, the benefits of collaboration will continue to increase with agile FinTech solutions not only for the end consumer but also for banks. However, innovation in the last mile services will only be as successful as the adoption of these services, and winning over customer trust will be paramount.