The Role Of Fintech In The Evolution Of Financial Markets

“The science of today is the technology of tomorrow” (Teller, n.d.)

Technology has consistently proven to be a powerful tool for mankind. Across all sectors, technology has improved the speed and accuracy in manufacturing and rendering services to end users. This essay focuses on the digitalization in the financial sector, the overall role of financial markets within economies and, how Fintech has played a catalyst in the evolution of financial markets while also looking at some downsides.

Digitalization has enabled a real-time connect of all those working in the financial sector. Evolving from traditional banking methods, newer vehicles for saving and investing has integrated the financial market globally and made allocation and investments of funds a very swift process. Technological advancements serve as a stimulator for this mechanism.  Financial markets play an ever-increasing and crucial role in our economies, greatly enabled by user-friendliness of these technologies.

In its simplest definition, financial markets are markets for allocation of funds from savers to investors. The financial system plays a key role in an economy by encouraging savings and facilitating economic growth, through an efficient and effective transfer of funds.  The payment function, matching lenders and borrowers, handling risk and managing household financial affairs has made the financial system a backbone for integrating the economy by fulfilling and matching people’s financial requirements.  Financial technology facilitates these, backed by swift and efficient processes. This has led to rapid interconnectivity of most financial markets spread over the globe. As an example, a retail investor located say, in India, can invest real time in Nasdaq, with a couple of clicks.

Technologies used and applied in the financial services sector, chiefly used by financial institutions themselves on the back end of their businesses is most commonly referred to as Fintech. Fintech represents technologies that are disrupting conventional financial services, including mobile payments, money transfers, loans, fundraising, and asset management. 

Fintech’s secure place in the financial system can be perceived from the benefits it has brought to financial markets:

• Personalizing Financial services

It offers customized services according to consumer preferences. An example of this can be seen in the case of insurance policies, where there is an inherent moral hazard from the perspective of a policy holder. In such a case, smart contracts are used to adjust the insurance fees in accordance with the behaviour of a policyholder. By providing tailor made services to the customers, the overall experience that they derive from such services is enhanced. 

• Transparency

According to Callum Sinclair - Head of Technology, “Millennials love to engage with social platforms, but when it comes to their money, there’s still a trust deficit.” Nowadays, everyone is aware of their rights as consumers and demand a fair and transparent financial system. Fintech aggregates products, services and data which provide information on choices, coverage and pricing of products and subsequently increases transparency in the entire system. 

• Providing Support & Guidance

Navigating complex mechanisms in the financial system can be difficult for end users. Through the use of Artificial Intelligence (AI) and Big Data Analytics, Fintech assists the consumers in a cost-efficient way. 

• Speed and Flexibility

High volume trading has been made possible due to computers that instantly buy and sell securities. Due to this, the time period of the owner holding the securities has been reduced to a mere blink of the eye.” This impressive feat has been achieved by Fintech which combines speed and flexibility in achieving consumer-centric services. 

Fintech has made a clear impact in the financial services sector but we know that efficiency in one sector of the economy, will eventually contribute towards the development of the economy and society.

One of the major ways Fintech has impacted the economy is in the form of Financial Inclusion. When people in developing countries gain access to financial services through Fintech, they will gain opportunities to expand their businesses such as e-commerce and e-learning, which are currently hampered by constrained access to payment services. In this way, Fintech is expected to contribute to economic development. As Shepard Fairey puts it, “There’s good and bad in every arena.” Although Fintech has made a vivid impact in the financial and economic sector, it comes with inevitable drawbacks as the lack of security. Companies are facing severe cybersecurity issues, including threats that has the potential to turn into massive breaches which affect millions of customers worldwide. As reported by Equifax (Consumer reporting agency), in July 2018, over 143 million accounts were compromised in a massive data breach, in which hackers stole names, social security numbers, telephone numbers, and other vital information of account holders. 

By its nature, Fintech involves communication between a vast array of connected devices which utilise unique software, often with differing security levels. Hackers can capitalize on this lack of uniformity and by gaining illegal access to personal information stored across the entire network, can jeopardise personal safety of unsuspecting people.

The breach of security associated with Fintech is one major reason for investors and users of financial markets to be discouraged from using such technology. However, as the industry continues to evolve, cybersecurity specialists are revisiting conventional security models and remodelling Fintech to make its security fail-proof and ensure total data privacy, thereby gain consumer confidence and catalysing the adoption of Fintech. 

In conclusion, I believe that the vast number of positive factors of Fintech and the major improvements it can bring to the financial system and overall economies, hugely outweigh any downsides associated with it. An appropriate quote by Steve Jobs that, “Innovation is the ability to see change as on opportunity - not a threat” perfectly.