• Eisele Candace, Writer/Market Researcher at Yalantis


• 30.06.2023 12:00 pm
#fintech

In the ever-evolving landscape of financial technology (FinTech), business owners are navigating a sea of innovation, opportunity, and challenge. On one hand, the advances in artificial intelligence (AI) and other technologies promise vast opportunities for growth and efficiency. On the other hand, these same technologies bring about a set of complex challenges, which, if not tackled effectively, may hinder the FinTech industry’s development. 

This article aims to guide FinTech business owners in understanding the financial services industry challenges and how to address them effectively with the help of a mature finance software development company.

What is FinTech

FinTech is a term that encompasses innovative technologies and business models that are disrupting the traditional landscape of the financial sector. The industry includes a wide array of services and solutions, from mobile banking and payments to crowdfunding platforms, peer-to-peer lending, robo-advisors, and blockchain technology. FinTech has evolved rapidly, propelled by factors like digitization, advanced analytics, AI, and the rise of non-banking players in financial services.

The current state of FinTech

The global footprint of FinTech is rapidly expanding. According to Statista, the number of FinTech startups worldwide is increasing at a phenomenal pace, with a marked rise in the number of users. The revenue of the FinTech industry is also expected to grow by 125.18 billion between 2023 and 2027. The transaction value of the FinTech industry is projected to increase during this period, indicating growing consumer trust and acceptance of FinTech solutions.

Investments in FinTech companies globally have been growing since 2010, and a surge in the value of investments in FinTech globally was recorded from 2014 to 2022. The deal size in the FinTech sector has also been increasing, which signals investor confidence in the industry’s prospects.

The FinTech revolution, with its roots in democratizing financial services, has indeed begun to disrupt traditional banking and financial systems. The continued growth and proliferation of FinTech signifies the changing face of the financial services industry, characterized by innovation, accessibility, and inclusion. A new digital financial inclusion index revealed that the quick adoption of FinTech has been facilitating financial inclusion. Notably, there is a wide gap in this index across different regions, with the highest index recorded in Africa and Asia, and the Pacific regions.

However, the rapid pace of technological advancement also poses new challenges in terms of regulation, data security, and customer protection, making it a crucial area for future research and policy-making.

https://unsplash.com/photos/s8F8yglbpjo 

Challenges that the FinTech industry faces

The FinTech industry, while offering a myriad of opportunities for digital innovation, grapples with several challenges. The rapid evolution of technology and a shifting regulatory environment set a complex scene, necessitating industry players to stay nimble and responsive. Let's take a look at a few challenges that FinTech businesses need to address.

1. Adoption and application of AI technologies

AI is an invaluable asset in the FinTech industry that significantly enhances financial efficiency. However, adopting and applying these technologies can be daunting. The pace of implementing AI in diverse areas of financial operations is inconsistent across financial institutions. While advanced economies thrive on AI and machine learning (ML) technologies, a 'digital divide' is evident with developing economies struggling to catch up. Thus, the challenge lies not only in technology adoption but also in ensuring that these transformative technologies are accessible and equitable globally.

2. Data privacy and protection

With the growing dependency on open banking and the resulting surge in data sharing, data privacy and protection have emerged as crucial challenges. The FinTech industry must handle increasing volumes of customer data, requiring sophisticated tools for data analysis that do not compromise privacy, such as federated learning, zero-knowledge proofs, and secure multi-party computing. 

Privacy is not just a legal obligation but also a valuable asset in establishing trust with customers and investors alike, hence its significance in FinTech operations. Many consumers are still skeptical about adopting digital financial services due to concerns about security, data privacy, and a lack of personal interaction. Overcoming these trust barriers requires FinTech companies to be transparent, provide secure platforms, and effectively communicate their value proposition. Additionally, educating consumers about the benefits and safety measures of FinTech services is crucial to building trust and broadening their adoption.

3. Security risks

As the industry grows, it becomes an increasingly attractive target for cybercriminals, a threat that has been heightened in the wake of the global pandemic. The World Economic Forum’s FinTech Cybersecurity Consortium underscores the need for a common approach to cybersecurity controls across the industry, given the unique challenges presented by the digital nature of the industry’s transactions and data handling processes.

More specifically, the consequences of a security breach in the FinTech sector can be particularly severe. Not only are there substantial financial implications, but the impact on a firm’s reputation can lead to a loss of customer trust. This is of particular concern given that trust in the handling and protection of personal financial data is paramount for customers using financial services.

4. Financial inclusion and accessibility

While FinTech has the potential to democratize access to financial services, significant challenges remain in achieving true financial inclusion. Many individuals, particularly in underserved communities, still lack access to basic banking services and face barriers to entry due to limited financial literacy or inadequate infrastructure. FinTech companies need to address these challenges by designing user-friendly interfaces, providing educational resources, and collaborating with governments and non-profit organizations to reach underserved populations. Additionally, overcoming the digital divide and ensuring internet connectivity for all is crucial for expanding the reach of FinTech services.

5. Regulatory changes and compliance

The rapid pace of innovation in the FinTech sector often outpaces regulatory frameworks, leading to a complex and shifting regulatory environment. FinTech firms must not only remain compliant with current regulations but also stay abreast of and adapt to evolving regulatory changes. This challenge is intensified by the international nature of many FinTech operations, which must comply with multiple regulatory jurisdictions.

How to overcome the challenges of FinTech-as-a-service platforms?

Overcoming the challenges of FaaS platforms requires a strategic approach, centered on embracing advanced technologies and maintaining a robust regulatory compliance posture.

Embracing an AI-first approach

Implementing AI across different operational areas enhances the cohesion and performance of the entire system. These applications can vary significantly, ranging from enhancing customer experiences with personalized services and automated transactions to powering back office functions like risk and fraud detection. A critical part of this approach is the introduction of AI into regulatory compliance measures, which has been demonstrated to have several benefits such as regulatory change management, reducing false positives, fraud and Anti-Money Laundering (AML) prevention, and addressing human error.

Prioritizing data security and privacy

With the increasing emphasis on digital solutions, the risks associated with data breaches and data privacy rule violations have escalated. To navigate these challenges, FaaS platforms should prioritize the implementation of cutting-edge technologies like federated learning and advanced encryption. These technologies not only help safeguard consumer data but also foster customer trust and ensure compliance with regulatory standards. In addition, institutions should also focus on risk management and be wary of risk complacency to maintain compliance with the evolving regulatory landscape.

Supporting vulnerable sectors

FaaS platforms can play a crucial role in providing support to vulnerable sectors, such as small businesses, particularly during crises. They can create strategies that focus on risk mitigation, alternative lending options, or flexible repayment structures. Investing in automation, analytics, and process efficiencies can also help ensure a responsive and resilient support system. By incorporating these considerations into their strategies, FaaS platforms can effectively support these sectors while also boosting their own resilience and stability.

While the FinTech industry faces substantial challenges, opportunities in FinTech abound for those able to navigate this complex landscape effectively. By embracing AI, prioritizing data privacy and security, and offering robust support to vulnerable sectors, FinTech business owners can not only surmount these challenges but also position themselves for long-term growth and success in the digital transformation of financial services. The future of FinTech is indeed promising, but success requires foresight, agility, and the courage to innovate continuously.