The 4th Industrial Revolution is now affecting nearly every sector across every country due to the rapidity of recent digital transformation. The scale and complexity of these developments need a radical turnaround of production, management, and governance systems. As a result, the Internet, social platforms, digital gadgets, etc., are used extensively due to the 4th Industrial Revolution.
Concerning its impact on economies and economic institutions, financial technology (FinTech) has expanded dramatically in recent years. FinTech offers both established financial services companies and start-ups a new business model. Though challenging for banks, fintech innovations modify conventional services and help banks grow. These developments may be seen in many financial sectors, such as credit supply, insurance, consumer finance, and wealth management. As a result, the rise of fintech might have a more significant effect on the financial system. A KPMG study from 2021 shows that global FinTech investment increased 94% from 2008 to $94.7 billion.
Fintech firms are emerging businesses that aim to upend the financial sector by offering services and products via cutting-edge digital tools and platforms. Since their inception, they have had yearly growth of 46.5%, filling the void left by banks after the 2008 financial crisis. They replaced traditional banking. These newbies are making it easier for people to enter the digital financial world, providing more specialized services tailored to their client’s demands, being adaptable and competitive, and promoting innovation across the financial sector.
The digital financial sector and its transformation
Data on Fintech investment shows that it has grown dramatically quickly in recent years, and as a result, scientific research on the topic has increased significantly, especially after 2015. On the other side, funding in the Asia-Pacific region increased more than four times to $4.3 billion in 2015, with most of the money going to China ($1.97 billion) and India ($1.65 billion). The number of funds invested in the fintech industry in North America increased by 44% to $14.8 billion in 2015, and the U.S. maintained its lead with 667 Fintech deals, a rise of 16%.
Many studies attempt to identify breakthroughs and disruptions using concepts like “digital innovation” or “digital transformation.” According to the definition of digital innovation, it is “a product, process, or business model that is regarded as novel, necessitates some major adjustments on the part of users, and is integrated into or facilitated by IT”.Digital Finance, which refers to the digitalization of the financial sector, is where IT and finance converge.
Fintech
The term “fintech” originated from the fusion of finance and technology. Fintech has been defined in various ways by experts in the subject. Financial Stability Board (FSB) definition of Fintech firms: “Technologically driven innovations in finance that may lead to new economic models, applications, procedures, or products with corresponding material effects on financial markets and institutions and the supply of financial services”.
The digital transformation of the banking system
The emergence of Fintech companies has increased economic development and has led to financial stability. Additionally, well-known IT companies attempt to participate in this scenario by working as organized financial services providers (OECD, 2018).
As Fintech companies use cutting-edge technology to provide commercial and corporate banking products and services, traditional banks have felt increased pressure to improve customer service. Banking has no alternative but to embrace digitalization, fundamentally altering the way it offers services and engages with both commercial and corporate clients due to two key factors—the fast digitization of all economic sectors and the emergence of new financial rivals in the sector with business models based on emerging technologies. These financial innovations might be categorized as new goods or services, new methods of production, or new types of organizations. New technologies impact the core business operations in digital finance, including payment services, credit and lending, insurance services, and investment management.
Electronic payment solutions cover a wide range of advanced payment options where the Internet serves as a “middleman” for both the bank and the client.
1. Mobile banking, a subtype of e-payments, uses a cell device to access banking services.
2. Peer-to-peer (P2P) payments enable transactions between private persons and are also linked to electronic payments.
3. The idea of a digital wallet, which can be used to make payments without using currency or money, is also current and novel.
There is an increase in Internet marketplaces that connect lenders and borrowers. Crowdlending or crowdfunding are terms used to describe online fundraising systems.
The fundamental concept is to raise money by having small investors provide them with microcredits through an internet platform.
The term “insurance” describes companies that operate in the insurance sector while utilizing cutting-edge technology. Since there are few significant interruptions, there are no further reasons to do the study. Instead, there are enhanced versions of the current insurance goods and services.
Digital investing involves managing a portfolio using technical tools or making investment choices in new assets, stocks, commodities, etc.
Financial Technology Transformation Challenges
The first obstacle the fintech industry faces is the ability to communicate its proposition to investors and other stakeholders, particularly if its offer is not in a way that is in line with existing markets and is not accepted by a certain percentage of users. These issues make it difficult for business investors to raise money. These stakeholders will be looking for unambiguous proof that the fintech digital technology is inventive, capable of assessing, and capable of minimizing risks as much as feasible.
Building connections and trust with clients who use traditional financial services providers is a significant challenge for fintech. They must dispel the idea that their novel innovation requires data management and security.
International competition is yet another significant obstacle to digital transformation; 95% of Fintech startups that attempted to grow up failed. This is due to Fintechs’ inability to operate outside of local and federal regulatory boundaries and reach clients in urgent situations.
Conclusion
The finance sector, like many others, has been impacted by digital technology. Even though most banks have initiated a transparent digitization process, financial institutions are usually progressing at a moderate pace, allowing start-ups and huge technical businesses to become rivals. These new rivals’ “assault” is a reality, and the risks they bring are becoming increasingly significant.
