Major Challenges and FinTech Trends That Will Dominate 2021
Article updated on March 16, 2021
The fintech ecosystem has started to progress rapidly over recent years. Global investments in financial startups were 10.631 billion in 2020, which is the second-best tally since mid-2018.
According to FinanceOnline, the global fintech services market is forecast to reach $26.5 trillion in 2022. Medium reports companies using robotic technologies for banking objectives obtained ROI of 100% during 3-8 months in 2020.
For businesses, it is important to remain aware of all challenges and take advantage of 2021’s key fintech trends to stay at the top of the game and create new markets.
So, in this article, we are going to:
- Uncover the main challenges the financial industry facing;
- Discuss hot fintech industry trends in 2021.
Main FinTech Challenges in 2021
Regardless of the numerous directions of the fintech industry’s evolution, there are some areas to focus on. We have observed fintech experts’ and managers’ interviews, where they share the biggest concerns in fintech today and if there are some ways to deal with these concerns.
Overall Digitizing In Banking Sector
COVID-19 pandemic environment made the financial industry adopt more innovative B2C and B2B models for:
- Redesigning and restructuring time-consuming and expensive back-office processes;
- Digitizing payment operations once people treat cash as “unclean coronavirus reason”;
- Scaling business via mobile payment apps integration.
CNBC went on to add, “Merchants are encouraging people not to use cash, citing Coronavirus. We would expect some trigger to accelerate behavior from cash to digital payments”.
The solution to addressing this challenge is to rely on customer data for generating new services which enhance the customer’s experience and boosts value to financial service. AI and ML solutions implementation make it possible and drive smoother assimilating 2021 trends in Fintech.
Extended Application Of Machine Learning And AI
Deloitte noted a broad economic shift from “respond” to “recover” (under pandemic), and leveraging unique fintech assets and skills to seize new opportunities via AI and ML solutions. At the same time, McKinsey assesses AI as “potentially able to unlock $1 trillion of incremental value for banks”.
Natalie Pavlovskaya, Chief Marketing Officer at HES (HiEnd Systems), identified the following major fintech challenges:
FinExtra identified frequent use cases for AI and ML in 2021:
- 38% reducing costs;
- 37% customer insights;
- 34% smoother customer experience;
- 30% internal process automation;
- 27% fraud detection;
- 26% customer satisfaction.
All the above-mentioned cases are stated in the interview for the International FinTech Core 101 Course with Flowcast’s CTO, Winnie Cheng, in which he said:
“The past 5 years have been about Big Data and Machine Learning (as an AI subset). Financial services invested heavily in Big Data infrastructure. This is a great thing — it means that a lot of the data is being stored and maintained, and ready to be put to good use by data scientists. In the next few years, I expect that predictive models will be as common as databases in developing fintech applications. We will see more user interfaces that can sort of ‘read your mind’ and suggest or highlight actions that are relevant to you. The entire banking user experience will be transformed, with design thinking and data analytics being a core part of designing any business process. The way we apply for mortgages, for business loans will be much less painful than it is now”.
Robo advisor is a kind of digital platform driven by AI to provide algorithm-empowered financial planning service with no human supervision. Banks launch Robo advisors to increase efficiency in serving retail clients online. Comprising AI and automation this platform makes the client follow a series of questions about their finances, investment experience risk readiness, and proposes the most suitable investment portfolio with shares, bonds, and other asset types.
Trends That Are Going To Improve Financial Services In 2021
Deloitte describes the fintech industry as a “red-hot” spot for changes once customers loved the idea of on-demand finance, applied thanks to mobile and cloud computing. They state people are more comfortable with managing their assets online. Thus it’s possible to identify major 2021 trends in finance:
- Blockchain solutions boost.
- Artificial intelligence (AI) and machine learning (ML) technologies.
- Open banking.
- Mobile technologies.
- Regulation technology (RegTech).
Blockchain For Secure Financial Transactions
Blockchain was primarily created to ensure that cryptocurrency transactions were secure and protected from hacking attempts. So, how does this fintech trend work?
There is a chain of financial transactions that consists of blocks. Each cryptocurrency transaction is a component of a block in this chain and is united with the next and previous transaction. So, any modifications made to a previous transaction require the approval of all the stakeholders that participate in the chain. Additionally, the entire system is fully encrypted, which makes penetrating it impossible.
When it comes to regular currency transactions, we transfer only pieces of code from one account to another. Hackers can easily find ways to duplicate the necessary code and “spend” the money embedded in that code multiple times. They can also modify the code to add more digits to the amount of money available.
While security is still a top priority, more and more financial institutions are starting to implement blockchain in banking systems because of unbeatable security. According to Gartner, more than 40% of the surveyed enterprises established at least one blockchain pilot project in 2020. They specified that more than 30% of businesses were ready to dive into the production project stage in 2021.
However, blockchain in the financial sector is not used to its fullest potential. In 60% of cases, this fintech trend is implemented for protecting transactions. See how you can also benefit from blockchain except for securing money transfers.
Benefits of blockchain for financial institutions
The value of blockchain in fintech can’t be underestimated. With blockchain, it has become possible to:
- Carry out transactions faster with no need for an intermediary.
- Reduced need for stuff in the financial back office, saving you lots of money.
- Increased transparency between parties involved in a transaction.
- Improved regulatory reporting with real-time tracking.
There are a few options for implementing blockchain into your financial services:
- First, you can build a completely new solution that corresponds to all your requirements. It will have only those features that you really need
- Second, you can customize an existing system with additional blockchain-based features. This is less time-consuming than building a new solution, and your employees will spend less time familiarizing themselves with new functions;
- Third, you can use a ready-made financial service that already exists on the market. Such solutions are good for short-term purposes, but they may include a limited number of features.
Innovecs can develop blockchain-powered financial applications and money transfer software solutions from scratch. Our engineers make use of blockchain technology to deliver secure and cost-effective products to our clients. We can also help revamp your pre-existing service or provide consultation.
Utilizing blockchain in fintech
Forbes observes the following domains of blockchain use:
- Cross-border payments: Westpac Australian bank established a blockchain solution for global payments to cut the cost of the transactions;
- Stock exchange and share trading: Nasdaq created a Private Market Platform based on colored coin concept to distinguish the coins used for trading as well as invested in blockchain ledger for trusted database performing all the transactions in real-time;
- Trade finance: IBM and Maersk collaborated to design a blockchain cross-border supply chain solution;
Digital identity verification: Cambridge blockchain is a startup using a blockchain-based customer identification system;
- Syndicated lending: BNP Paribas group initiated support for blockchain platform for syndicated loans;
- Accounting and audit: PricewaterhouseCoopers announced further development of blockchain auditing service to check other companies using fintech blockchain solutions;
- Credit reports: CreditDream, Brazilian platform, united lenders, and borrowers worldwide to perform secure deals.
Artificial Intelligence And Machine Learning
Artificial intelligence and machine learning (ML) technologies provide financial institutions with a myriad of benefits.
First, using trends centered around ML and AI enables organizations to know their clients’ preferences, behaviors, and expectations. This information helps offer the products and services to the target audience segments that are most likely to purchase. In such a way AI and ML are great opportunities for companies to enhance their profits and become closer to their target audience in 2021.
Second, ML and AI in fintech allow for software development automated personalization. This software aims to collect information about each client and analyze it, allowing you to personalize the messages to your clients, which improves the overall user experience.
Third, smart chatbots are developed based on artificial intelligence. They are considered to be the helping hands in better interactions with clients, thanks to their round-the-clock availability and cost-effectiveness. Although chatbots currently only have very basic functions, ML algorithms will help them significantly improve in the next few years.
The potential of AI in fintech is huge. For example, South Korea has introduced a national plan to invest $2 billion to strengthen its artificial intelligence capabilities by 2022. They plan to launch six AI research centers to investigate how this technology can impact different domains including fintech.
If you want to benefit from applying these technologies to your bank or other financial institution, outsource the development of fintech software to Innovecs. Our engineers are experienced in developing such solutions. For example, for one fintech company, we produced a software solution based on AI and ML for their clients’ behavior analysis, along with further reporting and predictions.
Benefits of ML and AI in fintech
When deciding to implement a smart solution based on machine learning and artificial intelligence, you can expect:
- An improved customer experience.
- Effective supply chain maintenance.
- Human intervention elimination.
- Deeper insight into the client’s preferences.
- Better financial services targeting.
Open Banking As A Key 2021 Trend
Open banking provides a secure way of sharing your financial information with third-party providers.
This system became possible due to the PSD2 Directive issued by the European Commission to lower the entrance costs and make transactions safer. Open Banking uses open APIs to share the data. For example, you can log in via Facebook to sign in to third-party websites still approving the connection.
How do customers benefit from Open Banking?
OBIE (Open Banking Implementation Entity) in the UK suggests 2 million people in the country already use it, and 45% of them are people aged 25-34. The user base is growing and people are satisfied with the following advantages:
- Once you have accounts in four different banks, you have no need to use four separate banking apps.
- The risks of chargeback are eliminated (customers make direct account-to-account payments).
- Lower transaction costs.
Mobile Technologies Keep Evolving
Millennials don’t have enough time to go to a bank in the modern world. They prefer being provided with all the necessary banking services regardless of where they are at the moment.
Other generations are adopting this fintech trend rapidly due to the undeniable convenience of having every necessary service available on-the-go. Mobile technology development continues to be on the rise in the fintech industry.
It is expected that, by 2021, the volume of mobile payments will increase by 43% as compared to 2020. These statistics provided by Statista prove that financial institutions will be able to greatly benefit from keeping their eye on mobile technologies.
Another fact proving that mobile technology is a fintech trend on the rise in 2021 is provided by Apptopia. They have found out that global banking app sessions have increased averagely 49%. The most growing app session rates were performed in Japan (75%), Germany (45%), Turkey (39%), the U.S. (33%), and the U.K. (29%).
The demand for mobile-based technologies is part of a bigger fintech trend, which is the merging of physical and digital banking together with other financial services. Consequently, fintech companies will become allies rather than rivals for legacy financial institutions, leading to a significant increase in fintech outsourcing services traded worldwide.
Benefits of integrating mobile financial solutions
Statista counts nearly 3.8 billion smartphone users globally. If financial institutions strive to provide streamlined services, scale their business, and address more and more customers, they need to go mobile and develop user-friendly apps. Emphasizing mobile payment capabilities in 2021 will definitely be advantageous, see how your financial services can improve by going mobile:
- Transactions will become faster (especially when it comes to cross-border money transfers).
- Blockchain-based mobile payment apps will ensure secure money flows.
- Engage more clients since people of all ages are slowly but steadily switching to mobile-friendly products.
Regulation Technology (RegTech)
Reg-tech stands for regulatory management in the financial industry via technologies. It performs the following functions: regulatory monitoring, reporting, and compliance. The Reg-tech boom appeared in 2021 because fraudsters are getting “cuter” and using technologies as well to bypass detection. The rise in the number of digital solutions has caused a rise in cyber attacks, money laundering cases, data breaches, and other fraudulent activities. The purpose of RegTech is to solve all these by applying machine learning algorithms generated on the basis of big data.
For example, a bank with a large volume of data can spend too much time on processing, which is very expensive. A company providing RegTech services can help solve this problem by comparing usual data with data, which causes regulatory failures. This helps make predictions and, thus, prevent fraud in the future.
Benefits of regulation technology for FinTech
By using RegTech in your financial services, you will have a chance to:
- Track financial transactions in real-time to generate accurate financial reports.
- Reduce the risk of money laundering within your organization.
- Improve and maintain fintech compliance.
- Cut costs associated with manual data management.
- Enhance data protection.
RegTech knowledge hub presents a number of cases, where technology is used to perform regulatory activities:
- to enhance product offering with a fully automated MiFIR (The Markets In Financial Instruments Regulation) reporting service;
- to reduce regulatory reporting costs;
- to meet regulatory state objectives;
- to address the complexities of the regulatory environment;
- to comply with MMSR (money market statistical reporting).
To recap the information about major fintech 2021 trends, we’d like to mention Celent’s (an advisory firm) research, in which they stated 70% of the companies treat customer satisfaction as a key driver for all technological digital improvements. Clients trust businesses more if they apply tech solutions to ease, secure, and make smoother any transactions. And they are ready to adopt introduced fintech trendy solutions.
The fintech industry has undergone major transformations over the last years. These changes in the field can be explained by emerging both pandemic situation and new financial industry challenges that could be addressed by:
- Blockchain-based solutions aim to make transactions fast and secure.
- Machine learning and AI in fintech help interact with clients more effectively.
- Mobile fintech technologies ensure instant payments.
- RegTech oriented toward improving compliance and eliminating fraud.
Most of the hot 2021 fintech trends are based on blockchain, AI, ML, and mobile technologies. And they are aimed to ease customers’ experience to gain more loyal satisfied product or service end-users.
The basic transformations in the fintech industry nowadays are determined by going people online more intensively than ever due to a pandemic global environment. And market players are about to seek new opportunities to make fintech business digitalizing smooth, secure, and profitable.
Innovecs can become your partner in implementing any of these new technologies to enhance your financial services. Get ready to bring your business to a new level with the help of smart software solutions on the basis of new fintech technology trends.