Fintech, a portmanteau of the words ‘finance’ and ‘technology’, refers to technology enabling banking and financial services. However, several new technologies such as AI, ML and Blockchain are not only enabling existing services via traditional business models, they’re also disrupting the industry by the introduction of new services, especially by born-digital ‘TechFin’ firms.
Adoption of fintech around the world has grown rapidly, from 16% in 2015 to 64% in 2019, reveals the Global FinTech Adoption Index 2019 by EY. The awareness of fintech, too, is now higher than ever. Along with startups, large corporates and established banks have forayed into this space, underlining the immense potential of fintech.
In India, fintech has gained strong traction in recent years, buoyed by the significant increase in smartphone usage. At an exciting time like this, let us take a closer look at the major tech-driven trends that will dominate the fintech industry in 2020.
AI-Assisted Credit Underwriting
Artificial intelligence (AI) is a truly transformative force in FinTech. While most companies are aware of this technology, very few have realised its ability to make smarter lending decisions. Of course, other AI-based applications such as chatbots have seen high adoption rate, but fintech firms are yet to recognise the merits that artificial intelligence can bring to the credit underwriting process. AI-driven credit underwriting combines data derived from both traditional and alternative sources.
The use of AI on alternative data sources such as statutory filings (GST, EPFO etc.) statuses, news sentiment, court cases and proceedings in other tribunals (NCLT, DRT etc.), external credit rating history (migrations and downgrades) provides valuable insight on the willingness-to-pay of the borrower and hence improve the robustness of the loan-underwriting process.
Organizations with an AI-assisted loan-underwriting system can have a 360-degree view of the applicant. In 2020, more companies will consider supplementing traditional credit underwriting methods with AI-powered models on alternative data, thereby facilitating faster, simpler and better decision-making.
Early Detection Of Loan Defaults With Machine Learning
Early detection of risks of default is crucial for banks and NFBCs alike, especially given the large volume of non-performing loans in the country. With machine learning, financial institutions can detect and predict default behaviours of applicants.
An ML-enabled model not only identifies relevant relationships between variables but also dynamically tweaks the threshold for those variables based on traditional data points that already exist. Essentially, machine learning can help human credit underwriters to notice the finer details that could indicate whether an applicant can repay the loan as per the schedule laid out.
For example, machine learning algorithms weigh in on an applicant’s account conduct, compliance behaviour, financial performance etc. to pick-up leading signals of distress in an account. It then compares the attributes of a specific borrower with those of thousands of other borrowers and draws a conclusion if that borrower is more likely to become delinquent or default.
A Higher Level Of Transparency Through Blockchain
Fintech is one of the key sectors where blockchain has made a splash. The technology holds great promise, but most of the industry players are still learning how they can apply blockchain to their services. Yet, a PwC survey shows that nearly 77% of the financial services industry plans to adopt the technology in some way by 2020. Blockchain does offer several solutions that can greatly benefit the FinTech industry, which continues to tackle data breaching incidents.
Its public ledger ensures transparency by providing the records of every single transaction to every participant. Furthermore, blockchain’s decentralized network model means that it is less prone to cyber-attacks as compared to centralized database systems. Some companies have already integrated blockchain into their operations, and higher adoption is anticipated in the upcoming year.
The Future Of Fintech: What Lies Ahead?
The ever-evolving nature of technology is what makes the fintech sector so dynamic. What was considered novel and disruptive even two years ago has since become a prerequisite for all companies. However, advanced technologies like artificial intelligence and blockchain will continue to drive the creation of entirely new categories of fintech products and services in 2020. This, in turn, will propel the growth of the overall fintech industry, including areas such as flow-based lending, mobile payments and investment management.