BlogCommunity5 Emerging Technologies in the Financial Services Industry

5 Emerging Technologies in the Financial Services Industry

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Nowadays, technology plays a significant role in everything, especially in business. In the financial services industry, technology management has become the key to company success.

However, since most financial institutions rely on core systems created more than 30 years ago, a patchwork of different system applications occurred.

Although they offer stability, these antiquated systems are inflexible and unable to meet the demands of this modern time.

Their actual operational costs only became visible during the Global Financial Crisis (GFC) when revenues in multiple formerly lucrative industries fell, and cost-income ratios sharply increased. 

Additionally, the new regulatory agenda’s capital requirements and scrutiny posed additional challenges to established business and operating models and their profitability standards. The only solution was to modernize the platforms, which required billions of dollars in investments.

Over the past ten years, emerging technologies—often referred to as “Fin-Tech”—have boosted innovation.

The term “financial technology,” abbreviated as “fintech,” is simply the integration of technology into the operations of financial institutions.

However, FinTech’s more comprehensive definition focuses on industry-specific applications.

This article will show you the emerging FinTechs and explain how they will affect the future of the financial sector.

1. Advanced Software Solutions

The first pillar of transformation technology is advanced software solutions. They are the ones that shape modern open architecture models, increasing their operational efficiency through automation and collaboration. Here are some of them:

Financial Application Programming Interfaces (API)

API alone is a software intermediary that allows various components to communicate with one another. They facilitate the development of computer programs and promote connectivity and standardization among third-party applications.

You must know that software systems are often segregated inside a standard banking technology design, making it impossible to access one system’s functions from another. API provides a safe way to link these software entities together. They make data sharing between systems effortless.

In the financial world, we use different kinds of API to make various programs, like the best POS software for small businesses.

There are financial APIs specifically used for connecting people’s bank accounts to financial services, called “open-banking API.” It enables the development of new apps and services using safe and secure connections to bank account data.

Moreover, it creates programs with the benefits of using a personal finance management app in mind to ensure quality and security.

Cloud Computing (CC)

CC refers to the on-demand network access and system resources available online to numerous users. It is used mainly for data storage and computational capability and has given technology infrastructure and software programs new features.

With the help of CC, financial companies may now flexibly scale their data storage, computing power, and bandwidth. And compared to previous server and data center solutions, CC provides a significant advantage.

It promotes mobility in the truest sense and aids in keeping up with the pace of clients born into the digital age. It offers on-demand availability of computer resources without direct user management while storing and enabling rapid access to data. 

Smart Desktop (Interoperability)

Interoperability connects various software solutions and applications through a unified customer experience, called the Smart Desktops. They help produce intelligent processes with customizable workspaces.

Their primary focus was integrating online apps with other web applications. Open-system containers emerged to create a virtual desktop environment where these technologies could be registered and subsequently interact with one another. 

Today, interoperability has evolved into a full-service platform solution that offers comprehensive window management, container support, basic web-to-web transmission, and native support for other types of applications.

Complex workflow management is greatly simplified by its unified customer interface across many applications. Financial institutions have set their sights on completely automating front-to-back procedures and services to reduce manual work in complex product integration.

Interoperability makes it possible to eliminate human error by allowing cross-application data sharing. This optimization has significantly improved the efficiency in an open architecture framework.

2. Artificial Intelligence

The second emerging technology in the financial services industry is artificial intelligence (AI), focusing on big data analytics that supports decision-making. AI aims to create machines that can do tasks without human involvement.

how artificial intelligence is transforming the financial markets

AI has many definitions, and the terms are frequently used in conjunction with machine learning (ML).

The main area of AI research, known as machine learning (ML), employs algorithms for data analysis, manipulation, pattern recognition, and prediction. These algorithms are mathematical formulas that interpret data in particular ways and produce predictable results based on identified patterns.

Big data refers to the utilization of enormous datasets for ML applications as a whole. It addresses the complexity and depth of financial institutions’ data obtained from internal and external sources. 

With the help of ML, vast amounts of data can be processed effectively, producing unbiased findings and yielding significant efficiency improvements and fresh insights. This allows for objective and precise decision-making by predicting macroeconomic possibilities.

AI Chatbots

With ML and its branch, Natural Language Processing (NLP), conversational chatbots emerged. The concept of NLP is that it helps with the interaction of computer and human languages. It applies the rules of linguistic structure and disassembles them into small parts to determine the semantic linkages between sentences and create sentiment data output.

That’s how conversational chatbots work, utilizing the data, ML, and NLP to streamline conversations.

It is also believed that conversational AI chatbots can manage 85% of all business-customer interactions. They exceed expectations by providing customized responses to client inquiries, making pertinent suggestions, and learning from past encounters and the current database.

3. Robotic Process Automation (RPA)

Another emerging technology that reshapes operations in the financial services industry is RPA. It is a tool commonly used in automation because it automates fixed and repeated procedures.

Unlike AI, RPA works in a simple rule to provide relatively straightforward but trustworthy outcomes.

These pre-programmed rules can apply to unstructured data (forms filled out by hand) or structured data (incoming data on interest charts) to handle digitization, approval, risk flagging, and other processes. 

RPAs create reports, log data and keep them, and automate repetitive tasks. For instance, they handle quick payments by employing a programmed rule to authorize a payment automatically if all requirements are met.

The data would then be updated across all apps and servers using the data after another RPA moved the documentation from the original file into a larger one.

This technology improves efficiency, quickens the work processes, and reduces human errors.

4. Blockchain

Blockchain, a type of distributed ledger technology (DLT), is considered to be the future of the financial world. It enables value storage, identity management, and back-office tasks like settlements.

But it is best recognized for its involvement in financial speculation and innovation through cryptocurrencies like Bitcoin and Ether. Although the two cryptocurrencies use the same blockchain ideas, their implementations differ.

Bitcoin is expressed as Bitcoin code, which is then executed by Bitcoin software to produce transactions that include information about Bitcoin currency and are stored on the Bitcoin blockchain. On the other hand, Ether is a collection of tokens stored on the Ethereum blockchain.

Blockchain is basically a bunch of rules that characterize and define its operations. These protocols are in the form of computer code, which can be compiled into software that implements and enforces the rules. This method describes how ownership is recorded, what counts as a legitimate transaction, and how users can interact with each blockchain network. 

On a blockchain network, transactions use cryptography. It is a mathematical mechanism known for encrypted data exchange.

Although there is no default encryption on the Bitcoin network, the technology uses asymmetric cryptography with its public and private key systems.

Private and public keys are essential technical components of blockchain transactions, together with hashing and digital signatures.

Blockchain also uses computer protocols like “smart contracts,” which are designed to digitally facilitate, verify, or enforce a contract’s negotiation or fulfillment without a third party’s intervention.

They make the implementations traceable and irrevocable. In addition, they seek to lower other contracting-related transaction costs and offer security that is superior to that provided by conventional contract law.

Blockchain is already transforming the financial sector through several applications over a broader infrastructure, opening a new chapter for (digital) financial innovation. It has also been used to settle securities transactions.

Its goal is to eliminate counterparty and settlement risk to boost speed and lower frictional, operational, and financial costs. 

5. Cybersecurity

We all know that financial businesses handle their customers’ sensitive information, including personal and financial data, so having strong security is crucial. But as financial institutions embrace digital transformation, the attacks have evolved and gone digital.

a blue lock behind a matrix style falling code

That being said, financial companies are now investing in creating a solid cybersecurity net.

One of the examples is OAuth2.0 (Open-standard Authorization), an action delegation framework that protects them from third-party cyber attacks while helping develop reliable APIs.

Another one is multi-factor biometric authentication, which allows in mobile banking applications. These tools and frameworks help protect sensitive information of the business itself and the customers.

The Bottom Line

Technology has been evolving to meet the current needs of everyone. In the financial services sector, emerging technologies impacted almost every organization. High levels of customization are offered to customers across all products and services, and procedures have become more manageable.

Even payments are now processed accurately and securely with the help of these technologies.

And with more investments in research and development of the present technologies mentioned above, we will enter a new chapter in the financial world.

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