The future of technology, artificial intelligence has been in the limelight for a few years now. What started as a mere concept, is living and thriving in the world today. The majority of us have had the opportunity to witness and experience this extraordinary creation by humans that has disrupted the functioning of more than one sector. 

Artificial intelligence involves the creation of technologies by simulating human intelligence to retrace human actions and behaviors to be used with technology. Creating machines that mimic human traits and trends for learning, analyzing, and problem-solving makes up the majority of artificial intelligence.

AI Role in Fintech

The fintech industry is dynamic, changing and disrupting services, products, and the entire financial structure robustly. The evolution of fintech is based on the amalgamation of customer requirements, competition, and most importantly, the scope of technology. 

The role of artificial intelligence has vigorously gained importance owing to the usefulness of this technology in serving humans. The biggest areas that have been impacted by fintech are:

Security

The level of security that AI brings to the fintech table is remarkable. Small changes such as using biometrics like facial recognition to open banking apps, to bigger changes like detecting fraudulent activities by studying customer trends and behaviors, have become possible because of the involvement of artificial intelligence. 

Automation

 Data analytics, machine learning, and automation of processes became pillars of artificial intelligence. By increasing automation and minimizing human involvement in everyday processes, the margin of error can be reduced. 

Customer Service

One of the major areas that have undergone monumental change because of artificial intelligence is the customer service area. With artificial intelligence in play, the emergence of trouble-shooting chatbots, automated and quick password changes, and various other customer-centric services has become quite prevalent. Checking your bank and credit card statements and the rewards earned from your purchases and investments is one of the primary benefits for most customers. 

Risk Assessment

Another major area that has evolved rapidly is risk assessment. For companies, the risk assessment is carried out on new and potential customers, while for individuals, this assessment is done on their investments to ascertain risks. With AI, studying trends, analyzing data and information to predict future trends, and reading the impact of everyday happenings have become much easier and exhaustive.

The Future of Artificial Intelligence

While AI has been in the limelight for some years now, there is no doubt that AI is here to stay. The scope of opportunities that AI brings is enough to suggest the incredible number of possibilities for the banking and financial sector. According to some reports, the main sectors that are likely to experience an increased corroboration with AI are:

Workforce

Using AI to upskill the workforce is one of the major tenets being focused on in this field. By infusing AI with learning and problem-solving tools, the major sector that stands to gain is the banking workforce.

Automation

An extension of customer-centric services, automation is being keenly eyed as one of the leaders of fintech. Automation of everyday processes like using Chatbots for frequently asked questions would not only enhance customer services but also help reduce the cost of labor.

Personalized Banking

The potential of AI is also being targeted at creating personalized banking apps for customers, which would study customer behavior and trends to offer services that suit the customer. Such steps would help build better and stronger relationships between customers and banks.

Fraud Detection

This is one of the most important areas where AI can have a huge role to play. By getting deeper insights into customer habits and behavior, AI can help detect frauds. If some account-related activity is detected that doesn’t follow a customer-specific trend, it can immediately be identified as an outlier and can eventually help detect fraud.

Final Notes

AI, which started as a concept has revolutionized the entire spectrum of fintech. Owing to its remarkable adaptability and scope, AI can be used for various purposes like problem-solving, fraud detection, risk assessment, and more. Fintech companies nowadays use AI to offer customer-centric services, enhanced efficiencies, and quick responses. The scope of innovation in AI is so vast, that it leaves no doubts that the future of AI remains bright.

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The financial sector has always been prone to risky activities which have mandated the existence of a streamlined and strict regulatory system. Such regulatory authorities include the participation of country-specific governments and international bodies, which help form a holistic structure that monitors the financial activities of individuals as well as companies. If not for such regulations and strict compliances, the entire industry of finance and fintech would crumble down.

The regulatory system entails various branches of compliances and standards that help keep the entire ecosystem of fintech safe from frauds, money laundering, hacking, etc. One of these subsections that helps protect companies from faulty customers is Customer Due Diligence (CDD).

Customer Due Diligence Meaning

The process of conducting checks and background inspections on customers to ensure the customers’ creditworthiness and standards is known as Customer Due Diligence. The dynamic pace of fintech has disrupted multiple aspects of finance. There is a persistent risk of customers and companies getting exposed to uncertainties. Customer due diligence empowers companies by evading doubtful customers, making the entire system more secure. 

A Usual Customer Due Diligence Process

A typical CDD process usually involves the following:

Application Form

The customer fills an application form that asks for their requirements and basic personal information.

Government ID

The agency conducting the CDD inspects the government documents submitted by the customer, like their name and photo identities issued by government bodies.

Biometrics

The biometrics of the customer, like fingerprint or retina scans are collected to ensure minimal lapses.

Database Checks

The personal information provided by the customer, is verified against the existing databases owned by governments and agencies to assess their creditworthiness.

AML Screening

Anti-money Laundering screening is done to reduce the company exposure to faulty customers by implementing a broad set of security measures.

Address Proof

The customers’ addresses are checked by authorized personnel to ensure their existence. This procedure sometimes also involves valuation of the addresses provided to help the financial bodies recover bad debts if need be.

Risk Pools

After conducting the screening and assessment, the customers that even slightly reflect faulty results are placed in a risk pool, which is re-examined by authorities to filter out the actual offenders.

Continued Monitoring

One of the most important steps that has recently gained a lot of attraction by authorities is continued monitoring. The directive here is to continue stringent checks and assessments for existing customers to create a foolproof structure that circumvents financial risks.

 The Importance of Customer Due Diligence

The importance of customer due diligence has been quite predominant in the fintech and financial industry. With customers pouring in from all over the world, the stakes have reached an unmatched level. Read on to know why exactly has CDD gained so much importance.

Fines and Penalties

The fines and penalties imposed on companies for not following compliances and regulations are expensive. Since 2009, the fines levied on US fintech firms have crossed $40 billion. Such hefty penalties incentivize companies to follow standards, procedures and regulations unfalteringly.

Cyber Threats

With the upsurge in the use and innovation of technology, talent has not remained restricted to the judicially right side. Criminals have had tremendous opportunities to explore the potential of technology by forming global connections, hacking into company systems to gain insider information, etc. Such elaborate systems not only put companies and its customers in vulnerable positions, they also cause financial damage. It is imperative for companies to conduct an enhanced due diligence to evade cyber threats and bullies.

Risk of Reputation

Any lag in conducting due diligence can lead to reputational risk for the company. If a lapse in customer due diligence is exposed by a third-party, the company would have to bear colossal damage to its reputation; this in turn, can lead to the company’s existing and potential customers doubting the company’s trustworthiness.

Impact on Customer Experience

With all financial institutions and bodies implementing strict regulatory procedures for all their customers, if a customer feels neglected in this regard, it can lead to the customers bad-mouthing the company and eventually pulling out of the onboarding procedure. Having multiple touch bases with potential customers to conduct proper KYC (Know Your Customer) and verifications is the new normal. 

Having said that, it is true that customers don’t particularly like slow and inefficient procedures; the companies have to ensure that their procedures are strict but not tiresome for the customer.

Final Thoughts

Customer Due Diligence is a crucial part of protecting the entire financial system from money-laundering, financial risks, bad debts, etc. All companies create customer due diligence checklists that are followed for each customer. A typical due diligence process flow requires companies to verify documents, identities and creditworthiness. However, one of the most critical steps in creating a holistic due diligence system is to conduct ongoing monitoring of all accounts and customers. This step reinforces a different level of security, enhancing the efficiency of the entire system.

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The credit card industry has been in business for the past 75 years. Today, more than 400 million credit card users operate in the US alone. After having witnessed impressive numbers, the customers of this industry are starting to explore and move into different branches of fintech, resulting in a gradual decline in the popularity of credit cards. 

Alternatives, such as, UPI, virtual accounts, cryptocurrencies, and other e-payment channels are rapidly gaining momentum in the present age. In the past decade, there has been an evident shift in the habits of consumers, where people have gradually transitioned to a more digital setup. This change has led to an upsurge in the adoption of fintech media, resulting in the decline of the popularity of credit cards.

Reasons Behind the Decline of the Credit Card Age

Debt Risks

Not all credit card users are adept in handling their finances. People have had agonizing experiences vis-à-vis credit cards, which have prompted people to form a negative opinion of this industry. Credit cards can be used almost everywhere, making it easy for people to fall into debt. This has been one of the biggest concerns of customers. The negative impact that lands on the creditworthiness of credit card users for late or failed payments, can damage their credit scores, making it an unrewarding experience. 

Extravagant Fees & Interest Rates

The credit card industry has thrived on charging a high fee from its customers. Not only the fees, but the interest rates applied on late payments, or used amounts are extravagant. It is for these reasons that the credit card industry has been known to serve mostly high-end customers, limiting its customer spectrum. 

Fast & Easier Options

With digitalization penetrating the financial industry so rapidly, there are countless options being made available to customers frequently. People have the option to conduct transactions, make international transfers with ease, sitting in the comfort of their homes. The pandemic has played an impartial role as a catalyst for the quick spread of fintech services, increasing its popularity even further.

Competitive Rates and Services in Primary Bank Accounts

With the disruption in the finance industry due to fintech, traditional banks have also had to match pace with the changing environment of fintech. The banking sector has started offering competitive rates and services, making it a much more efficient and reliable industry when compared to the credit card industry. 

The Role of Generation Z

One of the most influential factors in the decline of credit cards and the popularity of other fintech services is the role played by the Generation Z. The credit card industry spread like wildfire among Millennials but fintech has predominated most financial activities with the newer generation. The concurrence of the emergence and existence of both fintech and Generation Z has led to the stupendous growth of fintech and decline of credit cards.

Future of Credit Cards

The onset of fintech started with credit cards substituting cash. This replacement resulted in their usage growth. With e-payment solutions like open banking, QR codes, and e-wallets becoming more and more prominent, the credit card industry is bound to feel slightly neglected. The shift in customer habits and preferences, has already impacted credit cards, where authorities noticed a 9% fall in the total spendable amounts offered by credit card companies in the US alone. Such figures and trends suggest a bleak future for credit cards.

However, according to some reports, credit cards are not losing ground completely, and in fact, they are here to stay. The reach and benefits of the credit card industry is incomparable. Let’s find out the what the future entails for this industry.

Artificial Intelligence & Cryptocurrencies

Credit cards companies have already realized the importance of incorporating artificial intelligence practices in this industry. Collating customer data and information to study trends and habits can provide a crucial leverage to credit card companies, where the companies can then offer personalized suggestions to their customers by offering discounts on items that the customer would need in the near future. 

With the evolution of payment systems, the current restrictions imposed by governments and regulatory bodies will eventually subside, giving way to a more prevalent set up of credit cards merging with cryptocurrency technologies. This collaboration would enable quick and reliable cross-border transfers between businesses, customers and even peer-to-peer.

Digital or Virtual Cards

With more and more people jumping on to the bandwagon of going cashless, the use of physical cards has also declined. This shift has resulted in the emergence of digital and virtual cards. These cards use similar technologies as credit cards, where they have a 16-digit number along with an expiration date and CVV, but they exist only virtually or digitally. This technology is like an amalgamation of e-wallets and credit cards, where the system exists online, but the presence is in the form of a card. These virtual cards are gaining traction and are said to be the future of credit cards.
Wider Acceptance

Even though the popularity of fintech services has grown manifold, the reach of credit cards still remains unmatched. With such a wide acceptance, it is almost improbable that the credit card industry would die out.

Gamification

The rewarding system offered by credit card companies faces very mild competition from fintech services. This original gamification has been an endearing factor for most credit card users. Because of the reliability of the entire system, the credit card companies are able to enjoy a different niche.

Parting Thoughts

As the concern surrounding the future of credit cards grows, the unmarked niche of credit cards brings hope. There is no doubt that the entire spectrum of fintech has disrupted the way our financial industry functions. But, with newer technologies making their way into the cosmos, the credit card industry is also incorporating rapid changes to challenge other alternatives. 

By using artificial intelligence, the credit card industry can extend an impartial focus on its customers by reading their trends and behaviors to suggest more personalized rewards. Such practices and integrations would only help enhance the reach of credit cards, uplifting their popularity immensely. 

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Compliance, a buzzword in the fintech industry is keeping all fintech firms on their toes. With the advent of fintech services and their global adoption, all in the last recent years, the risk of cyber security getting comprised has become high. 

Cyber threats and malevolent agents have become a prominent risk in the system. The level of advancements in fintech development is impressive. However, talent isn’t restricted to the good side of fintech. With advancing technological developments shaping the fintech industry, the level of technology being employed by hackers and malicious parties is immense. 

To tackle this level of noise and intrusion from unwanted parties, regulatory bodies of the fintech world have become increasingly active and robust to match pace with the dynamics of fintech.

Background of Fintech Regulations

• According to a report, there were approximately 220 compliance revisions that fintech firms had to manage daily. 
• Since the onset of globalization back in 2009, the total of regulatory fines imposed on financial institutions and firms has exceeded $345 billion for different reasons.
• The average cost of fintech compliance has risen exponentially and is still rapidly rising.

RegTech

An amalgamation of regulations and technology, RegTech is a crucial subset of fintech, which helps monitor advancements and activities to increase efficiency and safety in the entire system. RegTechs are technology firms that provide technological services to traditional financial institutions and fintech firms that help simplify compliance and regulatory procedures with the help of digitalization.

This subset of fintech has increased prominence and importance because of its supplementary nature of services which makes the entire system more efficient and effective. RegTechs use top-notch technologies that keep track of relevant international and country-specific compliance regulations and consequently, help the customer firm to tweak their system and procedures in such a way as to avoid any breaches and lags.

The use of technology to facilitate regulatory conformities has produced a revolution, rendering it a world of its own. RegTech promotes technological advancements to monitor internal as well as external activities, increasing security considerably and protecting the customer.

Main Technologies Supporting RegTech

With enormous amounts of data pouring in every minute of every day, companies have had to succumb to technology and automation to manage and make sense of it. Analyzing trends, customer reports, company assets, and financials, becomes achievable when such complex processes are supplemented by technology. The main technologies that support RegTech are:

• Artificial Intelligence & Machine Learning
• Blockchain
• Cloud Computing
• Application Programming Interface
• Visual Analytics

 The Future of RegTech

Owing to the mass adoption of fintech and the dynamism in the industry, regulatory practices have become a must for every subset instrumenting its role in fintech. RegTech has gained popularity because of the convenience it brings to all parties; regulatory bodies can keep better control even at the international level, startups can ensure all their activities are following all relevant compliances, etc. 

The level of investments in RegTech has spiked by a huge margin in the past five years. This industry’s growth directly correlates with the fintech industry. As more and more fintech startups bring dynamic technological developments to the fintech world, the need for regulatory compliance and monitoring will only increase.

Thick files and folders containing hundreds of international and country-level regulations make it essential to streamline the regulatory system. Any miss or gap in monitoring can cause damage to a large extent. The level of investment that it takes for firms to deal with such issues is immense. But the potential cost that a company could incur on non-compliance with any of its activities would be much greater. 

Companies have spent billions of dollars to streamline and monitor regulatory compliances. By 2022, the international regulation management market was expected to reach more than $200 billion. 

Such extravagant costs have the potential to stub the market growth of RegTech as well as Fintech. However, relentless efforts are being made globally to minimize costs as much as efficiency and effectiveness allow. 

 The Purpose of RegTech

RegTech has two primary purposes: 

• Regulating and monitoring fintech activities across the world according to regulations that have already been established in the past
• Continuous evolution and adaptation of new fintech trends and innovations that are emerging every day

 Closing Words

RegTech is an inevitable subset of fintech that has made its position at the core of the industry. With changing and exhaustive guidelines making rounds globally, it has become an impossible task for financial institutions and fintech firms to not get technological supplements. RegTech helps simplify extensive processes by using various technologies to bridge the gaps between specified standards and industry practices.

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Data privacy in broad terms means the protection and security of data and information regardless of their nature. The internet is an infinite space with the potential to store unimaginable amounts of data. Every time a user conducts a small Google search, every detail of the process is stored in the form of data by the websites that are involved in the process, including Google.

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With uncountable opportunities for companies to acquire information, it becomes crucial for the system to be regulated and monitored. Data privacy is the practice of protecting all types of information, especially that which is sensitive in nature, like personal details, financials, and intellectual property data, from becoming mistakenly accessible to any malicious agents.

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The most important aspect of the virtual world is data. The majority of cyber activities prevalent in the world today have found their origination and ideation from data. Information can be segregated into different segments like personal information, company information, information related to purchases, employees, stocks, future projections, etc. Anyone having access to restricted information can put the vulnerable party at stake, be it a company, an individual, or even the government.

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The importance of data was not so pervasive till a few years back. With the onset of computers and smartphone technology, the amount of data that can be stored and used has led to data becoming one of the most indispensable assets there could be.

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The Leverage

Information of all kinds has earned the position of a crucial requisite in recent years. Companies store and use customer and visitor data to analyze trends, behaviors, and habits to get psychological insights, which they can then use to their advantage.

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Individuals ordering pizzas every day from a local store would start receiving incentivized communication from either the pizza company, the platform that the individuals use to place the order, or both. Such scenarios directly indicate that companies store and use information about their customers to their advantage.

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Using data in similar ways is a common global instance that most of us would have experienced at some point or the other. Sharing information about habits and behavior might not directly have a substantial impact on individuals.

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The leverage that information provides to the holder is enormous. Depending on the nature and extent of information and data available, the accessor can cause massive damage if not monitored.

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Financial Information

Data about individual and company holdings, expenditures, assets, clients, etc., contains everything the entity is and has. Any access to sensitive data like this can have detrimental consequences. 

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The most commonly occurring crimes related to data and information are theft, blackmails, disclosures, and damage to their hardware and software systems. Hackers and malicious agents can break down systems and put the affected parties at colossal risk.

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Cyber Security in Fintech

Cyberattacks in the digitalized financial world not only bring financial damage to customers, but they have the potential to completely defile a company’s reputation. Fintech companies are obligated to protect their customers’ data because malicious parties are inclined to misuse this information and they usually intend to get financial gains, by hacking into the company’s firewalls. 

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‍Security Practices Implemented by Fintech Companies

To protect customer information from getting compromised, it is highly imperative for fintech companies to monitor and regulate their system continuously. Other than regulations, fintech firms usually try and nip the bud by exercising extensive authentication protocols like:

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One-time Passwords (OTPs) –

To conduct any financial activity, small or big, company systems send OTPs to the registered mobile numbers or emails of the account holder, which is to be entered into the system every time the customer intends to complete a transaction. This process provides additional safety to basic passwords and hidden usernames.

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Regular Password Changes – Most fintech and online banking companies have mandated a regular change of passwords. Depending on the company, it may set up recurring timelines, which mandatorily prompt the user to change their password, enhancing their security even further.

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Timed Login Sessions –

This practice is usually used for financial accounts, where customers are only allowed a particular timeframe to stay logged in, after the expiry of which they are compulsorily logged out. This method allows a much smaller window for malicious parties to hack into the customers’ accounts amplifying the security considerably.

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Multifactor Authentication – This technology is not restricted to fintech and has gained a lot of popularity on platforms that require users to create accounts containing any personal or financial information. The procedure involved in multifactor authentication mandates the customer to provide two or three kinds of authentication; it could include a combination of security questions, OTPs, and regular passwords.

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Final Thoughts

Cyber Security is an essential part of fintech because of the potential impact it could have in case of any lags in this regard. Both companies and their customers should be wary of malpractices involving data and information. Protecting personal and financial information are fundamental steps to securing the identity and financials of customers and safeguarding a company’s reputation.

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The fintech industry has made incredible progress in the past few years. In the pandemic alone, we all witnessed an evident upsurge in the adoption of fintech by people globally. Because of the gigantic scope of technology, the fintech sector has attracted countless professionals and experts, who continue to work relentlessly to create innovative fintech solutions for customers and businesses.

With the rise in demand and the adoption rate of fintech, the number of fintech startups has grown astonishingly.

Fintech hubs like Silicon Valley, London, and Singapore have uncountable startups offering various fintech services to customers all over the world. The extent of innovation and dynamism in the industry calls for strict regulations.

Because of the ever-evolving nature of technology, compliance and regulatory standards have become a mandate for operating in fintech. With so many players in the market, there is a persistent possibility of risks like money laundering, hacking, etc., that could lead to immense damage. Therefore, the need for a robust regulatory system is a must.

More than anything, it is the scope of technology that is used and abused by criminals to beat the regulatory structure of the industry. To curb and mitigate the risks involved in fintech, all players in the industry would need to consistently work together to streamline processes and set up efficient systems.

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The Risks Involved

Fintech is an increasingly dominating industry that is gaining popularity quickly. With businesses and customers adopting fintech practices all over the world, the possibility of data and information falling into the wrong hands, increases. The most commonly occurring risks involved in fintech are:

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Money Laundering

Money laundering practices have been quite prevalent in the past and are still going on in the present age at a big level. Fintech enables the easy and quick transfer of money, especially transactions that require cross-border activities. If there is some level of leniency in the regulatory system, it could lead to the transfer of power from regulators to the people, leaving scope for anonymous and unverified transactions. 

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Quick Transfers

Fintech allows very fast transfers and transactions. Big amounts can be transferred across borders in a matter of seconds. This speed can also be used as an advantage by criminals. By quickly transferring big amounts from one account to another, there is the possibility that the trails created by these transfers outpace the regulations and scrutiny by the authorities. 

Criminals target “money-mules”, who are vulnerable customers like elderly or disabled people, who would not have the resources or the robustness to manage their financials very efficiently.

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Customer Identities & Data Privacy

As fintech operations and functions exist online, it leaves some space for anonymity that is exploited by criminals and hackers, where they can conduct transactions online by breaching companies’ customers’ data and filling in their information. 

Criminals can also hack into company systems if there are regulatory lags and can steal personal and financial information of the customers or the company, putting everything at risk.

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Bad Loans

Another risk involved in fintech is bad loans. With verification processes being conducted virtually, there is a huge possibility of people manipulating their data to get loans from banks, which then turn into bad loans. These bad loans make the entire system vulnerable and unstable.

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Risk Management

With an innumerable number of players functioning in the fintech sector, the role of regulators has become indispensable. It has become absolutely essential for regulators to prioritize handling and mitigating the risks involved in fintech. Risk management is a vital tool for fintech companies that they should invest in. By following regulations and meeting industry standards, the possibility of risk exposure lessens. 

Due to the changing landscape of the fintech industry, the need for robustness is essential. It is crucial for the regulations system to match pace with the level of innovation existing in fintech. 

With a proper risk management system in place, the safety of customers and businesses can be ensured. The well-being of customers, market integrity, and financial stability depends on risk management. Fintech companies should follow some practices that could help them sustain stability and security in the market like:

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Due Diligence

Conducting proper customer due diligence and verifications brings integrity and stability in the market. Adequate verifications, along with strict KYC (Know Your Customer) can help curb many problems.

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Monitoring Transactions

Fintech firms should also invest in regulatory systems that help them closely monitor all transactions being conducted through them. Every purchase, every transfer, regardless of the amount should be tracked, which would help bring a level of transparency and trustworthiness in the industry.

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Following Regulations

Abiding by regulations and compliance at the country and international level is crucial for fintech companies. The regulatory system is also continuously evolving alongside fintech. This requires robust changes according to the changes in fintech. For companies to keep track of and comply with all regulations, it is advisable to invest in reg-tech, which would make their systems much more efficient.

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