Wondering how technology changed Financial Management which has been handled by human accountancy alone for decades? Ever observed what has filled a void where people around the world who do not have access to traditional banking services, now can do it in on their phones within no time? Well, coming to the financial institutions, Ever used financial forecast in a model to see where a firm is headed in the future using different software, which is called Financial modelling? Yes, all these are part of the latest technological inventions. It is called Financial technology(Fintech), and it is changing economies around the world.
What is Fintech?
Fintech includes a huge range of products, technology, and business models that are changing the Financial Services Industry. It refers to everything from cashless payments to crowdfunding platforms, to Robo-advisors, to virtual currencies. And investors are buying it. Global investors, including so-called Big tech companies, have been heavily investing in Fintech. One reason for all of this investment is that consumers are adopting Fintech fast. Another reason that made Fintech go so unmask is just the pace of innovation in this space. The rate of innovation and the abundance of new technology which has sprung up everywhere.
Technology Re-inventing Finance
For decades, financial analysts have relied on data to extract valuable insights, but the rise of technologies like Data Science and Machine Learning has brought upon a new era in the field.
Now, unlike ever before, automated algorithms and complex analytical tools are kept in use by all the financial institutions to get ahead of the curve.
A brief note on how Financial Institutions use these technologies to their advantage in Financial Management:
1) Customer Analytics: Using this technology based on past behavioural trends, Financial Institutions can make predictions on how each consumer is likely to act. With the help of socio-economic characteristics, they are able to split consumers into clusters and make estimations on how much money they expect to gain from each client in the future. Knowing this Institution can decide which ones to cater to and how to appeal to them more.
On the other hand, they can cut their losses short on consumers who will make them little or no money. In short, it allows them to distribute their savings in the most efficient way.
2) Algorithmic Trading: One of the most important technologies that are capturing everyone’s attention is Algorithmic trading.
To explain it briefly, a machine or software makes trades in the Market( Stock Markets, Forex Markets, Commodity Markets, etc.) based on an algorithm. These trades can happen multiple times every second with various degrees of volume and do not need to be approved by a standby analyst. Algorithm trading has mitigated many of the opportunity costs that come from missing a trading opportunity by hesitation, as well as other human errors. How do these algorithms work? In their foundation, these algorithms consist of a set of equations based on theories, which drive the decisions to trade or not to trade at that particular circumstances. Based on how well the model performs, it adjusts the hyperparameters to make better estimations, going forward. Basically, the model adjusts the values for each rule, based on performance.
3)Personal Finance: In the old days, you would have gone to a financial advisor to get advice on financial management. But now a technology called Blockchain is invented, a global online database that anyone, anywhere with an internet connection can use. Unless like traditional databases that are owned by central figures like government and banks.
Blockchain is a huge one of recent technology inventions. Blockchain’s most famous app is bitcoin. It is a digital currency that is created and held electronically. Bitcoin provides a level of anonymity we have not seen in modern times. That is because unlike credit cards, there is no middleman such as banks and financial institutions asking for one’s personal information.
Instead, people from all over the world move digital money by validating other people’s bitcoin transactions earning a small fee in the process. Banks and businesses are rushing to adopt blockchain database technology. Why? Well, to save money of course. When this study looked into the data of 8 of the world’s largest investment banks, it found that Blockchain could save them between $8-12 billion dollars per $5 million dollars investment.
But it is not all good news for the big players, because blockchain lovers the barriers for entry into the banking industry and that means fintech startups are popping up in pretty much every market they operate in. If banks and companies cannot keep up they are putting their own survival at risk.
For the consumer, the future senses brighter with more security, lesser costs, and better experiences.
4)Fraud Prevention: This deals with fraudulent activities, such as identity theft and credit card schemes. Abnormally high transactions from conservative spenders or out of region purchasers often signal credit card fraud. Whenever this happens, the card is automatically blocked, and a message is sent to the owner. Random Forest and other methods of Data Science that determine there are sufficient factors to indicate suspicions. Apart from this invention of 3D passwords, messages, pint codes have also massively backed the safety of online transactions.
5)Anomaly Detection: Unlike Fraud prevention, the goal here is to detect the problem rather than preventing it. The reason is we cannot classify an event ‘anomalous’ as it happens but can only do it in the aftermath. The main application of this anomaly detection in Finance comes in the form of catching illegal insider tradings.
6)Risk Management/ Risk Analytics: Investors and higher-ups do not like uncertainty when it comes to major deals, so there exists a need to measure, analyze, and predict risk.
Risk has to be faced in many activities of Institutions- It can be uncertainty about the market, it can be an influx of competition or customer trustworthiness. Depending on what type it is institutions use different models to model and manage risk.
The Downside of Fintech:
Like any growing industry Fintech is not without risk or cons:
The rise of Fintech has forced traditional lenders, insurers, and Asset Managers to embrace new digital technology. For example, wealth managers now have to compete with Robo-advisors which are automated financial planning services, which causes job threats to many analysts in this field.
As we discussed how algorithmic trading has been helpful recently, there is also a downside for this technology, if algorithms were imprecise, it could lead to huge losses due to the lack of human supervision.
Data privacy is another major concern. The more the financial services go digital, the more they are prone to cyber-attacks.
These are the latest changes technology, especially data science has brought onto the Finance Management of Financial institutions and Individual Investors. Nowadays, data has become an important tool that results in getting an edge over the competition. Financial Industries are spending huge amounts of money on getting exclusive rights to data. Because all the technologies discussed above are merely possible due to relative data. Getting more information leads to the construction of better models which allows one to get ahead soon in the field. Thus the most valuable commodities are no longer themselves but the data itself. This is how technology has truly revolutionized the Financial Management.