The world of finance is undergoing a remarkable transformation, fueled by technological progress and innovation in the fintech sector. Consequently, financial institutions must adapt to remain competitive and meet the evolving demands of customers. McKinsey’s analysis has identified seven key technologies that are driving fintech development and shaping the future of finance in the coming decade.
In this article, we explore each of these technologies and their potential impact on the financial industry.
Artificial Intelligence (AI) Drives Massive Value Creation
AI is revolutionizing the financial industry by generating massive value. McKinsey estimates that AI can contribute up to $1 trillion in additional value annually to the global banking sector. Therefore, financial institutions are increasingly adopting an AI-first mindset to resist encroachment by technology firms and enhance their competitiveness.
Revolutionizing Financial Operations with Machine Learning
Machine learning applications are transforming various aspects of the financial industry. One critical area is automatic factor discovery, where AI identifies the elements that drive outperformance. This capability enhances financial modeling and risk management, leading to more informed decision-making and improved customer service.
Leveraging Knowledge Graphs and Graph Computing
Powered by neural networks, knowledge graphs and graph computing play a significant role in building associations and identifying patterns in complex financial networks. By drawing insights from diverse data sources, these tools enable enhanced fraud detection, risk assessment, and customer behavior analysis.
Prioritizing Privacy-Enhanced Analytics
Moreover, privacy-enhanced analytics is becoming a priority, ensuring minimal data usage while training financial models. Techniques such as federated learning and advanced encryption protect sensitive data and enhance consumer privacy, bolstering consumer trust in financial services.
Blockchain Disrupts Established Financial Protocols
Blockchain, specifically Distributed Ledger Technology (DLT), is disrupting traditional financial protocols by enabling transparent, secure, and decentralized transactions. What makes DLT groundbreaking is its ability to allow data to be recorded, shared, and synchronized across multiple participants simultaneously. As a result, this system eliminates the need for intermediaries and reduces transaction costs dramatically.
Enhancing Efficiency with Blockchain
The rise of blockchain has given birth to decentralized finance (DeFi), a blockchain-based financial ecosystem that operates without intermediaries. DeFi applications, built on smart contracts, offer innovative financial products such as lending, borrowing, and yield farming, opening new opportunities for investors and users.
Amplifying Liquidity Through Tokenization
Additionally, digital asset support services are gaining traction among institutional investors, offering tokenization for unlisted companies and private equity funds. As a result, this integration of digital assets with traditional financial products and services enhances liquidity and diversification for investors.
Streamlining Transactions with Digital Currencies
DLT-based Central Bank Digital Currencies (CBDC) are capturing governmental attention worldwide. These digital currencies offer improved oversight of monetary policy, facilitating resource allocation and streamlining cross-border transactions.
Cloud Computing Liberates Financial Services Players
Cloud computing is a game-changer for financial services players, liberating them from the constraints of physical infrastructure and empowering them with scalable and cost-effective solutions. McKinsey predicts that by 2030, cloud technology will contribute significantly to EBITDA (earnings before interest, taxes, depreciation, and amortization) for the world’s top 500 companies.
The benefits of cloud computing in the financial industry are manifold. Institutions can improve operational efficiency by migrating applications to the cloud, reducing infrastructure costs, and minimizing downtime. These automated and embedded security processes enhance platform integrity, ensuring data protection and compliance.
Moreover, cloud-based elastic computing enables banks to adjust computing resources dynamically to meet fluctuating demands. This flexibility is vital for processing big data analytics, improving risk assessment, and responding promptly to customer needs.
Internet of Things (IoT) Drives a New Era of Trust in Finance
IoT is heralding a new era of trust in finance, enabling seamless communication and real-time data sharing across various devices. IoT systems consist of three layers: perception and smart sensor systems, wireless communication networks, and application and operations support.
In finance, IoT applications are enhancing risk management and insurance underwriting processes. Companies use IoT data from vehicles and smart homes to assess risk accurately, leading to personalized insurance products and lower premiums for customers.
Additionally, IoT’s role in fostering Environmental, Social, and Corporate Governance (ESG) considerations is paramount. IoT technologies enable precise monitoring of industrial energy and power efficiency, supporting sustainability initiatives and compliance with environmental regulations.
Open Source, SaaS, and Serverless Lower Barriers to Entry
Open-source software, SaaS, and serverless architecture are lowering barriers to entry for new fintech businesses, fostering innovation and agility in the financial industry.
Fintech startups can leverage open-source software to build applications quickly, saving time and resources on development. SaaS models provide easy access to software without requiring ownership and maintenance, enabling nimble deployment of financial products and services.
Furthermore, serverless architecture eliminates the need for companies to manage servers, reducing overhead costs and facilitating automatic scaling based on demand. These technologies combined allow for rapid prototyping, market testing, and scalability, empowering startups to compete with established players.
No-Code and Low-Code Redefine Application Development
No-code and low-code development platforms are transforming application development, democratizing the process, and empowering non-developers to create software solutions easily.
No-code platforms offer graphical user interfaces and configurations, enabling users without coding expertise to build applications through drag-and-drop functionality. Low-code platforms allow for customization and code-based functionalities, bridging the gap between non-developers and professional programmers.
These platforms accelerate the development of cloud-based applications, enhance compliance through automated audit trails, and enable efficient customer engagement. By providing faster and more agile development, no-code and low-code platforms are revolutionizing fintech innovation.
Hyper Automation Replaces Manual Work
Hyper automation, a combination of RPA and AI integration, is transforming financial processes and accounting reconciliation, leading to increased efficiency and improved decision-making.
RPA streamlines middle and back-office operations, automating financial processes and reducing manual errors. This technology is especially valuable for accounts receivable and payable, period-end accounting, and settlement processes.
As RPA becomes more deeply integrated with AI and machine learning, it will handle complex business scenarios, making financial services more efficient and enhancing customer experiences.
Unlocking Future Competitiveness
The convergence of these key technologies is propelling the financial industry to a more accessible and decentralized future. Niche financial sub-sectors are already leveraging these technologies to generate value and gain a competitive edge.
To stay ahead in the ever-evolving fintech landscape, traditional finance institutions need to embrace technological progress and innovation. This revolution calls for decision-makers to foster a culture of innovation, rethink their IT strategies, and adopt an agile approach to fintech development. By doing so, they can harness the potential of these key technologies and unlock future competitiveness in the industry.
The Bottom Line
The future of finance is closely tied to the advancement of systems already at play. The seven key technologies identified by McKinsey are shaping the fintech landscape and reorganizing the way financial services work. Institutions that embrace these innovations will not only remain competitive, but also unlock the blueprint to success in the digital era of finance.
