Financial services are diversifying rapidly. The global expansion of financial technology (fintech) services has rapidly increased innovation across B2B and B2C applications. With traditional (trad-fi) and alternative (alt-fi) financial services leveraging emerging technology, the global future of fintech is a key focus for businesses and consumers.
New technology and innovations in a wide range of markets simultaneously benefit two crucial components for sector growth; service efficiency and accessibility. Importantly, the rise of web 3.0 applications powered by the next generation of banking technology are positioned to bring about the radical disruption of banking.
The emergence of web 3.0 technologies has catalysed the proliferation of fintech services globally. These technologies are numerous, each forming a significant cog in the rising fintech sector now valued at US$310bn. Of these technologies, there are some which need to be on the radar of financial professionals.
Blockchain & DLT is driving fintech
The application of blockchain was initially slow when incepted in 2008. However, blockchain has surged in use over the last decade, with CMI reports indicating the technology, valued at $4.8 billion in global market value, will escalate at 65% CAGR to a $69 billion market in 2030.
Blockchain is a type of automated and independent distributed ledger technology (DLT) that plots financial activity faster, more securely, and more efficiently. Applied without the need for intermediaries that have slowed efficiency and heightened risk in traditional financial services, the advantages are well-recognised by fintechs globally.
Fintech will increasingly rely on blockchain. Traditional and challenger banks are steadily applying DLT within their systems for efficient transaction clearing and reconciliation. Alternative finance, such as cryptocurrencies, have been using blockchain to facilitate their independent market position. The advantages are numerous, founded on the core principles of speed, security, and transparency.
Open banking in the fintech space
The global open banking market size was valued at US$16.03bn in 2021. By 2030, the market size is expected to grow at a CAGR of 26.9%, totalling $135.17bn. Observing these figures demonstrates that open banking is an established key to fintech’s future.
Working with trad-fi institutions, open banking leverages Application Programming Interfaces (APIs) – a software interface that allows separate systems to communicate and correspond. API technology enables regulated third-party developers, such as e-wallets or neo-banks, to safely access and use the data collected and stored by trad-fi. Doing so allows banking services to diversify based on consumer demand.
Open banking largely benefits B2C markets, such as neo-banks’ digital services and buy now pay later (BNPL) offerings. Harnessing the legitimacy of trad-fi and using embedded finance technology open banking provides flexibility to consumers prioritising speed and efficiency. As financial service diversification increases to satisfy various demographics, open banking will allow for a more customised user experience.
These customisation benefits are vital to providing access to populations outside of Western finance – the versatility of API-based systems means those who adhere to Islamic finance principles, or economies gravitating from cash-dominant payments, can also benefit.
AI & Automation in fintech
AI and automation have been mobilised heavily through all technology-based sectors, underpinning DLT and open banking technologies.
For consumers, AI is geared towards customisation, utilising touch-point data throughout myriad platforms and services, producing a financial experience tailored to each individual. For market services, AI helps generate actionable data for risk management, customer understanding, and service investment strategies – all of which are crucial when delivering effective financial services.
For both consumers and market players, automation provides vast benefits of speed while decreasing the number of resources required. In this aim, considerable advancements have been made toward the concept of ‘real-time’ technology; fintechs globally will continue to rely on automation and AI as pillars of their service offerings.
Islamic finance and its place in fintech
Western fintech services show no sign of slowing, with fintech hubs such as London, New York, and Amsterdam leading the charge in the diversification of financial services. However, when we look toward the future of fintech, Islamic finance is a sector primed for the most significant innovation.
This innovation is quickly occurring. Islamic consumer demand for fintech services has prompted diversification. The Islamic fintech market size within the Organisation for Islamic Cooperation (OIC) totalled $49bn in 2020. This figure represents less than 1% of the global fintech market size, however, according to research by Dinar Standard and Elipses the market will experience a CAGR of 21% to reach $128bn by 2025, compared to a growth rate of 15% for the conventional Fintech sector.
The future of Islamic finance is one of accelerated growth in new regions. Currently, 75% of the Islamic fintech market is dominated by just five countries; Saudi Arabia, Iran, UAE, Malaysia and Indonesia. To secure a prosperous future for Islamic fintech this market share must diversify.
Importantly, regions in Central Asia, such as Tajikistan, Uzbekistan, and Kazakhstan are rapidly adopting fintech services, with the latter providing a launch pad for the rest of the region. This is partly a consequence of state-backed institutions putting in place new rules and regulators to facilitate an increase in the application of fintech. For example, the State Bank of Pakistan has this year launched a licensing and regulatory framework for digital banks, effectively allowing an initial quota of five digital banks to begin operations in the country.
Expansion will not end here. In the UK, there are estimated to be more than 1.8million Muslims old enough to directly use financial services, and the government puts the value of net assets of Islamic funds in the UK at £600 million. Expansion into Western markets primed for the growth of Shariah-compliant financial services will only continue as awareness of Islamic finance innovation becomes commonplace.
Fintech services for Islamic communities worldwide provide shariah-compliant services inaccessible through Western trad-fi services. An example of this is Sukuk, a type of bond asset that complies with the principles of Islamic law, which prohibits the concept of riba, meaning there is no interest-paying bond structure within.
The future of fintech is global
Leveraging the above technology, the future for fintech as a whole is bright. With developments occurring daily, we can leverage alt-fi technologies to provide a faster, safer, and more inclusive financial landscape in the years to come. Looking at Islamic fintech technology in particular, a symbiotic relationship can be fostered with Western financial services – accelerating the effectiveness and growth of financial services and leading new innovations in this scaling sub-sector of financial services.
About the author: Khofiz Shakhidi is the chairman of the board of directors of the Tajikistan-based Alif Bank – Tajikistan’s leading banking fintech.
