FinTech will completely reinvent financial services
The Glossary for the Legal Technologist: what is Financial Technology, what is the impact of Artificial Intelligence in finance and the differences between Legaltech and FinTech.
The "digital revolution", intended as the large-scale diffusion of digital technologies, keeps having a significant impact on all productive sectors. In particular, the financial services sector has undergone a far-reaching and unprecedented process of technological innovation, which has given rise to Financial Technology or otherwise known as FinTech. This high-tech branch of the economy applied to the financial sector is governed by innovative start-ups and aims to enhance the services offered through innovation.
Table of contents:
• Definition and areas of application
• FinTech and Artificial Intelligence
• FinTech and Legaltech
[This article was originally published in Legaltech Italia].
Fintech: financial technology, artificial intelligence and Legaltech
Definition and areas of application
The acronym FinTech derives from the combination of the terms Finance (Fin) and Technology (Tech). FinTech technology can be applied to various fields: from information security to blockchain, which also includes cryptocurrencies, through algorithms applied to financial advice, turning to the payment system or the so-called open banking and lending platforms. It also encompasses some of the main innovations in banking and financial intermediation, such as crowdfunding, robo advisors - digital platforms providing automated and algorithm-driven financial planning services - , and P2P payments, i.e. peer-to-peer payments, whereby money can be transferred instantly between subjects via a digital platform, commonly an Application, with funds from current accounts, credit cards, et similia.
The major players in the FinTech financial technology market appear to be innovative start-ups and so-called "scale-ups". Scale-up (i.e., fast-growing Start-ups), and, secondarily, traditional financial operators, such as banks and credit institutions, which are striving to collaborate with the new players in the sector.
Financial Technology aims to:
• make finance user-friendly and accessible to the greatest number of people;
• provide customers with transparent and clear information on the characteristics and costs of the services offered;
• reduce the costs of financial products and services;
• customise the financial offer to customers according to their preferences and needs.
FinTech and Artificial Intelligence
Fintech, therefore, aims to revolutionise the financial services industry and the partnership with Apps and Artificial Intelligence could really become the key to the success of future digitisation in this field. In fact, Artificial Intelligence in finance is already transforming the way we interact with money, helping the financial industry to streamline and optimise processes, ranging from credit decisions to quantitative trading and financial risk management.
Artificial intelligence and machine learning in finance encompasses countless services, from chatbot assistants to fraud detection and task automation. AI can succeed in minimising human errors in banking procedures, enable banks to effectively understand their customers' demands, be used in credit card redemption and attract the unbanked to financial services.
FinTech and Legaltech
A distinction must be made between Legaltech and FinTech: Legaltech is the use of technology to provide legal services to lawyers, legal institutions or consumers of legal information. A Legaltech product is essentially a product for the legal market. While FinTech is a category of its own, encompassing all technology created for financial institutions or consumers of financial services. These are therefore not overlapping classes.
Nevertheless, Legaltech solutions can be, and are, in fact, also used in the financial sector. Indeed, the whole system of robotic business automation (RPA), a theme very dear to FinTech and the financial sector, is partly based on technologies that have been used, first in the legal sector and then in the financial sector. Robotic process automation is based on the assumption that all tasks of a routine and repetitive nature, likely to be pattern-driven and subject to a high risk of human error, can be successfully automated. Just think of the business areas of Sales Order and Invoice Management and financial and external reporting, which are highly automatable.
Document automation technologies, which originated in the legal sector to simplify and streamline the creation of contracts and other legal documents, have started to be used in the financial sector and can therefore be extended to any type of document that is susceptible to standardisation, such as invoices, reports and orders, and for the drafting of large-scale banking agreements.
AI-enhanced eDiscovery and document review is another technology that originated in Legaltech and was developed specifically for the legal market but can be successfully translated into the financial area. The impact and number of financial regulations are growing and when new regulatory frameworks are in place, financial agreements may need to be screened and amended in light of the new guidelines, for example with regard to changing provisions on interest rates, borrowing base and other industry-specific clauses. The use of document automation and machine learning technology can help to drastically reduce the time and costs of this activity.
FinTech represents the confluence of financial services, technology and law and is a global phenomenon, governed by innovative start-ups and scale-ups, which, through the use of new technologies, promise a rethinking of the user experience in the fruition of financial products and services, aiming to bring them closer to the world of finance and meeting, at the same time, the needs of an increasingly digital market. Suffice it to say that Fintech in Italy in 2020 earned around €250 million and already almost €350 million in the first quarter of 2021.
Traditional banks have already responded to the challenge thrown down by start-ups, rethinking their business model, investing in the restyling of their technologies and introducing new digital platforms. Indeed, banks using AI are able to streamline repetitive processes and greatly improve the customer experience by offering 24/7 access to their accounts, as well as financial advisory services.
The future goal for the market is to finally overcome the Silos Syndrome that plagues legal and financial players: leveraging AI in both sectors would be mutually beneficial and could produce interesting results. In this sense, global changes such as, for example, the Brexit, which has a pervasive impact on markets and related economic-financial agreements, the mixture of the Legaltech and FinTech sectors could certainly provide a valuable toolkit for experts in the field.
Finally, it would seem desirable to overcome the antithesis between the new operators and the traditional ones, favouring the fintegration between banks and FinTech start-ups: in this way, the former will be able to access digital tools and innovative methods, while the latter will be able to access the customer base of the large credit institutions, accelerating the growth of their business and lowering marketing costs.