How AI and Blockchain Are Shaping the Future of Fintech

PayXpert

PayXpert
Published 26/10/2023 · 4 min read

Predicting the future is a perilous exercise. You can go down in history for all the wrong reasons, like Thomas Watson, president of IBM, who proclaimed in 1943 “I think there is a world market for maybe five computers.”

 

Or, Robert Metcalfe, founder of 3Com (a pioneer in computer network products), who was sure about the future of the Internet in 1995, «I predict the Internet will soon go spectacularly supernova and in 1996 catastrophically collapse.”

 

We will not attempt to be quite so bold when looking into the crystal ball. To claim that Artificial Intelligence and Blockchain technology will be dominant in shaping the near future of Fintech is not especially controversial. Everyone in the Fintech space and beyond would do well to attempt to be ahead of this particular curve.

 

5 Ways to take advantage of Artificial Intelligence in Fintech

 

  1. Automation: AI can automate many of the repetitive and manual tasks currently performed by humans in the Fintech industry. This includes data entry, document processing, and customer support. Automating these tasks can free up human employees to focus on more complex and strategic work, and it can also help to improve accuracy and efficiency.
  2. Rapid fire data processing: AI-powered algorithms can analyse large volumes of financial data in real time, extracting valuable insights and patterns. This information can improve decision-making in various areas, such as risk management, fraud detection, product development, business analysis, marketing, etc.
  3. Fraud prevention: Detecting anomalies and patterns in financial transactions is another task our friend AI excels at. This allows for quicker enabling proactive fraud detection and prevention. AI can also assess risk more accurately, guiding decision-making in financial relationships between partners or customers.
  4. Personalisation: Personalising services by analysing customer data, behaviour, and preferences should be an obligatory exercise for any service provider. This information can be used to offer customers tailored products and services and provide more relevant support. Besides offering a more efficient sales process, personalisation done well is a major trust factor. This is something that financial services companies should wholeheartedly embrace.
  5. Regulatory compliance: Machine Learning (ML) algorithms can help Fintech companies to comply with complex regulations. “Trained” algorithms can automate data collection, analysis and reporting. What almost all kinds of illegal activity have in common is that they produce anomalies. Detecting anomalies in vast data sets is a monumental challenge. A challenge that ML excels at!

FinTech, Blockchain and DeFi 

 

Blockchain in the world of Finance is characterised by its decentralised, distributed, immutable and transparent digital ledger technology. These characteristics of blockchain technology are the foundation of both optimising verification and distribution of legacy financial information and spawning new business models.

 

The former touches upon basically most facets of Financial Services, whereas the latter (new models) refers to, to a large degree, to Decentralised Finance (DeFi). This model is constructed upon blockchain technology and aims to use the decentralised nature of blockchain to circumvent traditional financial institutions like banks. DeFi applications use smart contracts to automate financial transactions like lending, borrowing, trading, and investing.

 

In what sectors do you find DeFi applications?

 

You will find DeFi across the spectrum of financial services. Decentralised exchanges (DEXs): DEXs allow users to trade cryptocurrencies without needing a centralised exchange. It is the very nature of cryptocurrencies to be decentralised, and as such, any part of the value chain like trading, but also asset management, lending etc. is part of a decentralised finance practice.

 

Neobanks are a subset of financial institutions that leverage blockchain technology, particularly the Neo blockchain, to offer decentralised financial services. A “neo blockchain” is a blockchain platform that digitises assets and enables the development of digital identity and smart contract applications.

 

These types of Fintech companies have been able to use blockchain technology to bypass traditional financial institutions and quickly launch alternative financial services. However, neobanks face multiple challenges in expanding into multi-country, full services offering. Retail banking deals with very country-specific regulations and neobank rich services aren’t easily transferable to new markets.

 

The neobanks also face stiff competition from incumbent Fintech players like PayPal who is aggressively expanding their financial services offering and even launching a cryptocurrency, PayPal USD, a stable coin backed by liquid assets.

In a previous post we talked about how the tech giants are racing to create Super-apps, and Twitter/ X has obtained licenses in 7 US states to process payments, including cryptocurrencies.

 

3 Challenges facing DeFi Companies

  1. Security risks: Smart contracts, which are the foundation of DeFi applications, are complex pieces of code that can be difficult to audit and secure. As a result, there have been a number of high-profile hacks and exploits in the DeFi space.
  2. Scalability: DeFi applications are often built on Ethereum, which is a blockchain platform that has scalability challenges. This means that DeFi applications can be slow and expensive to use, especially during periods of high demand.
  3. Centralisation: While DeFi is designed to be decentralised, many DeFi applications are quite centralised. For example, some DeFi applications are controlled by a small group of developers or have a few large liquidity providers.

Challenges with Using DeFi

 

One major challenge for many DeFi companies is the maturing regulatory practices in Europe and the UK. Historically, DeFi companies have been unregulated with no central authority to solve disputes etc. and, both UK authorities and the EU are changing tax laws, fraud regulations etc. to better suit the services and practices of DeFi.

 

DeFi can be complex and difficult to understand, even for experienced investors. This can make it difficult for people to get involved and benefit from its potential benefits.

 

Furthermore, it is important to note that DeFi is, as mentioned, also a high-risk ecosystem. This can make DeFi a complicated place to invest, especially for new users. Therefore, it is crucial to do your research and understand the risks involved before using DeFi applications.

 

Taking advantage of blockchain in the Fintech industry

 

Enhanced Security: Blockchain's decentralised and cryptographic nature makes it highly secure. Fintech companies are leveraging this feature to enhance the security of transactions, customer data, and identity verification processes. The immutability of blockchain makes it challenging for hackers to manipulate data.

Reduced Fraud: Blockchain's transparency and immutability help reduce fraud in financial transactions. Smart contracts, self-executing agreements with predefined rules, enable automated and secure transactions, reducing the need for intermediaries and the associated fraud risks.

Financial Inclusion: Blockchain has the potential to bring financial services to the unbanked and underbanked populations worldwide. With internet access and a smartphone, individuals can access blockchain-based financial services, such as digital wallets and micro loans, without requiring a traditional bank account.

Tokenisation: Fintech companies are using blockchain to tokenise various assets, including real estate, stocks, and commodities. This allows for fractional ownership and easier trading of traditionally illiquid assets, increasing market accessibility. Tokenisation is also used for data encryption. Applied to data security, it is the process of substituting a sensitive data element with a non-sensitive equivalent, referred to as a token with no extrinsic or exploitable meaning or value.

Regulatory Compliance: As with ML algorithms, Blockchain can facilitate regulatory compliance. An extra layer of security is added by providing a transparent and immutable ledger of transactions. This transparency can make it easier for Fintech companies to meet regulatory requirements and prevent money laundering and fraud.

Like most nascent technologies Blockchain and Artificial Intelligence hold both great promise and potential for disruption and disorder. Traditional business models are being disrupted, but so are regulations and financial laws. This is an industry where consumer trust is at the very base of a successful operation that also holds up against regulatory scrutiny. The next, mature stage of AI will offer a myriad of new opportunities for the Fintech companies that manage to build on that base!

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