FinTech: Risks and Benefits
What is FinTech?
The term FinTech is an abbreviation for ‘financial technology’. FinTech involves the use of technology (such as the Internet of Things, Web 3.0 and Robotic Process Automation) to access financial services. From contactless payments to cryptocurrency and digital banking, FinTech is essentially transforming the way financial transactions are being carried out. In fact, we are living in an era dubbed as the “FinTech” Revolution.
FinTech: Risk and Benefits
Difference between Digital Finance and FinTech
Fun FinTech Fact
FinTech is considered to be a relatively modern phenomenon. But did you know that FinTech innovations go as far back as the late 1800’s and early 1900’s when the first electronic fund transfer system was enabled using technologies such as the telegraph and Morse code?
Digital Finance vs FinTech – are they one and the same?
Digital Finance generally refers to the digitalisation phenomenon happening within the financial sector and encompasses the utilisation of financial services products, services or processes that are allowed via technology-enabled devices and the internet.
So how do FinTech and Digital Finance intersect?
- Digital finance refers to a broader spectrum of digitalisation when compared to FinTech within the financial sector.
- Digital finance is more linked to well-established digital processes and products, while FinTech focuses on novel products and business processes that may disrupt and challenge the financial sector and that are not already widely adopted.
- Put simply, every FinTech product is classified under digital finance, but not all digital finance products may qualify as FinTech.
What benefits does FinTech bring about for consumers?
Consumers can enjoy many benefits when using FinTech solutions and products. Here are some of them:
Customers no longer need to go to a physical bank location to make basic financial transactions. Nowadays, you can make a deposit, apply for a loan and make a payment with a click of a button on your mobile phone, with no paperwork involved. Many mobile applications provide a user-friendly interface and can be accessed 24×7.
In certain circumstances, FinTech offerings provide more protection for consumers and investors. For instance, solutions that utilise blockchain technology, also known as Distributed Ledger Technology (‘DLT’), provide consumers with full transparency and traceability of transactions happening on the platform. Also, other technologies, such as Machine Learning (‘ML’) and Artificial Intelligence (‘AI’) may be applied for identity verification and fraud detections to decrease financial crime.
Another benefit which may sound rather obvious and is often taken for granted, is that, through digitalisation, some FinTech solutions provide and facilitate greater access to different financial products and services for consumers. In fact, the need for using FinTech has never been greater as in the past two years which saw more financial services companies shifting to digital solutions in response to COVID-19 restrictions.
FinTech adoption fosters competition as a wider range of products and services are made available to consumers.
What risks should you be aware of when using FinTech solutions?
The increase in investor empowerment which has been brought about by FinTech, without an apt understanding of the risks involved, also increases the possibility of customer harm.
Consumers may not be familiar with the complex business models resulting from FinTech. This leads to heightened risks of fraud and misconduct by operators or related parties.
Misinformation or the lack of transparency may impose additional risks to consumers when prices, features and additional risks are introduced.
Consumers may be exposed to additional risks when FinTech platforms or offerings are unreliable or vulnerable to external threats. These can vary from the inability to make transactions due to network/service downtime to inadequate data protection.
Undoubtedly, FinTech provides access to more financial products, including novel and more complex ones. However, consumers who lack the knowledge and experience to assess such products may end up purchasing products or services that are unsuitable to their financial needs.
The lack of human intervention can potentially lead to ethical issues relating to accountability, transparency, data bias as well as determining who is ultimately liable in scenarios of algorithmic errors or bias.
What can you do to minimise the risks linked to the use of FinTech?
No financial transaction is entirely risk-free. The same goes for FinTech and Digital Finance products. Always be vigilant!
- Before trusting your money with a FinTech-enabled entity, confirm that you are dealing with a reputable and authorised provider and make sure that you understand the product.
- Make sure that fees are clearly stated before you commit.
- Don’t download an app unless it comes from a trusted source. Read user reviews and do your research beforehand.
- Create strong passwords and do not use the same password on different accounts.
- Use additional security features such as two-factor authentication.
- Monitor your financial account activity regularly so that you can spot any suspicious transactions.
- Ensure that your devices are password or PIN protected.
- Do not use public wi-fi to access your financial accounts.