Financial IT Industry
Some of the trends in the US fintech industry related to cloud and security services are public cloud as a dominant infrastructure model and blockchain. The growth drivers in this sector include the use of mobile banking and the increased investments the industry is seeing. The US fintech industry is stifled by cybersecurity risks and regulatory issues. Still, companies like Microsoft Azure, AWS, and Ripple manage to dominate the industry.
US FINTECH INDUSTRY: FINANCIAL CLOUD AND SECURITY SERVICES
Public Cloud Becoming the Dominant Infrastructure Model
- Currently, several financial institutions in the US are using cloud-based software-as-a-service (SaaS) applications for non-core business processes like CRM, financial accounting, and HR.
- These businesses are also relying on SaaS for point solutions on the edge of their day to day operations, including security analytics. However, as application offerings are enhanced and technology and information executives become used to the arrangements, the cloud-based software-as-a-service (SaaS) technology is rapidly becoming the norm, in terms of how core activity is processed.
- By the end of 2020 and beyond, core service infrastructures in areas like billings and consumer payments for "asset managers’ basic current account functions will be well on the way to becoming utilities."
- Due to this shift, there has been a significant decrease in data storage costs, facilitated by cloud-based infrastructure. This has made it relatively easier to apply revolutionary analytics. In addition, it has reduced "the barriers to entry for new FinTech disruption."
- Both B2B and B2C customers actively seek a flexible, personalized system experience. With costs continuing to plummet, the cloud has a promising future in the fintech industry.
- A study by the Cloud Security Alliance showed that 61% of financial services industry operators consider a cloud computing strategy formative in their organizations. Up to 41% mentioned that their IT strategy is a "hybrid mix of cloud and in-house computing, while 18% said their cloud strategy would largely be confined to using private clouds."
- Blockchain is shaking up the US fintech industry. According to PWC, 56% of financial services operators recognize its importance.
- The financial services industry faces a multitude of issues that blockchain could help fix. For one, the technology makes information transparent, while also using encryption technology to deter hackers. It has particularly been proven effective in solving prominent issues that the financial services industry faces.
- Banks in the US still suffer from fraud, mainly stemming from hacking and DDOS attacks. On a blockchain network, these attacks would be almost impossible to carry out. Blockchain also makes it easy to identify hackers.
- Another issue that blockchain is solving in the financial services industry is complicated paperwork. Financial services firms are now using smart contracts - which relies on blockchain technology - to create contracts that can automatically update and remove stipulation values.
- Blockchain also helps eliminates third parties needed for transferring money. Typically, this process goes through banks and credit card processors, among others. With blockchain in place, it would simply be a peer-to-peer system.
- The technology is increasingly been adopted by financial services firms in the US. Bank of America, for example, has filed a blockchain related patent and plans to "create a ledger that secures records and provides authentication of data."
- Goldman Sachs is heavily investing in a new project it calls Circle. The main aim of this project is to "solve the volatility problem that haunts cryptocurrencies to this day."
- By the end of 2020, almost 80% of fintech firms plan to use blockchain. In a short period, the technology has reached remarkable milestones.
Use of Mobile Banking Solutions
- The increasing use of mobile banking applications for digital payments and other banking applications is positively impacting the fintech industry.
- Mobile banking applications have become an important part of bank offerings as it allows them to have an edge in a competitive environment.
- Small and large banks in the US have either launched or are planning to launch person-to-person payments with platforms like Zelle.
- Currently, almost 90% of the US population have mobile phones, while 77% have internet connection. Of the total internet users, roughly 53% use their smartphone for mobile banking.
- Among people who use mobile banking apps, 40.9% of them use it a few times weekly, while 34.4% use it once a week or less, 20.9% use it once daily, and 13.7% use it more than once daily.
- More than 30 depository institutions in the US are now experimenting beyond mobile channels and using Amazon's cloud-based service, Alexa. These banks allow customers to review account information and facilitate transfers through Alexa.
Investments in Fintech Solutions
- The increased investment in fintech solutions is driving the growth of the fintech sector.
- Venture capital and private equity firms are heavily investing in fintech startups due to "the increasing demand for fintech solutions among users and for the purpose of future returns."
- In 2018 alone, the US fintech industry saw hundreds of investments worth more than $7 billion.
- Almost $2 billion was invested in the payments segment of the fintech industry, closely followed by the insurance technology sub-sector with $1.8 billion in investments. Others include investment and capital markets technology ($1.35 billion), digital lending ($1.2 billion), banking technology ($800 million), and financial media and data solutions ($400 million).
- In 2019, total fintech investment across private equity firms, venture capital funds, and mergers and acquisitions reached $59.8 billion in the US. The largest portion of U.S. funding went to "lending startups and those in payments, each accounting for 26% of the total, while insurtechs took in another 18%; the country’s largest deal was the US$1 billion that consumer finance fintech Figure Technologies Inc secured from a credit facility in May 2019.
- Due to the strong demand for fintech in the US and internationally, these investments are expected to increase, albeit to fast-growing economies.
- In March 2020, Thought Machine - a startup that has built cloud-based technology powering financial services institutions - raised $83 million in a Series B funding round.
How IoT is Fueling Cyber-Security Risks
- Cybersecurity is currently one of the main risks that financial institutions face. A study cited by PWC corroborates this by revealing that almost 70% of CEOs at financial services firms are either somewhat concerned or extremely concerned about cyber threats.
- This valid concern is fueled by several forces including the use of third-party vendors, cross-border data exchanges, the rapid growth of IoT and complex technologies.
- The rapid growth of Internet of Things (IoT) and the increased use of this technology by financial institutions poses a new set of security risks and challenges that are severe. Insurance companies use telematics technology in IoT to track driving habits while banks are collaborating with IoT companies like wearable technology manufacturers to "allow customers to make mobile payments using fitness trackers or watches."
- Despite the fascinating opportunities IoT offers to the financial services industry, cybersecurity remains the main challenge to the adoption of this technology because "insecure interfaces increase the risk of unauthorized access."
- Some of the concerns include the fact that hackers can enter a corporate network through an IoT devices; the technology depends on cloud-based services, making it difficult to add effective perimeter defenses; a lot of IoT devices do not support the implementation of rigid security controls; and the "pervasiveness of IoT data collection coupled with advanced analytic capabilities could potentially result in consumer privacy violations."
Financial Supervision and Regulation
- The fintech industry revolves around new technology. As a result, regulators are always experimenting with tools to keep up with this new technology and ensure security without stifling innovation.
- Still, fintech firms established through technical innovations are finding that regulators need time to adapt to "emerging technological innovations, and to get used to the complexity of financial digitization."
- Policy makers have designed a lot of financial laws and regulations to mitigate some of the risks that may be associated with new innovations.
- The underlying, cross-cutting technologies that "enable much of fintech are subject to such policy trade-offs. The increased availability and use of the internet and mobile devices could offer greater convenience and access to financial services, but raises questions over how geography-based regulations and disclosure requirements can and should be applied."
- While technologies like "Big Data promise more accurate risk assessment, they raise concerns over privacy and the unfair use of consumer data."
- Fintech applications in some financial industries also raise policy questions. The growth of "nonbank, internet lenders could expand access to credit, but industry observers debate the degree to which the existing state-by-state regulatory regime is overly burdensome or provides important consumer protections."
- As banks have increasingly come to rely on "third-party service providers to meet their technological needs, observers have debated the degree to which the regulations applicable to those relationships are unnecessarily onerous or ensure important safeguards and cybersecurity."
- Knowing what policy applies to certain technologies in the fintech space can sometimes be difficult for new entrants and existing operators.
Amazon Web Services (AWS)
- Amazon Web Services (AWS) provides reliable and affordable cloud computing services. Its cloud computing services was rolled out in 2006.
- Although headquartered in California, the company powers thousands of businesses in 190 countries worldwide and has data center locations in the US, Australia, Europe, Japan, Brazil, and Singapore. Its revenue in 2019 was $35 billion.
- Amazon Web Services' cloud-based products include IoT, networking, machine learning, enterprise applications, blockchain, storage, and security.
- Within the financial services industry, it offers Amazon WorkSpaces which allows these institutions to meet security requirements for desktop applications and mobile workers; Amazon Connect, which enables "financial services institutions to stand up a fully operational contact center in minutes and operate it virtually anywhere;" and AWS Grid Computing, which offers everything financial services firms need to seamlessly create and manage HPC clusters in the cloud.
- Although AWS caters to a wide range of industries, it offers one of the top cloud-based solution used by several large banks in the US to run portfolio credit risk simulations faster and more efficiently.
- Some of the financial services institutions that build on AWS include Capital One, Stripe, NASDAQ, Liberty Mutual, State Street, Thomson Reuters, and Robinhood.
- Launched in 2008, Microsoft Azure describes itself as an "open and flexible cloud computing platform" that allows users to build and deploy applications anywhere.
- The company is headquartered in Redmond, Washington, however, it has locations in all parts of the world. In 2019, Microsoft Azure's revenue was $39 billion.
- Its hundreds of products and solutions are categorized into artificial intelligence, machine learning, blockchain, analytics, security, networking, storage, web, devops, identity, hybrid, and compute, among others.
- Microsoft Azure enables financial services firms to personalize their customers' financial experiences and meet stringent security and compliance requirements.
- Some of the financial services institutions in the US using its products include Sunwest Bank, FINRA, Axioma, Sierra Pacific Mortgage, MetLife, Liberty Mutual Insurance, GEICO, Progressive Insurance, GTE Financial, and Insurwave.
- Leveraging advanced blockchain technology, Ripple enables financial services institutions - including banks and payment providers - to send faster and lower-cost payments worldwide. It is the only "enterprise blockchain company today with products in commercial use."
- Established in 2012, the company now has nine global offices, over 350 employees, and more than 300 customers. It is headquartered in San Francisco, California.
- Some of the financial services institutions using Ripple include American Express, PNC Financial Services, MoneyGram, and Santander.
- Ripple has received almost $300 million in funding from venture capital firms like Google Ventures. The company is currently worth $10 billion. Since it is privately-held, it has not released its revenue, neither is it obligated to reveal this information.
- Founded in 2007 at Chicago, Illinois, Braintree offers tools required to build businesses, accept payments, and enhance customer service. The company has over 500 employees and other locations in New York, Austin, San Francisco, London, Singapore, and Sydney.
- Its products for financial services institutions include Braintree Direct, which allows businesses to receive and process payments online, as well as, manage data security; Braintree Extend, which allows businesses to connect with service providers; Braintree Auth, focused on enabling merchants provide authorization and establish connections; and Braintree Marketplace, which is a payments' solution for marketplace businesses.
- Braintree promises enhanced security with its advanced fraud prevention features.
- It has processed more than $500 billion in payments. The company has not released any data on its revenue.
- Some of the businesses using the platform include LevelUp, Marketplacer, and Sky Scanner.