Unit 2
Financial technology and digital payment
Artificial Intelligence in fintech
1 . Personalized customer experience
Banking customers today are quite digital-savvy, and they expect banks to offer a lot more than
the standard, traditional customer support processes. What this means is customers now want
more personalized solutions and customized support, which goes a long way in improving their
satisfaction.
When several years ago, AI made its foray into banking, a key challenge for organizations was to
determine if customers will welcome the idea of an AI solution not just responding but also
carrying out tasks on an end-to-end basis. And an Accenture survey early this year found out that
a sizeable percentage of customers (at about 54%) do want an AI to help them [1]. With time,
this figure is sure to increase as customers get used to AI solutions performing customized
actions for them.
Banks all over the globe have already employed AI in their framework that can give customers
real-time updates, provide support with their queries, and reduce wait times. In addition, when it
comes to personalized banking, AI in the form of bots and digital assistants can identify
recurring customers based on pattern recognition.
2. Making customer actions smarter
Last year, a key top application of Artificial Intelligence (AI) in banking 2022 started emerging
and nearly all AI vendors had their goal of incorporating it into their solutions. It was about
making banking processes smarter for the customer based on their actions. Following on the
point of pattern recognition in the previous application, AI not only made banking personalized
for customers but also made the processes smarter.
For example, AI-based banking procedures can now assist customers with fairly complex
requirements other than just the standard bank account, loan, or credit card application. This is
because, these solutions are trained to be ‘smart enough’ to tap into customer actions, analyze
their intentions, and make valuable predictions for faster banking activities.
This further led to AI solutions carrying out complex procedures such as resolving foreclosure
notices, interpreting invoices and bills present in an unstructured format, and archiving sensitive
data. More and more programs are being developed by chief Fintech AI market players. With
such smart banking procedures fuelled by a growing interest from third-party developers,
personal banking is expected to become much better in the future.
3. Automating front-end customer support and other back-end operations
A key front-office issue faced by employees working in the front office section of banks involves
dealing with millions of customers that bring their problems and expectations to the desk every
day. In the pre-AI era, this often caused employees to get heavily burdened with work. Unending
piles of customer inquiries and issues and less time kept aside for sensitive tasks ultimately
caused subpar operational efficiency and work productivity.
Now, with AI solutions bringing digital transformation to the banking industry, many of these
actions can now be automated with the help of Intelligent Process Automation (IPA). This AI-
based technology is a collection of individual technologies that enable banks to handle end-to-
end automation of not just front-facing customer service, but also at the back-end such as inquiry
processing, handling, and verification, and archiving.
In fact, with the application of AI, banks can save an estimated $447 billion by 2023. Out of that,
$416 billion of savings will come from AI use in the front and middle, and back-end offices [1].
IPA predominantly consists of specifically designed AI products and services integrated with the
banking infrastructure, and tasked with addressing different banking functions, all occurring
simultaneously.
4. Adopting responsible and ethical use of AI for compliance in banking
In the financial domain, many customers are now aware of the dangers of data breaches and the
leaking of their sensitive information while using banking procedures. And with this
apprehension, banking businesses are increasingly adopting ethical and responsible AI practices.
This also includes making their procedures compliant with international data security regulations
such as the General Data Protection Regulation (GDPR) and the International Organization for
Standardization (ISO).
Many vendors are developing AI solutions that are compliant with different ethical frameworks,
especially in terms of safeguarding customer data. This in turn not only helps banks maintain
effective trust and transparency with the customers, but also acts as a shield against bias, fraud,
hacking, and other similar cybercrime activities.
Thus, the use of responsible and ethical AI practices in banks has been noted as one of the
fastest-emerging applications of AI in this industry in 2022
Machine learning in fintech
FinTech companies can use AI and ML to provide customer-centric services in line with
changing market trends. In particular, the top use cases for machine learning in FinTech include:
Machine learning and algorithmic trading
Machine learning and fraud detection and prevention
Machine learning for regulatory compliance
Machine learning for better customer service
Machine learning in the stock market
Machine learning for loan automation
Machine learning for data analytics and decision making
1. Algorithmic trading is a highly effective strategy used by many companies to automate their
financial decisions and increase the volume of trades. It involves executing trading orders in line
with pre-programmed trading instructions created using machine learning algorithms. Every
major financial company invests in algorithmic trading, as the frequency of trades executed by
ML technology would be impossible to replicate manually.
For example, 8topuz uses ML algorithms and AI to help investors grow their wealth. The
company provides an automated trading system powered by artificial intelligence solutions. By
using ML algorithms to analyze massive sets of historical data from different stock markets,
8topuz helps investors design better algorithmic trading strategies.
2 .Machine learning and fraud detection and prevention
PwC’s Global Economic Crime and Fraud Survey revealed that 46% of surveyed organizations
encountered fraud, corruption, or other economic crimes in the past 24 months. This highlights
the need for effective solutions like machine learning fraud detection.
Sophisticated deep learning models, armed with vast data sets, enable organizations to uncover
hidden relationships between data points and swiftly identify anomalies.
For instance, Danske Bank, a major bank in Denmark, made a significant shift from its legacy
rule-based system to a machine learning fraud detection approach. This change led to a 60%
reduction in false positives and a 50% increase in fraud detection, demonstrating the efficacy of
machine learning in combating financial fraud.
3 .Machine learning for regulatory compliance
Among the top machine learning use cases in finance are Regulatory Technology (RegTech)
solutions.
Because ML algorithms can read and learn from a pile of regulatory documents, they can detect
correlations between guidelines. As a result, cloud solutions with ML algorithms integrated for
use in finance can automatically track and monitor regulatory changes as they occur.
Moreover, banking institutions can also monitor transaction data to identify anomalies. In this
way, ML can ensure that customer transactions comply with regulatory criteria.
4 .Machine learning for better customer service
Personalization is key for building customer trust and loyalty, especially in finance where
transparency and accuracy are highly valued. Machine learning in fintech plays a pivotal role
here, as it can analyze customers’ data to predict services they might like or offer helpful advice.
This technology is also instrumental in customer churn prediction as it helps businesses
understand and retain their customers.
Moreover, the remarkable advancements in natural language processing have enabled fintech
companies to employ chatbots for resolving customer issues. These advanced chatbots go
beyond answering basic queries. They now offer more personalized and insightful financial
advice, adding another dimension to customer service in the fintech industry.
5 .Machine learning in the stock market
The vast volumes of trading operations generate tons of historical data, providing unlimited
learning potential. However, historical data is merely the grounds on which predictions are made.
ML algorithms analyze data sources available in real time, such as news and trade results, to
identify patterns explaining stock market dynamics. Traders are then tasked with deciding which
ML algorithms to include in their strategies when making a trading forecast, and selecting a
behavioral pattern.
6 .Machine learning for loan automation
Machine learning algorithms manage to process more layers of data without being limited to
FICO scores and income data.
Such applications of machine learning in finance have opened alternative data sources to lenders.
For example, many diverse indicators are now being considered to establish an accurate risk
score — from social profiles, telecommunications companies, utilities, rent payments, and even
health checkup records.
Algorithms compare aggregated data points with thousands of customers to generate an accurate
risk score. A loan will be issued automatically if the risk score falls below the lender’s threshold.
Importantly, machine learning algorithms can evaluate borrowers without emotion or bias, unlike
human credit assessors. According to the Harvard Business Review, financial companies can
make lending more equitable by removing racial, gender, and other biases from the models when
they are being developed.
7 .Machine learning for data analytics and decision making
Machine learning in fintech offers a robust solution for handling and interpreting extensive
amounts of data. By integrating data analytics services, it delivers thoroughly analyzed insights
that enable real-time decision-making, saving both time and money. This technology also
enhances the accuracy and speed of predicting future market trends.
Moreover, by leveraging predictive analytics solutions, fintech companies can develop
innovative and future-ready solutions tailored to the evolving demands of customers and market
trends. This proactive approach, powered by the synergy of machine learning and data analytics
services, positions fintech firms to effectively anticipate and meet emerging financial needs.
Machine learning in accounting and finance
Machine learning is very relevant for the fields of accounting and finance as more and more
companies use systems powered by this technology for greater data analysis.
As an accounting or finance professional, you’re responsible for the financial health and
reporting of an organization. The information you receive impacts how well you’re able to do
your job.
If these departments are using ML-powered systems to generate, connect, and organize
information, you’ll need to understand both what you’re looking at and what to look for.
The formatting and content of these reports may differ from what you’ve historically received
from those departments. It could give you a much more accurate and timely picture of the
company’s finances or books – that’s a powerful benefit.The question of how machine learning
works specifically for accounting and finance tasks is an important one too.
Bookkeeping is an obvious area of improvement – systems that can automate, sort, tag, verify,
and more.But even with the opportunity of new tech, companies should be wary of the pace of
adoption.
Building an outsized tech stack that doesn’t support interoperability could be a mistake. In an
ideal world, new tech in a company doesn’t reinforce silos, it diminishes them.
The goal is for the technology used in accounting to work seamlessly with that used in business
development, HR and other departments within your organization.
This will create a single point solution and streamline the user experience, which is essential for
accelerating progress.Ok, deep breath. I know this is a lot, and it represents a lot of changes to
how things have always been done.
As an accounting professional, your ability to learn to use new technology, and even support it
across the whole business, could be a powerful indicator of your leadership abilities.
If you’re reading this, you probably have an interest in becoming a CMA or are a CMA, which
means you already have a knack for leadership – that’s amazing.But becoming skilled in
emerging technology could be a huge differentiator for your career growth.
Robotic process automation (RPA )
Robotic Process Automation, or RPA, is a technology that utilizes software robots or “bots” to
automate repetitive, rule-based tasks typically performed by humans. These bots can interact
with applications, capture data, manipulate information, and perform tasks just as a human
employee would. The primary goal of RPA is to free up human resources from mundane
activities and allow them to focus on more strategic and value-added tasks.
RPA in the Fintech Industry
The fintech industry is characterized by a myriad of data-intensive processes, extensive
regulatory requirements, and a constant demand for accuracy and speed. RPA’s introduction into
this sector has proven to be a transformative force, as it addresses many of the industry’s key
challenges.
Stripe: Automating Payment Processing
Stripe, a leading fintech company, leverages RPA to automate its payment processing
operations. RPA bots are employed to handle tasks like transaction reconciliation, customer data
validation, and fraud detection. By automating these processes, Stripe can efficiently process
millions of transactions daily, reducing manual errors and ensuring faster, more secure payment
processing for its global customer base. As a result, Stripe has gained a competitive edge in the
online payment industry, attracting numerous businesses that value efficiency and reliability.
Ant Financial: Streamlining Loan Underwriting
Ant Financial, an affiliate of Alibaba Group and operator of the widely-used mobile payment
platform Alipay, has embraced RPA to streamline its loan underwriting process. The company
uses bots to gather and analyze vast amounts of customer data, assess credit risk, and make loan
approval decisions. RPA has significantly reduced the time and resources required for loan
processing, allowing Ant Financial to cater to a massive customer base efficiently. The increased
automation has also enabled the company to expand its financial services offerings beyond
traditional banking, such as micro-lending and wealth management.
Betterment: Optimizing Investment Management
Betterment, a popular robo-advisor and digital wealth management platform, employs RPA to
optimize its investment management processes. RPA bots collect and analyze market data, track
investment portfolios, and execute trades based on pre-defined algorithms. By automating these
tasks, Betterment can offer its customers personalized investment strategies and real-time
portfolio adjustments without the need for manual intervention. The use of RPA has not only
improved the overall accuracy of investment decisions but has also enabled Betterment to offer
low-cost, accessible investment solutions to a broader range of clients.
Robinhood: Enhancing Customer Support
Robinhood, a commission-free trading platform, utilizes RPA to enhance its customer support
services. RPA bots handle routine customer inquiries, such as account balance checks, password
resets, and account verification. By automating these tasks, Robinhood’s customer support team
can focus on resolving more complex issues and providing personalized assistance to users. The
faster response times and efficient query resolution have contributed to higher customer
satisfaction and increased loyalty among Robinhood’s rapidly growing user base.
SoFi: Expediting Mortgage Processing
Social Finance Inc. (SoFi), a fintech company known for its innovative lending and investment
products, employs RPA to expedite its mortgage processing. RPA bots gather applicant data,
verify income and credit scores, and assess property valuations to generate pre-approval
decisions rapidly. By automating these tasks, SoFi has been able to reduce the mortgage
application turnaround time significantly, giving customers a seamless and efficient borrowing
experience. The integration of RPA has contributed to SoFi’s reputation as a fintech pioneer,
revolutionizing the traditional mortgage industry.
Robotic Process Automation is transforming the fintech industry by providing cost-effective
solutions, heightened efficiency, and improved customer experiences. The success stories of
Stripe, Ant Financial, Betterment, Robinhood, and SoFi illustrate how RPA is reshaping the
financial landscape, empowering companies to offer innovative solutions and maintain a
competitive edge in the dynamic fintech industry. As the technology continues to evolve, more
fintech companies are likely to adopt RPA to stay ahead of the curve and meet the ever-growing
demands of their customers. Embracing RPA will become crucial for fintech companies looking
to stay competitive, resilient, and relevant in an ever-evolving industry.
FinTech in Data Analytics
Numerous companies rely on FinTech applications to analyze data. Software like Microsoft
Power BI and Sisense enables business professionals to collect and visualize large amounts of
information, such as financial transactions and customer demographics. These tools help
companies gain financial insights and monitor performance.
Many FinTech applications also use AI and machine learning to process data. These tools use
powerful algorithms and predictive analytics to detect patterns and anticipate future trends.
Companies can use this technology to assess risk, detect fraud, and evaluate creditworthiness.
The Future of FinTech in Finance and Analytics
As technology advances, FinTech will continue to transform the financial industry. According to
a recent report by the Boston Consulting Group, FinTech services will generate $1.5 trillion in
annual revenue by 2030 and makeup nearly 25% of all banking revenue.11
Many emerging trends have the potential to become the next big hit in FinTech, including:12
Embedded Finance: This technology combines several financial services into a single
platform so users don’t have to use multiple applications
Software as a Service (SaaS): Companies can pay for cloud-based financial services
without building custom systems
Voice Recognition Security Measures: Financial services can use voice recognition
technology to verify the user’s identity, increasing security
DIGITAL PAYMENTS
Digital payments are payments done through digital or online modes, with no exchange of hard
cash being involved. Such a payment, sometimes also called an electronic payment (e-payment),
is the transfer of value from one payment account to another where both the payer and the payee
use a digital device such as a mobile phone, computer, or a credit,debit, or prepaid card.
The payer and payee could be either a business or an individual. This means that for digital
payments to take place, the payer and payee both must have a bank account, an online banking
method, a device from which they can make the payment, and a medium of transmission,
meaning that either they should have signed up to a payment provider or an intermediary such as
a bank or a service provider. A digital payment transaction can happen both on the internet and
in person to the payee.
For example, if a buyer pays via UPI on an e-commerce website or buys from his local grocer
and pays him through UPI while purchasing at the store, both are digital payment transactions.
There are various modes of digital payments, including UPI, NEFT, AEPS, mobile wallets, and
PoS terminals. UPI is the most preferred mode, having crossed the milestone of $1 trillion in the
value of transactions.
DFS ECO SYSTEM
The Digital Financial Services ecosystem consists of users (consumers, businesses, government
agencies and non-profit groups) who have needs for digital and interoperable financial products
and services; the providers (banks, other licensed financial institutions, and non-banks) who
supply those products and services through digital means; the financial, technical, and other
infrastructures that make them possible; and the governmental policies, laws and regulations
which enable them to be delivered in an accessible, affordable, and safe manner. The DFS
ecosystem aims to support all people and enterprises within a country, and should support
national goals including financial inclusion, economic health, and the stability and integrity of
the financial systems.
The Goal of Digital Financial Services The goal of financial services made available via digital
means is to contribute to the reduction in poverty and deliver on the recognized benefits of
financial inclusion in developing countries. Financial inclusion means the sustainable provision
of affordable financial services that bring the poor into the formal economy. An inclusive system
includes a range of financial services that provide opportunities for accessing and moving funds,
growing capital, and reducing risk. Such services may be provided by banks and other traditional
financial services organizations, or by nonbank providers. Many people have pointed out that
financial inclusion is a means rather than an end. Financial inclusion contributes to the
development goals of poverty reduction, economic growth and jobs, greater food security and
agricultural production, women’s economic empowerment and health protection. The financial
inclusion benefits of a digital financial services ecosystem include Safety and security: poor
people are able to store and manage value without needing to protect cash as a physical asset
Speed and Transparency: given the liquidity and transactional anonymity of cash, cash
payments are subject to delay, “leakage” (payments that do not reach the recipient in full), and
“ghost” (fake) recipients.This is particularly true in the context of government payments. By
moving to digital payments, the traceability of the payment process is improved through more
stringent identification procedures, direct transfers that skip current intermediate hands, digital
record- keeping, and more immediate funds transfer.
Increased Flexibility: many poor people, particularly those in rural areas, receive part of their
annual income through domestic and international remittances. They may also reach out to their
social networks in times of need to obtain additional funds. At times, these monies do not arrive
at all or do not arrive in time. The transfer can be costly and it is not clear to the payers that their
funds will be directed to the proper purpose. Digital financial services can reduce costs and
increase the coverage of remittances transfers, making remittances of smallamounts viable.
Moreover, digital financial systems can enable remitters to direct funds directly to savings,
health, educationfees, or other types of targeted accounts that ensures funds are being spent as
intended. The increased flexibility ITU-T Focus Group
Digital Financial Services: The Digital Financial Services Ecosystem 2 of digital systems also
allows the poor to pay for goods and services on lay-away, pay-asyou-go, or through other
payment options that more closely match their ability to pay.
Savings Incentives: digital technology facilitates access and interfaces to saving products.
Furthermore, digital payments create the opportunity to embed poor people in a system of
automatic deposits, scheduled text reminders, and positive default options that help people
overcome psychological barriers to saving. Moreover, digital technologies can make available
data analytics on users' financial lives and therefore increase the willingness to save.
Credit Histories: electronic payments create records, allowing transaction histories that can
support borrowing by poor consumers and merchants.
Women’sEmpowerment: evidence suggests that digital financial remittances(domestic and
international) empower women within their households.The digital nature of the payment
enables the recipient to keep financial transactions private, even within a family.
RTGS networks
RTGS or Real Time Gross Settlement refers to a fund transfer system where the transfer of
money from one bank to another takes place on a real-time and gross basis. Settlement in real-
time means the transactions are not subjected to any waiting time. The payment system
processes every fund transfer instruction as and when it is received.
Settlement on a gross basis means the banks settle the transactions on a one-to-one basis. They
do not group it with other transfers, as in the case of NEFT.
RTGS is used for high-value transactions (above Rs 2 lakhs), such as large business
payments or government transactions. It is considered one of the safest and most efficient
methods of transferring funds. RTGS payments are recorded directly in the books of the Reserve
Bank of India (RBI) and are, therefore, irreversible once completed.
Banks process RTGS transactions, which can be time-consuming and prone to errors. However,
with the rise of fintech and the increasing use of technology in the financial sector, the RTGS
process has become much more streamlined and efficient. In this blog, we will explore
everything about RTGS and how fintech can help in the processing of RTGS.
The Role of Fintech in RTGS
Fintech, or financial technology, refers to the use of technology in the financial sector to improve
and streamline financial services. In the context of real-time gross settlement (RTGS), fintech
can facilitate the efficient and secure processing of financial transactions in real time.One of the
key ways that fintech helps in RTGS is through the use of APIs, or application programming
interfaces. APIs allow different systems to communicate with each other, enabling the seamless
transfer of funds between banks.
For example, when a business wants to make a large payment to another business, it can initiate
the transaction through its online banking platform . The platform will then send a request to the
receiving bank’s system through an API, which will automatically process the transaction and
transfer the funds. This process is much faster and more efficient than manually processing the
transaction, and it reduces the risk of errors or fraud.
Benefits of Using Fintech for RTGS
Fintech can help in several ways to facilitate RTGS. Some key benefits of using fintech for
RTGS include:
1. Speed: As mentioned, the use of fintech solutions enables the real-time transfer of funds even
beyond the bank’s operating hours. The transactions can be completed much faster than in
offline mode.
2. Accuracy: Fintech solutions reduce the risk of errors in RTGS transactions, as the process is
automated and less prone to human error. It is important, particularly for high-value transactions,
as even small mistakes can have significant consequences.
3. Security: We have seen various cases of RTGS fraud by bank staff and through cyber attacks.
Fintech solutions for RTGS are generally more secure than traditional methods, as they use
advanced security measures such as two-factor authentication and encryption to protect against
fraud and cyber-attacks. It is important for both banks and their customers, as it helps to ensure
the safety of their funds.
4.Convenience: Fintech solutions for RTGS have made the process of transferring funds more
convenient for both banks and their customers. Customers can initiate transactions from their
smartphones or computers, and banks can process them more efficiently and accurately. This
reduces the need for manual processing, freeing up staff to focus on other tasks.
