Financial technologies (fintech) improve and automate delivery and use of financial services. Fintech companies are heavily invested in software or other technology. Some well-known fintech products include payment systems (e.g., PayPal), mobile payment applications (e.g., Square), and combined social networking and payment services (e.g., Venmo, WeChat, etc.). In response, traditional banking introduced Zelle, which allows funds transfers between customers of member banks.
Fintech has provided alternate paths for raising capital. For example, crowdfunding platforms like Kickstarter and Patreon allow pooling funds to bring various products to market. Banks no longer need to play middlemen, selecting winners and losers. Instead, individual investors organically coalesce and use their capital to vote on projects.
Asset management is another area transformed by fintech. Robo advisors can use questionnaires and algorithms to develop automated financial plans for investors. These plans can include artificial intelligence (AI) managed exchange traded funds (ETFs), thus allowing customers to plan for the future without human interaction.
Fintech’s transformation of financial markets introduces challenges for central governments, especially with increased adoption of novel digital assets like cryptocurrencies and non-fungible tokens (NFTs) that exist on public blockchains. For example, in Argentina, these digital assets are used by locals to hedge against cyclic economic crises. With an internet connection, local currencies can be easily exchanged for digital assets. Thus, program-controlled digital assets directly compete with central government-controlled currencies.
In addition to hedging, cryptocurrencies have enabled use of algorithms for decentralized banking. Individual lenders can provide digital assets to be held by a computer program, allowing the program to use these digital assets to make loans or to provide liquidity in an exchange service. The individual lenders are incentivized to lock their digital assets in the program by promise of interest. The program can then use various algorithms to optimize returns for lenders.
These banking schemes empower individuals with internet connectivity. Internet penetration rate in Africa is estimated to be 43%, while that of North America is 93.9%. With internet access growing yearly, financial institutions can more easily reach and onboard underserved banking populations. Financial institutions will need new methods to determine credit worthiness of these new customers, since some customers will not have traditional financial history that banks rely upon. Innovations in AI are needed to determine credit worthiness using atypical data.
Not every jurisdiction requires its citizens to have identification documents for internet access. However, when money is involved, verifying identity is crucial. Financial institutions usually need to comply with "know your customer" (KYC) requirements to curb money laundering, terrorism funding, or other illicit use of funds. Government-issued identification cards and identification numbers can serve to authenticate individuals in the physical world, but financial institutions may not be able to rely on these means for verifying identity online. By exposing billions of people to new financial products, AI and consensus mechanisms will need to be leveraged to ensure compliance with KYC requirements.
As individuals become more empowered and can easily move funds across jurisdictions with the click of a button, AI will not only be needed to provide financial services, but will also be needed to maintain compliance with local laws.