The meteoric rise of FinTech is the mirror image of an ongoing digital revolution that will inevitably influence all sectors of the economy. FinTech, or financial technology, refers to computer programs and other technologies that are commonly used to support or enable banking and financial services (source: Oxford Languages). FinTech already impacts investment banking and keeps impacting this area over time. FinTech has enjoyed a particularly rapid emergence, which has not been without consequences.
The rapid emergence of FinTech
FinTech is the result of a rapid and ongoing technological evolution. As a matter of fact, FinTech is the result of the exponential growth of technology, especially in the area of big data, cloud computing as well as mobile computing. Those technologies are used to innovate the financial services proposed by traditional banks or, by being developed by startups specialized in FinTech. FinTech is a worldwide phenomenon since it has been driven by globalization where all the financial institutions are impacted and tend to expand their services to international markets.
This emergence has not been without consequences. For instance, FinTech has enabled a new approach to the customer experience. Indeed, it allows for meeting the increasingly sophisticated demands and requirements of customers, since they usually demand more transparency and more personalized offers and services, which traditional institutions are not fully prepared to provide. FinTech, therefore, is a new way of being more aligned with the customers’ demands, by offering new services thanks to sophisticated technologies.
The entry of FinTech into the financial market has been swift and is now evident in the new ways of dealing with some traditional processes, which are now being reviewed to be more efficient. Here are a few examples:
- A way of reducing costs and increasing efficiency
FinTech allows the growth of automation, enabling banks to automate parts of their processes. For instance, processes such as account opening or trade execution don’t need as much human work to be done.
- A way of targeting services and products to clients
FinTech tools enable investment banks to better analyze and understand market trends in order to anticipate their customer behavior. In fact, FinTech includes the enhancement of data analysis, which is the key to investment banks in order to provide targeted services to their customers.
- A way of improving customer experience
FinTech provides a better customer experience through many new technologies such as robot-advisors, which provide personalized advice to customers.
- A new way to fundraising
FinTech can imply disintermediation and is useful to many startups. Therefore, startups disrupt traditional investment banking services and tend to offer alternative platforms in order to fundraise and enable capital formation, through crowdfunding and peer-to-peer lending.
- A new way to innovate
Startups specializing in FinTech increase the competition within the banking industry, by entering the market and by pressuring the traditional banking systems to innovate and improve the proposed services technologically.
Therefore, FinTech impacts the investment banking industry in many ways, through new processes and approaches concerning the technical aspects and the customer experience.
Focus on Luxembourg
Luxembourg is the number one European leading financial centre and attracts many investment funds, such as the Undertakings for Collective Investment in Transferable Securities (UCITS) and alternative investment funds.
FinTech services offer the opportunity to automate the administrative tasks around investment funds, such as the Net Asset Value (NAV) calculations. The automation of fund administration also concerns risk management and compliance monitoring, which reduces costs significantly. FinTech allows the availability of digital distribution channels, to provide investment funds, in order to let them have access to a larger range of investors and therefore, reduce distribution costs. Data-wise, the data analysis is significantly improved thanks to FinTech solutions, as they can be used to analyze data in a more efficient and effective way and have a better comprehension of the market trends.
Luxembourg is a prominent place for FinTech to expand, as it is considered the European FinTech Valley. Nevertheless, Luxembourg takes this challenge with pragmatism, as its regulatory framework aims to push innovation in the FinTech sectors while assuring the protection of investors and of the actual financial system (la loi du 5 avril 1993 relative au secteur financier et la loi du 10 novembre 2009 sur les services de paiement).