In recent years, financial technology has changed the way financial service firms do business. And now, several new developments are set to have an even greater impact on the industry. While some may have concerns that new technologies will replace certain financial services workers, including financial advisors, the more likely scenario is that businesses that successfully integrate these tools into their operations will leave those who don’t in the dust.
That said, as with most new technologies, there are certain risks that must be properly managed. Before you implement any new technology in your FSP, first discuss it with your compliance officer and practice management consultant. By having a clear and practical understanding of the regulatory and business requirements related to fintech, you can make the right decisions for your business.
In this article, we look at how technology can help or hinder financial service providers (FSPs) in general and investigate its potential to assist businesses that want to excel in this ever-changing environment.
What is fintech?
Financial technology, better known as fintech, refers to the technology used by the financial services industry to improve service delivery, streamline operations and automate certain activities. For example:
- Customer relationship management (CRM) software and applications can collect, store and analyse customer data in one place, allowing it to report on and give FSPs better insights into its customers’ needs and behaviours. This allows FSPs to make data-driven decisions regarding their clients, build stronger customer relationships and improve customer retention.
- Process and workflow automation tech can improve operational efficiency by streamlining, standardising and automating certain routine processes and tasks. This allows staff to focus on other duties like building customer relationships.
- Data analysis software enables FSPs to quickly and accurately analyse substantial amounts of financial data. FSPs can make informed decisions using insights gleamed from reports generated by this software.
- Artificial intelligence (AI) has been slow in gaining traction in South Africa but is expected to become more commonplace. There are several types of AI, but one that recently made headlines is ChatGPT, a natural language processing (NLP) application. By being fed enormous amounts of data, an NLP can create links between words, topics, sentences and concepts. NLPs can process and generate text, images and other media and provide near human-like responses. It is technically referred to as generative AI.
How fintech can benefit FSPs
Instant access to information: With online portals, businesses can give clients secure access to personal information without requiring human intervention. For example, an employee wouldn’t have to download information and email it to a client (and as we reported here, with the rise of cybercrime and business email compromise, using a secure online portal to disseminate personal information is safer than sending it via email). Similarly, a CRM system and process flows can automate certain client correspondences, such as renewal or review reminders, confirmations of transactional requirements or collection of outstanding information.
Similarly, chatbots can provide round-the-clock support to clients by answering basic queries, for example business times, contact information or how to submit queries or complaints. A more advanced chatbot can be trained to have an initial conversation and provide factual information (not advice) about life insurance to younger clients who are unfamiliar with the product. Thereafter, an advisor can pick up the conversation and discuss the product’s more complex aspects.
Virtual assistants can also help lighten the load when it comes to screening, reporting and preventing requirements, which businesses are required to do more of. It can ask clients for the necessary information and documents you need before you can add them to your book. If any information or documentation is outstanding, your virtual assistant can automatically send follow-up emails.
Improving on risk and compliance capabilities: Smaller independent financial advisors (IFAs) often struggle to keep up with the ever-changing financial services industry, but they can minimise their risk by using fintech tools to assess business requirements and assess process changes.
IFAs can also use these tools to better manage their staff, distribution channels and marketing activities, ensuring that management information is on hand when needed and risks can be addressed as and when they are identified.
Risk management software, automated workflows and other tech tools can also assist with controlling customer onboarding and complete aspects of the customer due diligence process to protect the business and raise red flags when it spots potential issues relating to money laundering, terrorist financing and proliferation financing.
Optimised, tailor-made services and advice: Data analysis tools and software can analyse vast amounts of data quickly and accurately, enabling FSPs to make more informed decisions about their clients, products and services. It can be used to analyse consumer characteristics, spending patterns, and product allocations to identify potential business opportunities or risks. These insights can help IFAs offer more tailored services and advice, which in turn can help reduce business acquisition costs, build trust and strengthen client relationships.
In addition, further advancements in fintech, especially in AI, may soon help advisors manage and analyse client portfolios more efficiently by quickly identify opportunities for diversification, rebalancing and tax optimisation. By reducing time spent on these activities, the advisor has more time to engage with their client on other aspects.
Streamlining marketing and client engagement: By leveraging AI-powered digital marketing tools, IFAs can target potential clients more effectively and tailor their messaging to specific demographics or segments. For example, you can ask software like ChatGPT to produce a marketing plan aimed at Generation Z clients for a specific financial product. Within seconds, ChatGPT will be able to come up with a plan you can go to market with.
Potential dangers and risks of using fintech in your business
Fact vs fiction: AI tools like ChatGPT can misinterpret facts, and it struggles to distinguish between data that is true or false. (OpenAI, the AI research laboratory that created ChatGPT, admits that this is an issue, and they are working towards improving it.) So, if you use fintech tools, someone still needs to check the accuracy of its responses and reports.
In addition, these tools do not understand the complexity of the regulatory environment, and it certainly does not prioritise ethical behaviour or fair client outcomes like Treating Customers Fairly (TCF). For the foreseeable future, proper compliance and risk management will still require human intervention and FSPs should include their Compliance Officer and practice management consultant in these projects and developments.
Data privacy and security: Building apps or writing software programs are complicated, expensive endeavours, and IFAs are more likely to use third-party tools. This can be a major issue if risks are not considered and managed. IFAs will have to ensure that they have the necessary consent to share information and ensure that the third-party provider complies with cybersecurity measures and regulations.
Algorithm bias: In Section 38(a)(iii) of the General Code of Conduct for Authorised Financial Services Providers and Representatives 2003 (GCOC), the regulation already provides for the provision of automated advice. The GCOC also recognises another challenge: the potential for bias in AI algorithms and automated decision-making environments. FSPs must be aware of requirements such as monitoring the risk of inadvertently perpetuating existing biases in their data sets or algorithms and take steps to mitigate this risk by monitoring and reviewing the automated advice, decisions, and the quality and suitability of interactions.
Impact on employees: While technology can enhance efficiency and reduce costs, it also has the potential to displace human workers. FSPs must carefully consider the impact of technological advancements on their workforce and take steps to ensure that employees are equipped with the skills and knowledge required to adapt and manage risks in a changing industry.
Embracing tech and business data in the and Omni-CBR era
One area where fintech has the potential to make the lives of IFAs much easier is with the shift into the Conduct of Financial Institutions Bill (COFI) and conduct of business return (Omni-CBR) reports.
Data analysis: Fintech tools can analyse data from various sources, for example financial statements, transaction records and compliance logs, to identify trends and patterns.
Risk assessment: By analysing data on business performance, market trends and other client factors, technology can be used to assess and monitor risk in FSPs, which can be used to inform the FSPs’ decisions on appropriate risk mitigation and remedial actions.
Business strategy analysis: Tech can also assist an FSP with analysing their business strategies, market positioning, client profile and other factors, which can be used to inform the business’ decisions on market segments, product partners or future service developments aspects. By analysing data on customer demographics, market trends and other factors, business analysis tools can identify areas of potential growth and provide intelligent data on how to improve business performance.
If this information is more readily available, the FSP and its Compliance Officer can use it to do a root cause analysis and identify areas where an FSP needs to improve their compliance, risk management or business practices, which is a critical component of COFI and Omni-CBR.
Risk and opportunity
There are risks involved in using technology, and FSPs should rely on partners like Compliance Officers and practice management consultants. They can provide objective input in support of business activities to ensure that FSPs have the appropriate knowledge around measures that must be put in place to comply with regulation, especially when new tech results in new regulation.
Overall, fintech tools have the potential to help FSPs navigate various business challenges and prepare for regulatory requirements. By using and analysing data, these tools can give FSPs a unique view into their business, which will assist them in achieving better results for themselves and their clients.
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While the boom in fintech is expected benefit FSPs, it also opens the door for cybercriminals to find new, innovative ways to defraud people and steal customer information. Be sure to stay a step ahead by signing up for our online cybersecurity and POPI Act courses. Or click here to learn more about our POPI Act implementation services.
SOURCES:
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Bank of International Settlements Working Paper: BigTech and the changing structure of financial intermediation. Bis.org.
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The new physics of financial services: How artificial intelligence is transforming the financial ecosystem. Deloitte.co.uk.
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International Monetary Fund Working Paper: Financial Intermediation and Technology: What’s Old, What’s New? Imf.org.
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AI systems like ChatGPT could impact 300 million full-time jobs worldwide, with administrative and legal roles some of the most at risk, Goldman Sachs report says. Insider.com.
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AI in Banking. Applications and Benefits of Artificial Intelligence in Financial Services. Nexocode.com.
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OECD Business and Finance Outlook 2021: AI in Business and Finance. Oecd-ilibrary.org.
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What happens when ChatGPT lies about real people? Washingtonpost.com.