Artificial Intelligence and Fintech: the synergistic effect of financial optimism?
Can AI application in fintech industry help incur more clients?
AI technology can positively alter the fintech industry by efficiently automating the financial services and wealth management. The AI technology offers opportunity to analyze vast pool of available data and thereby offer error free customized risk analysis from various portfolio of investments. They can also accelerate the investment time (between receiving data, analysis and execution).
“Beware of little expenses. A small leak can sink a great ship”- Benjamin Franklin.
What is Fintech?
Fintech is an emerging collaborative industry between technology and financial sector. The primary goal is to innovate and improve traditional financial methods. It has application in insurance, banking, trading stocks and even risk analysis and management for corporate projects. One of the most popular fintech application is mobile banking and payment . This option allows individuals to make financial transactions at increased convenience and speed. It is considered the third most used mobile application by individuals.
According to statista.com, there are approximately 8775 fintech startups in North America as of February 2020. This is an approximate 52% increment from 2019. Technology and finance are the most sought after fields and hence a collaboration between the two can create new opportunities. Some of the factors that play primary role in its adoption in geographical sectors include internet availability and the trust on its cybersecurity offered by the fintech company.
The various categories of Fintech companies include: Personal finance, Wall Street, Investment, Lending, Real Estate, Crypto and blockchain and Payment options.
Forbes 2019 Fintech companies funding distribution [source of data : Forbes 2019/Fintech]
The pie chart shows the funding distribution across various categories of the Fintech companies. The highest is mostly biased towards payment options and crypto currency being least. The reason why crypto is lacking behind in accumulating fund is because (i) it is a relatively new concept,(ii) the price volatility (iii) barriers of government regulation for freedom in penetrating in large scale into mainstream transactions. The payment specialized fintech companies design algorithm for regulating cash flow analytics. Real estate fintech platforms offers opportunity as an automated lending platform to identify accredited investors of real estate. Investing fintech application offers rob-advisors in asset management by analyzing individual client financial goal and risk tolerance.
The advantages of integration of AI technology includes:
(i) faster processing of data : This allows the fintech industry to attain and process more client data. This means that the financial professionals can rather involve themselves into more active decision making process rather than engaging in simple tedious clerical work.
(ii) customized client portfolio : AI technology can access and process the client database and proactively determine the best ROI ( return on investment). Every client has their individual risk-reward tolerance and AI technology can effectively perform assessment through analyzing their portfolio history.
(iii) cost effectiveness : Most personal finance applications are usually offered free of cost to their users. For the survival of any business, it requires a low overhead cost associated with their day-to-day business operations. Though initial investment in the AI technology is high but it can pay off in the long run; as it eliminates the cost of hiring professionals to perform repetitive task and that can be easily automated.
(iv) forecasting opportunity : Finance is mostly about identifying the right opportunity . Rather than struggling to calculate the “right opportunity” for your investment, it is more effective to utilize AI technology to perform forecasting task that can easily analyze the risk associated with your investment.
There is nothing more frustrating than to realize a missed train of investment opportunity.
(v) optimized data modeling technique developed through machine learning (ML) algorithm : Machine learning technology and its application in the fintech industry has grown more than just a hype now. The technology has the potential to analyze individual client profile and determine optimum solutions.
For example, if a client repeatedly incurs maximum of its expenses on dining out; ML can easily identify it and offer the client alternatives such as preparing meals at home or ordering from cheaper restaurants.
A semi-automated fintech platform may be more effective with many individuals. This can provide opportunity to clients who on occasions prefer to talk to individual business professionals rather than just a rob-chat box.
Role of AI in Personal Finance Management
Among the many financial application sectors where AI can dominate is the personal finance management. It eliminates the need for individual or families to perform strenuous spreadsheet assessment on incomes and expenses but rather rely effortlessly on AI algorithm to perform such financial decisions for them.
Robo advisors or digital assistants are already been considered and developed by programmers when application platforms are developed for customers trying to manage their individual or family finances. Robo advisors has the leverage to accurately identify your financial income, expenses and long term saving goal. Through machine learning (ML) they can identify the sector where you need to mitigate the expenses in order to attain the long term or short term financial goal. This provides two advantages :
(i) saves time on strenuous financial calculation
(ii) the process is more efficient and can even allow to control unnecessary expenses (when linked to your bank account or credit card). This method is indeed effective if self restrain and impulse spending is a struggle .
Another reason why I see AI at getting more popular in the personal finance management, is because most people either hesitate or are simply shy on discussing about their money with other financial professionals.
Even in 2020 most people are extremely hesitant on discussing about money or their struggle with their income and expenses. Personal finance management is not taught at school and individuals fail to realize and educate themselves to be more financially stable. Most low or middle income families and individuals would rather choose a virtual platform than discussing with a professional.
Analyzing some of the positive Client Reviews on using a Personal Finance (PF) application platform
For any startup or clients , reviews on an application platform are integral for the success or failure of a service. Below are a list of both positive and negative reviews compiled across various boards and website, from clients that used AI driven personal finance app.
- Free : Most clients prefer a free platform as opposed to paying a premium. However, it also depends on the demographics and the service that the fintech company is targeting and offering . For example, wealthier demographics realize the price value of their money and are most likely to pay a reasonable service charge.
On the other hand for most personal finance management individuals or families,they are least likely to pay for such services.
Reason 1: Other competitors offer similar free services.
Reason 2: If they are only saving a few pennies as opposed to having to pay few dollars for that service.
2. Helps them to stay consistent with finance management: Most of us are guilty of this. We start off being confident on our resolution on improving our personal wealth management. However, few weeks into our ‘self-devised’ program we struggle to be consistent with our plan.
Research shows that if we are committed or invested to a financial platform or application technology then we are more likely to follow through.
AI technology can be a perfect substitute for our financial consciousness. Through integration with our financial institutions like savings bank or credit card, it can ensure that we are mitigate avoidable expenses.
3. Identify patterns of spending effortlessly : As discussed earlier, AI technology can effortlessly identify streams of unwanted expenses. For example, excessive dining out at restaurants, shopping spree on shoes or clothing lines or gadgets. Sub consciously most of us are guilty on spending too much , not just for ourselves but also on presents for Christmas. As the saying goes “ Beware of little expenses. A small leak can sink a great ship”- Benjamin Franklin. ML technology can help control and educate us on such expenditures.
Analyzing some of the Negative Client Reviews on using a Personal Finance (PF) application platform
- Sometimes the app crashes : User experience is critical for the success of any service. However when it comes to the fintech industry, reliability is a key component that application users prioritize. Hence it becomes extremely important that apart from the advanced AI technology the programmers invest at developing enhanced user experience.
The user interface (UI) and free brokerage service initially might increase their client database. However, glitches during trading hours might ultimately provoke some of its clients to choose other competitors.
2. Cannot always be compatible or integrated with bank/financial institution or credit card: In the development of a fintech platform, it becomes vital that your credit card/bank account to be easily linked and saved at the application. Though most US banks and credit cards can be easily linked to the application but there are certain banks both domestic and global that sometimes does not offer this flexibility.
US banks usually adds another layer of security to ensure that it is your own account. The process is controlled through AI technology . This is done by an automated deposit made to the account ( in few cents) and if the user can ensure the correct magnitude of the deposit, it automates the synchronization.
3. Does not offer enough user flexibility : Certain clients usually prefer more flexibility in their application. For instance, one of the complain regarding personal finance app is that it does not allow customization of categories for spending. For example, they cluster all the spending :both basic necessities (eg. groceries) and entertainment (eg. trip to a movie theater) all under the same category. This becomes difficult for client to identify where he or she actually needs to curb their spending.
AI driven personal financial applications are suppose to improve user experience. This can be achieved by machine learning (ML). The more a client uses the application, the easier it would be for the algorithm to identify and manage the financial expenditure.
AI for personal financial management has to grow beyond graphical representation. Visual dashboards are important but flexibility and improved customization is the key to success.
Understanding customer needs are crucial for the survival of the fintech industry. This article highlights the positive aspects of the AI technology and discusses on the positive reviews compiled from clients on using AI facilitated fintech services. However, there are negative feedback from clients that can help the industry to improve on their services to cater to their clients. All these data eventually provides opportunities for startups to realize the client preferences and frustrations and therefore pivot their technology to acquire more client market share.