FinTech and the digital disruption in financial services

From IAFEI December 2020 Quarterly newsletter:

By Alessandro Valente, Co-chair of the Ethics and Sustainable Development Working Group at IAFEI and member of the Tax Technology Committee and of the New Tax Professionals Committee at CFE.

Introduction

The application of blockchain in the form of a Distributed Ledger Technology [DLT], has the potential to transform well established financial institutions and bring lower costs, in addition to faster and more secure transactions, improved transparency, ordered ability of operations, among other benefits. Particularly relevant will be the disruption of payments for financial institutions, as well As for customers by reducing the cost and time of money transfers.

Blockchain technology has already begun to impact on the world’s financial sector. Blockchain has the potential to displace any business activity built on transactions occurring on traditional corporate databases, which is what supports nearly every financial service function. Any financial operation that has low transparency and limited traceability is thus vulnerable to disruption by blockchain and artificial intelligence (AI) applications. For these reasons, Fintech has been steadfast in experimenting with these technologies to improve activities in finance and focusing on better and cheaper access.

Among the most revolutionary tools available to the fintech industry is supply chain finance (SCF). its main contribution is the simplification of the integration of physical and financial flows. This is due to the blockchain, the Internet of things (IoT), AI, machine learning, and Big Data Analytics.

Moreover, these technologies can help reduce many supply chain financial risks.

Governments, financial institutions – including fintech startups – form an ecosystem. All the participants of this ecosystem faced different challenges and opportunities which allow for a more dynamic and complex landscape along with its continuous evolution. As the financial service sector is moving from the exploration phase to the application phase, it is very important for both financial institutions and experts to understand the role of disruptive technologies and capitalize on their potential.

FinTech – the digital disruption

Payments and cross border transactions have historically been slow and expensive. Blockchain endeavors to change that, allowing near real-time, point-to-point transfers of funds. This will also translate to increased profitability due to lower operational costs and overheads.

FinTech is the provision of financial products and services through the most advanced information and communication technologies.This is achieved by redefining and creating new applications, processes, products, and business models. The major innovative and revolutionary technologies that support the incoming disruption within the traditional banking system are blockchain, AI and machine learning.

Among these technologies,blockchain has arguably been at the forefront in terms of innovative power, having been applied to a multitude of business and corporate areas. An excellent example of such applications is smart contracts, which automatically regulate payments, adjust accounts, and coordinate records among multiple organizations. Moreover, blockchain technology is at the core of the invoicing, Which does not simply translate into the production and management of electronic invoices and often represents a relevant piece of the financial value chain and supply chain dematerialization.

In addition, blockchain technology allows for greater trade accuracy and a shorter settlement process. Today, we have commercial and investment banks, payment institutions, hedge funds, and private equity that carry out various functions like providing businesses with access to capital, underwriting deals, holding deposits, lending money, and confirming transactions and exchanges. In this context, blockchain will likely solve identity management issues while smart contracts will streamline the process. Furthermore, blockchain can also improve the real time visibility of the transaction to Institute regulatory and customs oversight.

On the other hand, AI will significantly improve FinTech by increasing the accuracy and personalization of payments, lending, and insurance services, while also helping to discover new borrower pools.AI and machine learning are thus proving to be very effective at interpreting and recommending actions based on real time data streams.

The supply chain

the technologies that make up the so-called fourth industrial revolution have generated shockwaves within the financial system, the implications of which will spread beyond the fintechs that spearheaded their use in financial services. Value chains have been a crucial component of the financial industry for decades and are currently being disrupted with ramifications for customers, regulators and nearly every stakeholder operating in the financial world.

Among the greatest challenges for fintech adopters is to identify a reliable set of indicators that also able to capture and to synthesize the interactions between the financial value chain and the supply chain. The objective is to come up with a revolutionary model of company score and analysis based on real-time digital information and driven mainly by the e-invoicing system. Providing valid support to all the relevant stakeholders through the use of mathematical and statistical tools, blockchain technology is able to not only provide relevant data in relation to cash flow throughout the supply chain, but most importantly, to forecast solid plans of credit in case of future material investments.

Supply chain management involves the flow of goods and products from the initial to the final stage. Supply chain management is not a one-person job to perform as there are different entities involved in it. Smart contracts in the supply chain can record ownership rights while the products are transferred through the supply chain. Everyone in the network contract the location of the product at any given time. The final product can be checked at each stage throughout the delivery process until it reaches the end customer. If an item is lost in the process, smart contracts can be used to detect its exact location.

Moreover, if any stakeholder fails to meet the contract terms, it becomes transparent for the whole system to witness. Ultimately, smart contracts bring transparency to the overall supply chain system. In addition, smart contracts have certain advantages for many industry sectors such as reducing overhead costs, providing transparency, and saving time period while more reliable, secure, efficient, and trustworthy when compared to paper contracts, Care needs to be taken to avoid the risks of code corruption.

Furthermore, SCF, also known as supplier finance or reverse factoring, is the set of solutions that allows a company to finance its working capital, leveraging not only its economic, financial or business characteristics but also on the role it plays within the supply chain in which it operates (production chain).

Currently, SMEs and growth businesses find maximizing liquidity to be a challenge, as well as accessing funding, particularly amid the COVID-19 pandemic. At the same time, many smaller businesses, particularly in emerging markets, find that they lack the credit rating required to Access Bank finance.

Although traditionally seen as a solution for large companies with solid credit history, SCF is creating opportunities to help SMS access working capital through the greater availability of digital options. In 2018 alone, SCF saw a 25% growth in the DACH region, and 23% in the US and Latin America region in the second half of 2019.

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