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Demystifying the Top 5 Fintech Trends

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Dawid Przespolewski, Head of Business Development at Future Processing

 

Recent years have seen major disruption, business challenges and digital transformation. And the impact on the financial services sector was no different. Driven by fintech innovations, businesses were opened up to a wide range of services that were more accessible than those offered by traditional banking institutions. While dealing with digitally-savvy consumers, who demand quick global payments at their fingertips, organisations soon realised that they must leverage fintech trends in order to meet their customers’ needs and create a profit in the longer term.

Join me for the rest of the article as we demystify the top five fintech trends of 2022 so far and the implications these will have on the wider industry.

 

The Rise in Decentralised Finance

The emergence of decentralised finance (DeFi) – also known as the Open Finance movement – is separate from the control of a single entity such as the central bank or government agencies. It is a concept that defines financial services that are created in public blockchains, similarly to Bitcoin and Ethereum.

Although financial services companies (centralised systems) have been efficient for years, they offer much less transparency to their customers on how the money is used compared to the open-source and decentralised DeFi applications. That is where DeFi has an advantage, without intermediaries such as brokers, exchanges, or banks to manage settlements of transactions payments happen in real-time. And this seems to be what the financial market needs, taking power away from the institutions that manage money behind the scenes and giving it back to the customers.

Currently, one of the main disadvantages of DeFi is that it is not immune to risks of fraud and theft. Technical issues associated with the protocols can make assets vulnerable to cyber criminals, which is the main reason some may be extra cautious when investing their capital. Additionally recent fluctuations on cryptocurrency market shown how unpredictable DeFi still is and requires much more maturing before becoming a real competition to centralised banking. Nevertheless it is an area to keep an eye on.

 

Invisible Forms of Identification

Traditional financial institutions often use Know Your Customer (KYC) standards for verification, which protects them against fraud, corruption, money laundering and terrorist financing. Fintech tools will now allow users to create bank accounts without the need for those forms of identification, with all necessary information stored virtually in the cloud.

In particular, fintech will help many companies in opening bank accounts without the need for KYC verification using identification documents. Supplying more individuals with financial services is likely to render far greater access to financial services such as borrowing and even the investment tools that could become a crucial step in financial security, better debt management and the creation of businesses.

 

Exploring Artificial Intelligence Capabilities

Artificial Intelligence (AI)-powered finance assistants have drastically risen in popularity during and following the pandemic. As data gets systematically stored in the cloud, it allows for AI to step in to solve problems regarding frequent issues, which allows for quicker response. The human touch is reserved for more personal matters like advising or supporting clients’ understanding of their financial situation.

But AI can be serving a much wider purpose than just customer assistance. AI-powered analytics are highly efficient when applied to data-based procedures. AI systems can now be utilised in fraud detection, lending decision-making, credit risk assessment, insurance, wealth management and more. Precision levels and high-speed query resolution of AI systems are showing results unmatched by any other system. It is safe to say that in the next few years, we will be able to observe many more processes using AI in the fintech industry.

 

Cloud Technology Continues to Thrive

The emergence of hybrid cloud solutions has allowed for real-time data integration which opens services to share information between different applications, bringing the benefits of scalability and security to the rapidly growing platforms.

Cloud enables the management of financial processes from afar. Self-service applications based on cloud technology allow businesses to deliver at a fast pace. Also, businesses can utilise cloud technology to collect and store large amounts of data securely and accessible at any time. Especially for fintech which utilises data from onboarding and identity verification procedures to account management, balance checking, and analysis of spending patterns. Beyond day-to-day processes, the cloud allows the creation of a recovery plan for any digital infrastructure in case of a disaster, which would save any business but is simply necessary for financial technology.

Over the last decade, the cloud has become the foundation of many business operations. The financial industry in particular will continue adopting the solution across many platforms, as it shows how big an impact cloud computing has on making the financial world more accessible.

 

Sustainability

Sustainability is a growing trend reflected in the fintech sector, which can be observed in product design, tracking carbon footprints, or providing accessibility and financial inclusion.

This trend is showing a real need for a shift in the economy. As sustainability becomes a huge part of all industries, consumers are more conscious and demand from brands they choose to share their values. Lately, the introduction of regulations demanding that organisations implement ESG in their operations makes sustainability more than just leverage, but a requirement. Additionally, as communities expect more action toward sustainability, financing those startups that aim to aid environmental issues become an area that fintech can support.

Fintech is a growing force in the financial market and has already shown to be a great driver in shaping a better future. As more organisations trust new ways of managing their finances, it paths the way for technological innovation in the financial world. Over the next few years, we will be able to see further applications and developments of the above-mentioned trends and as 15 years ago no one knew that banking could evolve into a service that is widely available to almost anyone and any business, certainly we can expect more improvement in this area in the future.

 

Finance

Mini-Budget 2022:

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Tax giveaway is a boost for business, but will it drive growth or fuel inflation?

 

Chancellor Kwasi Kwarteng has announced a comprehensive wave of tax cuts and other incentives for individuals and businesses, as well as confirming some of the announcements made earlier this week.  The measures are part of a new Growth Plan, which is aiming to boost economic growth. However, only time will tell if they will curb inflation and temper recession concerns.

Richard Godmon, tax partner at accountancy firm, Menzies LLP, said:

“With another fiscal statement to follow, this mini-Budget is a defining moment for the new Government and tax cuts are firmly back on the agenda.

“The biggest surprise was the decision to simplify Income Tax by moving to a single higher rate of tax for high earners of 40%, with effect from April next year. This will encourage a spirit of entrepreneurialism by incentivising work and putting money back into the economy. The flip side is that the Government might also be hoping that the move increases the tax take, as it could help to draw people back to the UK who may have previously chosen to live and work elsewhere, while encouraging others to stay put.

“The reduction in dividend tax rates and the abolition of the additional rate of tax from April 2023 means that business owners will need to consider carefully the timing of dividend payments over the next few months.”

Up to 40 new Investment Zones

The Chancellor also outlined plans to create up to 40 new ‘investment zones’ in England, with the potential for more in Wales, Scotland and Northern Ireland. Businesses in these zones will benefit from wide-ranging tax breaks including 100% tax relief on investments in plant and machinery, and no National Insurance Contributions will be payable on the first £50,000 earned by new employees.

Richard Godmon, tax partner at Menzies LLP, said: “The new Investment Zones are reminiscent of the former Enterprise Zones, but they will provide a much more favourable tax environment for businesses and they promise to become a magnet for inward investment. There are currently 38 areas in England on the list for consideration and we look forward to finding out which ones will be selected.”

Incentivising business investment and Corporation Tax rise ‘cancelled’

The limit of the Annual Investment Allowance (AIA) will not revert to £200,000 as planned in April next year, it will now permanently stay at £1 million.

Richard Godmon, tax partner at Menzies LLP, said:

“Capital allowances are highly valued by businesses and they will be pleased that this one in particularly is going to stick at £1 million and that this is no longer being described as a temporary measure, but is to be made permanent.

“The decision to cancel the planned increase in Corporation Tax (due to tax effect next April) will be a relief to many small and medium-sized businesses who have been concerned that this increase would erode profits further and make it even more challenging to remain viable.”

Incentivising entrepreneurial investment

The Chancellor highlighted plans to increase the cap on investments that can be made under the Seed Enterprise Investment Scheme (SEIS) from £150,000 to £250,000. Individuals making investments in start-ups up have had the limit doubled to £200,000, with the 50% income tax relief remining the same. The Government also gave its commitment to continuing to back the Enterprise Investment Scheme (EIS).

“These announcements send a signal to entrepreneurial investors that tax should not be a barrier and the Chancellor wants to expand incentives in this area,” added Richard Godmon, tax partner at Menzies LLP.

Stamp Duty Land Tax

The threshold at which Stamp Duty Land Tax (SDLT) becomes payable on residential property purchases in the UK has been raised to £250,000, double its previous level in a bid to boost the property market. In addition, first-time buyers will not have to pay SDLT on property purchases up to a value of £425,000 (up from £300,000). Both measures will take effect from today.

Richard Godmon, tax partner at Menzies LLP, said:

“The decision to raise the SDLT threshold is designed to build consumer confidence and boost the housing market generally. For property developers it will fuel activity by creating demand, particularly from first-time buyers, and help to free up finance to front-end development projects.”

IR35 Changes

Richard Godmon, tax partner at Menzies LLP, said:

“The repealing of the 2017 and 2021 IR35 changes will be hugely welcomed as it will remove an administrative burden, risk and cost, enabling businesses to devote resources to furthering their growth strategies.

“It is important to recognise that IR35 has not been abolished and the result of the changes is that the risk and compliance costs are being returned to the individuals and their personal service companies.  HMRC will no doubt redirect their focus towards the contractors, which will bring challenges and make enforcement more difficult.”

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A zero trust environment is critical for financial services

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Boris Bialek, Managing Director of Industry Solutions at MongoDB

Not long ago security professionals were still focused on protecting their IT in a similar formation to mediaeval guards protecting a walled city – concentrating on making it as difficult as possible to get inside. Once past this perimeter though, access to what was within was endless. For financial services, this means access to everything from personal identifiable information (PII) including credit card numbers, names, social security information and more ‘marketable data’. Unfortunately, we have many examples of how this type of security doesn’t work, the castle gets stormed and the data isn’t protected. The most famous is still the Equifax incident, where a small breach has led to years of unhappy customers.

Thankfully the mindset has shifted spurred on by the proliferation of networks and applications across geographies, devices and cloud platforms. This has made the classic point to point security obsolete. The perimeter has changed, it is fluid, so reliance on a wall for protection also has to change.

Zero trust presents a new paradigm for cybersecurity. In this context, it is already assumed that the perimeter is breached,no users are trusted, and trust cannot be gained simply by physical or network location. Every user, device and connection must be continually verified and audited.

What might seem obvious, but begs repeating, with the amount of confidential customer and client data that financial institutions hold – not to mention the regulations – this should be an even bigger priority. The perceived value of this data also makes financial services organisations a primary target for data breaches.

But how do you create a zero trust environment?

Boris Bialek

Keeping the data secure 

While ensuring that access to banking apps and online services is vital, it is actually the database that is the backend of these applications that is a key part of creating a zero trust environment. The database contains so much of an organisation’s sensitive, and regulated, information, as well as data that may not be sensitive but is critical to keeping the organisation running. This is why it is imperative that a database is ready and able to work in a zero trust environment.

As more databases are becoming cloud based services, a big part of this is ensuring that the database is secure by default, meaning it is secure out of the box. This takes some of the responsibility for security out of the hands of administrators because the highest levels of security are in place from the start, without requiring attention from users or administrators. To allow access, users and administrators must proactively make changes – nothing is automatically granted.

As more financial institutions embrace the cloud, this can get more complicated. The  security responsibilities are divided between the clients’ own organisation, the cloud providers and the vendors of the cloud services being used. This is known as the shared responsibility model. This moves away from the classic model where IT owns hardening the servers and security, then needs to harden the software on top – say the version of the database software – and then needs to harden the actual application code. In this model, the hardware (CPU, network, storage) are solely in the realm of the cloud provider that provisions these systems. The service provider for a Data-as-a-Service model then delivers the database hardened to the client with a designated endpoint. Only then does the actual client team and their application developers and DevOps team come into play for the actual “solution”.

Security and resilience in the cloud are only possible when everyone is clear on their roles and responsibilities. Shared responsibility recognizes that cloud vendors ensure that their products are secure by default, while still available, but also that organisations take appropriate steps to continue to protect the data they keep in the cloud.

Authenticate Everyone  

In banks and finance organisations, there is always lots of focus on customer authentication, making sure that accessing funds is as secure as possible. But it is also important to make sure that access to the database on the other end is secure. An IT organisation can use any number of methods to allow users to authenticate themselves to a database. Most often that includes a username and password, but given the increased need to maintain the privacy of confidential customer information by financial services organisations this should only be viewed as a base layer.

At the database layer, it is important to have transport layer security and SCRAM authentication which enables traffic from clients to the database to be authenticated and encrypted in transit.

Passwordless authentication is also something that should be considered – not just for customers, but internal teams as well. This can be done in multiple ways with the database, either auto-generated certificates that are needed to access the database or advanced options for organisations already using X.509 certificates and have a certificate management infrastructure.

Tracking is a key component 

As a highly regulated industry, it is also important to monitor your zero trust environment to ensure that it remains in force and exompasses your database. The database should be able to log all actions or have functionality to apply filters to capture only specific events, users or roles.

Role-based auditing lets you log and report activities by specific roles, such as userAdmin or dbAdmin, coupled with any roles inherited by each user, rather than having to extract activity for each individual administrator. This approach makes it easier for organisations to enforce end-to-end operational control and maintain the insight necessary for compliance and reporting.

Next level encryption

With large amounts of valuable data, financial institutions also need to make sure that they are embracing encryption – in flight, at rest and even in use. Securing data with client-side field-level encryption allows you to move to managed services in the cloud with greater confidence. The database only works with encrypted fields and organisations control their own encryption keys, rather than having the database provider manage them. This additional layer of security enforces an even more fine-grained separation of duties between those who use the database and those who administer and manage it.

Also, as more data is being transmitted and stored in the cloud – some of which are highly sensitive workloads – additional technical options to control and limit access to confidential and regulated data is needed. However, this data still needs to be used. So ensuring that in-use data encryption is part of your zero trust solution is vital. This also enables organisations to confidently store sensitive data, meeting compliance requirements, while also enabling different parts of the business to gain access and insights from it.

Securing data is only going to continue to become more important for all organisations, but for those in financial services the stakes can be even higher. Leaving the perimeter mentality to the history books and moving towards zero trust – especially as cloud and as-a-service infrastructure permeates the industry – is the only way to protect such valuable data.

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