Alif Bank Chairman: What does the future hold for FinTech?

Financial services are diversifying rapidly. The global expansion of financial technology (fintech) services has rapidly increased innovation across B2B and B2C applications. With traditional (trad-fi) and alternative (alt-fi) financial services leveraging emerging technology, the global future of fintech is a key focus for businesses and consumers.

New technology and innovations in a wide range of markets simultaneously benefit two crucial components for sector growth; service efficiency and availability. More importantly, the rise of web 3.0 applications powered by next-generation banking technology is positioned to create radical disruption in banking.

The emergence of web 3.0 technologies has catalyzed the spread of fintech services globally. These technologies are many, and each forms a significant cog in the growing fintech sector that is now valued at USD 310 billion. Of these technologies, some need to be on the radar of financiers.

Blockchain & DLT drive fintech

The adoption of blockchain was initially slow when it was launched in 2008. However, blockchain adoption has increased over the past decade, with CMI reports indicating that the technology, valued at $4.8 billion in global market capitalization, will escalate at a 65% CAGR to $69 billion market by 2030.

Blockchain is a type of automated and independent distributed ledger technology (DLT) that plots financial activity faster, more securely and more efficiently. Used without the need for intermediaries that have slowed efficiency and increased risk in traditional financial services, the benefits are well recognized by fintechs globally.

Fintech will increasingly rely on blockchain. Traditional banks and challenger banks are constantly using DLT in their systems for efficient transaction settlement and reconciliation. Alternative finance, such as cryptocurrencies, have used blockchain to facilitate their independent market position. The advantages are many, based on the core principles of speed, security and transparency.

Open bank in the fintech area

The size of the global open banking market was valued at USD 16.03 billion in 2021. By 2030, the market size is expected to grow at a CAGR of 26.9%, totaling USD 135.17 billion. Observing these numbers shows that open banking is an established key to fintech’s future.

Working with trad-fi institutions, open banking leverages Application Programming Interfaces (API) – a software interface that allows separate systems to communicate and correspond. API technology enables regulated third-party developers, such as e-wallets or neo-banks, to securely access and use the data collected and stored by trad-fi. By doing so, banking services can diversify based on consumer demand.

Open banking greatly benefits B2C markets, such as neo-bankers’ digital services and buy now pay later (BNPL). Leveraging the legitimacy of trad-fi and using embedded financial technology open banking provides flexibility to consumers by prioritizing speed and efficiency. As the diversification of financial services increases to satisfy different demographics, open banking services will provide a more customized user experience.

These customization benefits are critical to providing access to populations outside of Western finance – the versatility of API-based systems means that those following Islamic finance principles, or economies that draw from cash-dominant payments, can also benefit from them.

AI and automation in fintech

AI and automation have been mobilized heavily across all technology-based sectors, underpinning DLT and open banking technologies.

For consumers, AI is aimed at personalization, using touchpoint data across myriad platforms and services, producing a financial experience tailored to each individual. For market services, AI helps generate actionable data for risk management, customer understanding and service investment strategies – all of which are critical to delivering effective financial services.

For both consumers and marketers, automation offers huge benefits of speed while reducing the number of resources required. In this goal, significant progress has been made toward the concept of “real-time” technology; fintechs globally will continue to rely on automation and AI as the pillars of their service offerings.

Islamic finance and its place in fintech

Western fintech services show no signs of slowing down, with fintech hubs such as London, New York and Amsterdam leading the way in the diversification of financial services. But when we look at the future of fintech, Islamic finance is a sector poised for the most significant innovation.

This innovation happens quickly. Islamic consumer demand for fintech services has led to diversification. The Islamic fintech market size within the Organization of Islamic Cooperation (OIC) was $49 billion in 2020. This figure represents less than 1% of the global fintech market, but according to research by Dinar Standard and Elipses, the market will experience a CAGR of 21% to reach $128 billion by 2025, compared to a 15% growth rate for the conventional Fintech sector.

The future of Islamic finance is one of accelerated growth in new regions. Currently, 75% of the Islamic fintech market is dominated by just five countries; Saudi Arabia, Iran, UAE, Malaysia and Indonesia. To ensure a prosperous future for Islamic fintech, this market share must be diversified.

More importantly, regions in Central Asia such as Tajikistan, Uzbekistan and Kazakhstan are rapidly adopting fintech services, the latter providing a springboard for the rest of the region. This is partly a consequence of state-supported institutions having put in place new rules and regulators to facilitate an increase in the use of fintech. For example, the State Bank of Pakistan this year launched a licensing and regulatory framework for digital banks, effectively allowing an initial quota of five digital banks to start operations in the country.

The expansion will not end here. In the UK, there are estimated to be more than 1.8 million Muslims old enough to use financial services directly, and the government estimates the value of net assets of Islamic funds in the UK at £600 million. Expansion into Western markets primed for the growth of Shariah-compliant financial services will only continue as awareness of Islamic finance innovation becomes mainstream.

Fintech services for Islamic communities worldwide offer Sharia-compliant services unavailable through Western trad-fi services. An example of this is Sukuk, a type of bond asset that adheres to the principles of Islamic law, which prohibits the concept of riba, meaning there is no interest-paying bond structure within.

The future of fintech is global

By leveraging the technology above, the future of fintech as a whole is bright. With developments happening daily, we can leverage alt-fi technologies to provide a faster, safer and more inclusive economic landscape for years to come. Looking specifically at Islamic fintech, a symbiotic relationship can be fostered with Western financial services – accelerating the efficiency and growth of financial services and leading new innovations in this scaling sub-sector of financial services.

About the author: Khofiz Shakhidi is the chairman of the Tajikistan-based Alif Bank – Tajikistan’s leading banking fintech.