Alternative finance refers to financial channels, processes, and instruments that are outside of the traditional finance system such as banks and capital markets. For several years, Alternative Finance is slowly altering financial services and the providers of such services in two main ways –
o New business models
o New technologies.
It's critical to understand the four keys or technologies that have allowed Alternative Finance to flourish. These can be interpreted as the ABCDs driving FinTech (Financial Technology) namely,
A - Artificial Intelligence, or AI,
B - Blockchain,
C - Cloud computing, and
D - Data
Source: edX
A – AI
The term artificial intelligence was coined at the Dartmouth summer research workshop in 1955. Two initial clarifications would be helpful. First, there are two forms of AI - the narrow or weak AI that relates to algorithm performing specific tasks, and conversely, the strong AI that reflects broader human intelligence and decision-making. Second, there are different strands within AI, including Natural Language Processing or NLP which relates to language, often written, and Machine Learning where systems learn from experience by being trained with data as opposed to being rules-based. There are many techniques within Machine Learning, including Neural Networks which comprise nodes of interconnections inspired by the human brain, and Deep Learning, which refers to algorithms based on neural networks arranged in deeper layers.
Data storage cost continues to fall while data are being gathered at remarkable rates through online activities and connected devices, hence in view of more structured & unstructured data to be gathered, stored, and used to train the machines. Major cloud companies, such as Amazon's AWS, Google Cloud, Microsoft's Azure, IBM Cloud and Alibaba's Aliyun incorporate AI into their services, which include machine learning frameworks on open-source basis to allow their clients to experiment and incorporate into their operations. For example, AI is rapidly changing Alternative Finance user interfaces, from facial and voice recognition for bio-metric identity management to chat-bots that can provide personalized recommendations. Algorithmic matching of needs, pricing, and predictive analytics are also being used.
AI also allows some alternative finance companies to create new business models that focus on analytics of the customer data rather than building platforms to provide financial fund flow. For example, some Chinese companies which started primarily as P2P lending companies have pivoted to provide credit analysis and scoring that serve the marketplace lending conducted by institutional investors and lenders.
B - Blockchain
The oldest example of double-entry bookkeeping can be found in the publication in 1494 of Franciscan Friar Luca Pacioli which allowed for reliable documentation of both creditor and debtor in a standardized manner. The white paper on Bitcoin by the mysterious Satoshi Nakamoto in 2008 was similarly revolutionary in establishing a cryptocurrency that seeks to solve the double-spending problem intrinsic in a currency based on software without the need of a trusted authority or central server.
Nakamoto postulated a ledger that is distributed via a peer-to-peer network that records transactions by way of blocks. Each block is validated by different node computers in the network through solving cryptographic mathematical puzzles, or hashes, at which time a new block with a new cryptographic hash, timestamp, and data would be added to the chain which is transparent to all users.
Blockchain is the underlying technology behind cryptocurrencies that have expanded dramatically beyond Bitcoin. In this way, this technology has created a new form of digital asset as well as a new alternative finance method to raise capital for new projects, with the so-called crypto exchanges comprising new forms of online capital marketplaces. In addition, blockchain technology could form the basis of new capital markets infrastructure. For example, NASDAQ is using blockchain technologies to secure record-keeping of ownership of private companies and transfers. In December 2017, Australia's ASX announced that it would replace its stock exchange registry, settlement and clearing system with blockchain technology. An even more ambitious use of blockchain technology through the creation of Distributed Autonomous Organizations or DAOs that allow for automatic execution upon specific conditions via smart contracts, with innovative governance mechanisms based on direct voting and consensus. If implemented to their fullest extent, DAOs and their efforts to dis-intermediate could impact not only the Venture Capital market but also the very concept of the joint-stock company and even some functions of government.
C - Cloud computing
Cloud computing effectively allows for institutional level technology support to retail businesses whereby user customers can now transact on their office computer on the road via their smartphones or smart cars or at home in their pajamas. In the past, businesses such as financial institutions had to build their IT systems using different enterprise-level software that was developed or licensed at a high cost over time and hosted on large servers on-premises. That scenario got changed. Now, with the advent of cloud computing, software resides at data centers on servers run by companies dedicated to managing such servers which also provide value-added services such as cybersecurity protection. This means that new businesses such as alternative financial providers no longer need to dedicate high capital expenditure to expensive infrastructure and can focus on improving client experience and can dynamically scale their server usage following their rates of growth.
Software as a service or SaaS businesses bypass the traditional vendor
model of software development and sales that require marketing software licenses at higher upfront fees and then again each time a new version or
upgrade is introduced. Software that resides in the cloud can now be marketed
at a lower upfront cost based on a subscription model. And software upgrades
can be automatically made continuously which gives the client one less reason to
switch vendors. This means that online capital marketplaces as well as, startup
virtual banks like UK Starling Bank require less upfront cost to prototype new
business models and user interfaces to roll out more quickly. In addition, the
cloud enables connected IoT (Internet of Things) devices to gather data and stream more services including
financial services to customers through new interfaces like smartwatches, voice-activated
speakers and smart homes and smart cars.
D - Data
Data have been called the new oil that is being bought and sold by gatherers and users and increasingly fueling the AI engine. A lot of information in the financial system is still being collected through paper forms filled by customers & bank staffs and not easily searchable or manipulated for analysis. The digitization of information from paper into data, from physical pulp to digital ones and "0"s means that such information can more easily be stored, transmitted, searched, processed, analyzed and displayed. This digitization allows for online capital marketplaces to be more easily created and operated where gatherers can process and analyze the data for those who need the capital and then display the relevant information on the new platforms for the potential providers of capital to make their own investment decisions. At the same time, digital form filling and tracking of the online customer activity allows both these online platforms as well as, virtual banks and e-brokerages to scale more quickly with less manual labor and space resources. Customer data include online behavior such as the time and location of logging in and transactions as well as, other online activities such as web browsing, e-commerce and social media use. Increasingly, offline behavior is also being tracked through data from IoT (Internet of Things) devices such as wearable smartwatches, smart cars and smart home devices such as Amazon Echo. For example, in the world's biggest retailer, Walmart, 2.5 petabytes of data every hour is processed. One petabyte is 10 bytes with 15 "0"s afterwards.
Alternative Finance is happening and will be with us for the rest of our lives and that of our future generation. It is the only thing to check - ARE WE FAST ENOUGH TO COPE WITH IT?
