FinTech V/S Banks: The Road Ahead


fintechThe new age Financial Technology sector aka the FinTech sector stormed into the financial services industry post the 2008 crisis with modernised, efficient, personalised and extremely quick services. This caused a large-scale disruption in the sector and threatened the customer base of traditional banks. Some of the biggest breakthroughs in the financial services industry have been driven by FinTech organisations.

They cater to a gap in the market and are fast-paced and vigorous by nature. Several pioneering banking options have emerged that threatens to steal the market share from traditional financial institutions. However, at the same time, it is also opening up new channels for partnerships and revenue generation.

Technology powerhouses like Google have also entered the fray and have further raised the bar on innovation in the sector. Hence, banks and other traditional financial institutions began to adapt to the market and improve the rules of engagement to compete with these new players. FinTech has truly come into its own and has evolved from start-ups that disrupted the financial sector to working together with traditional financial institutions to strengthen the whole ecosystem. The collaboration between FinTech and banks has spurred faster innovation, cost reduction, inclusion, and better customer experiences! The financial sector maintains its financial edge by incorporating some of the most cutting-edge approaches in technology and changing itself in the due process.

While traditional players will probably remain at the heart of the system for a long time to come, finance is evolving around it. Financial institutions that pay attention to the future will be best positioned to turn the disruptions into opportunities for growth.

“If you can’t beat them, join them”

Banks, are largely process-oriented and have a strict regulatory framework that restricts their ability to quickly leverage new technologies and roll out new products and services. These frameworks largely restrict innovation, productivity and profitably. FinTechs, on the other hand usually have flexible organisational structures. However, as disintermediation spreads in the financial sector, banks have been forced to find new ways to remain profitable. Traditional barriers to entry in markets, such as regulations and incumbency are disintegrating and regulatory bodies are encouraging banks to embrace fintech-led change. Everything is pointing to a more positive approach; a recently conducted study showed that 91.3 percent of banks and 75.3 percent of Fintechs expect to collaborate with each other in the future.

Over the past few years, traditional financial institutions have dramatically evolved and have recognised that collaboration might indeed be the best path to long-term growth. Especially since it brings the strengths of both banks and fintech firms together.

The Segregation of Financial Services

Recent directives enacted by the government enable the public to opt for individual banking products and services that they need rather than buying a “bundle” of services. While this seems like an additional degree of separation for banks from end users; banks engaged in strategic partnerships instead have the opportunity to become a financial hub for end-users. For instance, the recent PSD2 directive by the EU government requires banks to provide third-party providers with access to account data through open APIs. This has enabled these third-parties to layer financial services on top of a banks’ infrastructure and data.

FinTech has paved the way for the creation of more personalised and frictionless financial services and solutions for seamless transactions. It has also led to a better connection between people and their money and the inclusion of more people into the mainstream financial arena.

Commoditisation of Financial Data

The struggle that banks face in connecting with the public today is large because of the evolving demographics of banking customers. Millennials; a group that will have $1.4 trillion in spending power by 2020 expect 24/7 access; premium self-service, speed and personalised experience.

Banks have an extremely large database of customer data accumulated over time, however, most of them have not yet tapped into the business potential of these assets. Working with fintechs to gain insights into the millennial segment and offer products and services via AI, machine learning and other novel technologies will help banks avoid becoming obsolete. Currently, customer-centric innovation is key to remaining distinct and banks will need the help of fintechs to unlock their full potential. Particularly so, because, it is an area that is led by data-native FinTech companies which have all rolled out niche products targeted specifically at the millennial population.

In conclusion, Financial industry stalwarts have noted the importance of combining the innovation of FinTech with the reach of banking. Hence, most banks do not look at fintech companies as competition anymore, instead, they have become partners; building customer-centric experiences to thrive in the new open banking marketplace.

(Views expressed in the article are a personal opinion of TM Praveen, CEO, Opus Consulting Solutions.)

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