The technological revolution has redesigned the finance industry from its very inception. Metallurgical advancements brought coins as currency. Then came the printing press facilitating paper money. And then came ATMs that changed the way we accessed our cash, finally evolving into today’s online banking options.
Over the past few years, new digital financial technology – ‘fintech’ – has begun to change and disrupt the financial services sector. FinTech has transformed banking by introducing solutions that enhance customer value. They bring innovations in the financial sector and some of the noteworthy examples include peer-to-peer lending; cryptocurrencies and blockchain; digital wealth advisory and trading platforms; and mobile payment systems. These innovations disrupted the financial services sector by intensifying competition and blurring industry boundaries.
FinTechs v/s traditional banks
Fintech companies have been phenomenally successful in targeting customer pain points that traditional banks have not been able to do for long. From phone apps to cashless businesses and way beyond, digital disruption has become the new normal for consumers. While early FinTechs persistently created exclusive products to augment existing financial services, the line between banks and FinTechs is becoming increasingly blurred. A fintech can be:
1. A stand-alone start-up that creates tech- driven products to solve specific problems in the marketplace.
2. A start-up that grows to evolve into an actual bank.
3. A traditional bank adopting innovative technologies by absorbing smaller FinTechs to renovate its services.
How is fintech changing financial services?
From finding shortcuts to provide banking services more efficiently or cutting costs through automated processes, here are some of the key ways FinTechs are changing the financial sector:
1. More service values: Most of the banking sector innovations have led to a single goal i.e., better service value. FinTech innovations have created value for targeted users. For example,Payment Gateways have brought value to online merchants. Digital banking delivered ease to the open banking services value chain. Robo advisors provided advisory services to wealth clients.
2. Customer-centered approach: FinTechs have facilitated an improved customer-centered approach by providing better insights with technologies like Big Data and Artificial Intelligence. FinTech usually focuses on a specific financial process and helps them build trust with its customers. For example – A payment and service provider company Klarna disrupted the finance sector with its marketing strategy. They started the “Consumer Council” program for consumers to share their experience of using their products and changing their products as per the consumers’ wants and needs. Similarly, another firm Stripe started Stripe Sessions to listen to users’ experiences of using the payment system.
3. More branding: FinTech firms are also adopting new and innovative approaches to branding. For example, gamification uses game-like elements in a non-game context. It guarantees a fun experience for users while using a product and improves customer retention rates.
Some of the companies which are shaping branding with Gamification are:
• Ikano Bank: provides wealth management services for small savers (Swedish Bank)
• Revolut: UK’s most valuable FinTech company.
• Fortune City: Helps in organising finances (Taiwanese city-building app)
Ten innovative fintech business models
The new digitisation era has empowered customers to plan their own financial destinies, with greater access to data, tools, advice, and personalised finance options. Let us look at 10 innovative FinTech business models that are leading the path of disruption.
1. Alternative credit scoring: Many of the self-employed customers with a stable source of income, at times do not pass traditional bank loan screenings due to various credit scoring criteria. Credit rating FinTech companies like Nova Credit have adopted innovative approaches by taking into consideration alternative data points like social signals and percentile scoring amongst similar borrowers. These new factors combined with intelligent and self-learning algorithms have led to better lending decisions.
2. Alternative insurance underwriting: In today’s world, two customers with the same weight and height, both non-smokers and non-alcoholic will be offered the same life insurance premium. However, one person might exercise daily, and another might be having no interest in exercising. Most of these premium calculations are based on averaging out calculations (called normalising in actuarial terms). These premiums do not account for quantifiable factors. But FinTech companies like Carpe Data are building variable premium computing mechanisms with alternative data points such as social signals, lifestyle, and medical history. Combined with intelligent and self-learning algorithms, these InsureTech companies can determine whether to offer insurance and provide different terms and conditions.
3. Transaction delivery: Data is the main ingredient for any transaction and by managing it better can give enormous insights into the preferences of the customers. FinTech start-ups in the transaction delivery space have come up with free products like expense management apps to collect customer data and then cross- pollinate that data with the other members of the group, to find the potential of the customer to pay premiums, make real estate investments, buy mutual funds, etc. The business model by these FinTech companies is commission based. For example, a commission earned through third-party financial products reselling.
4. Peer-to-peer lending: In simple terms, Peer-to-peer (P2P) lending means individual borrowing money from other individuals. Similarly, peer-to-business (P2B) lending means a business borrowing money from one or multiple individuals. FinTech companies like LendBoX create platforms to match borrowers with lenders and usually take a fee from the borrower’s repayment.
5. Small ticket loans: Usually traditional banks don’t want to venture into giving smaller ticket loans because of the low margins and high costs involved in servicing them. FinTech companies like Affirm are delivering impulse buy mechanisms (buy now & pay later, or BNPL) and one-click buy buttons on e-commerce websites to enable customers to buy quickly without customers entering any authentication form or credit card details. These loans are underwritten at 0 per cent interest and with options to pay in installments. On the other hand, the Fintechs earn by sharing customer data with the merchants. And these customer data combined with algorithms help in providing highly customised marketing offers.
6. Payment gateways: Payment gateways are platforms that enable shoppers to pay for a product or service on a merchant’s website. Today, there are numerous payment methods like prepaid cards, cryptocurrencies, credit cards, digital wallets, etc. Usually, banks charge a considerable amount of fees to handle transactions from the above payment methods, but FinTech companies are integrating these payment methods into suitable apps that online merchants can easily afford and integrate on their websites. For examples: – Paytm, Cashpay, Razorpay, etc.
7. Digital wallets: Digital wallets are a combination of a no-frills bank account and a payment gateway. Users can pre-load a certain amount of virtual money into the wallets and use this money to make online or offline transactions with merchants who accept digital wallets as a payment mode. With the digital wallet business model users have the convenience of making payments for a small fee which is charged as a merchant discount rate (MDR) to the merchants. EXamples are Google Wallet, etc.
8. Asset management: FinTech companies like UpstoX enable investors to trade for free in exchange for their personal data. The data is later forwarded to high-frequency traders who market their personalised products to the customers. At times investors might pay a slightly higher price for their asset, but the difference between the amount they save from trading fees and the slight increase in price remains positive.
9. Digital banking: There are a lot of challenger banks such as N26, and Jupiter which is offering no-frills individual and business bank accounts through a complete digital infrastructure. The business model here is the same as of a traditional brick-and-mortar branch except that with the huge cost savings in manpower and real estate. On the other hand, customers can greatly benefit from reduced rates.
10. Digital insurance: FinTech companies operating in the insurance industry are also taking traditional services to the digital world. FinTechs are offering life and health insurance with variable premium rates depending on the customer, thereby offering aggressively cheaper coverage compared to traditional insurance companies. These types of insurance, together with personalised marketing, are creating business possibilities that insurance companies have only begun to explore. For example – PolicyBazaar.com.
Fintechs evolving in the Indian Banking Sector FinTechs have transformed the Banking Industry in India in 4 major ways.
1. Self-Service technologies: Self-service products have allowed customers access to procedural portals, which were previously physically accessed by branch staff. The services include online money transfers; availing loans and insurance; and account opening. Customers get a clear understanding of their financial credibility and learn about the ways to make better financial decisions.
2. Instant payment features: Indian population was largely dependent on cash payments till the last decade. With the introduction of POS terminals in 2016, followed by the rapid expansion of internet services and demonetisation, a large number of people started moving towards digital payments. Now it takes only a few seconds to send or receive money from their mobile phone using Digital applications.
3. Automated voice bots for customer service: Banks have come up with AI chatbots that are specifically used for customer relationship management. These products use natural language processing capabilities and voice recognition to aid and assist customers.
4. Neobanking: These banks have no physical branches and solely exist on digital platforms. They offer a plethora of banking services like loans, MF, FD, savings accounts, etc. which can be easily accessed online. This trend became more popular during the pandemic with more people adopting convenient digital ways.
Some of the successful Indian FinTechs
1. Paytm: Paytm is one of India’s largest payment companies. It offers multi-source and multi- destination payment solutions. Consumers can make payments from any bank account to any other bank account free of cost. More than 8 million merchants availed of its services. Users can use the Paytm app to shop for physical and digital goods; pay DTH bills; other bill payments; mobile recharges etc.
2. Upstox: UpstoX provides financial services like stock investments, mutual funds, derivatives, commodities, ETFs, and digital gold. It ensures transparent pricing by offering zero brokerage for equity trades and meager fees for intraday, commodities, and currencies. The founders brought this idea of easier and cheaper trading and investing and created it for fellow young Indians.
3. PolicyBazaar: It is an InsurTech company that gives a comparative analysis of insurance products offered by various insurers using parameters like price, quality, and key benefits. Users can compare insurance policies and the company assists them in selecting the best or the most relevant policy.
Future of fintech and banking
Despite invading banking activities, and showing exponential growth over the past few years, the FinTech sector remains small in comparison with the banking sector. For example, global FinTech activity surpassed $210 billion in 2021, on the other hand, global financial services had $23,319.52 billion in the same year. Similarly, in the lending market, FinTech’s reach had remained small. For example, peer-to-peer lenders generated a total credit business of £4 billion in the UK in the year 2021 versus £316 billion by banks. Similar growth patterns existed in other countries too.
However, innovations in seamless payment technologies and automated lending are expected to steal the show in the retail sector as customers demand unrivalled convenience. Going forward, the disruptive FinTech force will have a dramatic influence on the organisational structure and function of established financial institutions, bringing in new verticals and new systems.
Views expressed by Thomas Mathew, Research Officer, State Bank of India.