The rise of fintech in the last couple of decades has been incredible. Driven by technological advancements, today’s financial technology or fintech space seeks to improve customer experience, minimize fraud, and provide better financial security. Fintech is also instrumental in reshaping the modern-day banking industry, especially as customer banking continues to scale new heights each year. We believe that the consumer banking sphere is on the verge of a complete overhaul as new innovations are on the horizon. Besides, the entry of new players in the banking sector offers significant promise, bringing with them new and innovative technologies.
The capital markets and the banking sector will witness changes thanks to fintech. Besides, the impact of fintech on banking efficiency, market entry strategies of new players, the banking market structure, and more continues to grow. With digital technologies, we are likely to see the automation of many financial activities in the future.
Let’s inspect the role of fintech in banking and its growing impact on this sector. But before we begin, let’s understand what the term “fintech” actually means.
What is Fintech?
The birth of the term “fintech” comes from the marriage of two words; financial services and digital technology. Fintech facilitates the use of technology to build next-generation financial products including alternative finance, financial management, mobile payments, and more. We are seeing an influx of startups that are leveraging fintech to roll out exciting financial products and services worldwide.
Customers are loving fintech, but why?
Initially, fintech was introduced as a technology that was primarily used in the back-end systems of banks and financial institutions. Over time, the definition of fintech has changed its course. Today, multiple consumer-based applications fall under the fintech umbrella. Consumers can now easily trade stocks, manage their investments, purchase and sell crypto, make payments, and much more with fintech technology.
The arrival of fintech in banking has revolutionized how consumers can access their finances. Popular applications such as Square, Mint, Robinhood, MoneyLion, and more have now entered the fray and garnered a significant user base. Besides, the fervent impact of Fintech is being viewed as a potential threat to conventional brick-and-mortar banks. One reason for this change is the increasing customer aversion toward traditional financial services. Besides, customers also favor fintech services and products over traditional banking services because of their quick and secure nature.
Now that we know what fintech is and why customers are swaying toward it, let’s look at its impact on banking and finance.
Fintech’s contribution to evolving banking landscape
Redefining customer service, mobile applications garner popularity
Conventional financial players are playing the catch-up game when it comes to offering seamless customer-centric solutions compared to the new-age Fintech companies. A PwC Global Fintech Survey 2016 revealed that around 53% of respondents from the banking domain believe they are consumer-centric, compared to over 80% from the Fintech ecosystem .
The game-changer here is the 24/7 access offered by Fintech services through non-traditional platforms including social media. For many reasons, social media has emerged as a primary medium to engage, connect, and get closer to customers since 2020. Traditional banking services fail to pave the way for customer-centric Fintech applications.
We predict it will become very important for fintech players to diversify how they offer services to make a mark in the banking sector. Around 90% of banks believe that the usage of mobile applications will see a huge surge in the next five years . Many traditional banks are turning to a ‘mobile-first’ approach to improve customer interactions.
Smarter and improved solutions
New players in the fintech space are focusing on the pitfalls and shortcomings of traditional financial institutions such as banks. The new kids in the block are eyeing segments that need to focus on customers immediately. Currently, new fintech companies are making their presence felt by developing highly effective applications that are bridging the looming gaps present across different segments, often ignored by conventional banks. So, what exactly is changing in the new era of Fintech?
Fintech companies are providing different solutions for customers who cannot get loans because of poor credit scores. These companies have created a marketplace for customers who could not secure loans from traditional sources. In addition, a dazzling array of financial management tools are now available that provide seamless and easy access to personal finances.
Easier integration of new applications with banking apps
Another reason fintech applications are becoming increasingly popular is that they can seamlessly integrate with traditional banking applications. It is a known fact that the adoption of new technologies has remained very sluggish in the banking area. Many banks and financial institutions are shying away from the idea of introducing new applications solely because they believe they will have to make major adjustments.
Therefore, software-as-a-solution (SaaS) and open development applications developed by Fintech startups are becoming a go-to for many banks worldwide. These applications enable banks to integrate and organize operational capabilities. Besides, these apps also create a safe passage for them to move toward digital/mobile delivery. The involvement of application program interfaces (APIs) allows third parties to create value-added solutions and features that can be integrated with other bank platforms.
An increasing alliance between new entrants and established names
The stiff competition between new entrants and established financial institutions could increase collaboration across the entire Fintech ecosystem. This collaboration should offer monetary benefits to both parties. Some of these opportunities include a partnership between fintech startups and banks. Here, startups can design and develop products that are in tune with the distribution and infrastructure capabilities of banks.
There are several barriers that could impede partnership opportunities between fintech companies and banks. Banks are skeptical about the lack of defined IT infrastructure and regulatory certainty. On the other hand, Fintech firms do not entirely trust the management and culture of banks. While these challenges exist, we are certain that Fintech companies and banks will work together in a tightly knit ecosystem in the upcoming years.
Adoption of Fintech to solve compliance and regulatory requirements
It is important to note that we can apply fintech applications and digital technologies to fulfill compliance and regulatory requirements. In the tech world, the term for this is “RegTech”. Currently, providing a level-playing field between new players and incumbents while promoting innovation and preserving financial stability is a glaring regulatory challenge that needs to be addressed at the earliest.
New fintech companies should ensure they do not turn into shadow banks that do not work within the purview of the regulatory guidelines. The Financial Stability Board says that thorough introspection for systematic problems because of cyber and operational risk with fintech activities should be prioritized. In addition, Fintech companies should also be able to operate with less leverage than conventional banks. In simple words, we need to understand that for new technologies to flourish and benefit consumers without hindering financial stability, new regulations need to be in place.
Branchless banking, the new normal
Fintech is changing the entire banking system and transforming it from a branch-specific process to different digital channels including social, mobile, and online. Besides, several banks are reducing their dependency on brick-and-mortar branches to operate. Omnichannel banking will also lead to the closure of many traditional banks. For example, in the European Union itself, around 9,1000 bank branches shut down by the end of 2016.
Omnichannel banking along with fintech will gradually shrug aside branch-specific processes. It is just a matter of time before that actually happens.
Fintech’s influence on the future of the banking industry
Let’s summarize a few points discussed in this article to understand the role of fintech in banking and key areas where we are likely to see the maximum impact.
- Increased collaboration between banks and Fintech startups
- Better customer service
- The dwindling number of physical bank branches
- Improving the efficiency of work processes
- New investment opportunities
- End-to-end security
- Optimized risk management processes
We hope that by now, you have a better idea about the connection between fintech and banking. Improving customer experience, offering a passage to seamless and quick banking, access to finances, and improvement in customer-oriented banking are some of the key areas where Fintech companies will show their mettle. The role of fintech in banking will remain critical to wave aside the challenges of traditional banking.
What do you think is in store for the banking sector in the upcoming years? Will Fintech continue to make inroads into the banking ecosystem? We would love to hear from you.
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  (2016) “FinTech-Global-Report2016” PwC [online] Available from: https://www.pwc.co.uk/financial-services/fintech/assets/FinTech-Global-Report2016.pdf [accessed in August 2022]