How Fintechs Are Changing The Role of Traditional Banking Industry

Keyword : #bankingindustry, #fintech, #financialservices

Introduction

Fintechs came into being in the 1950s with the launch of the first credit card by Diner’s Club. However, in 1967 Barclays Bank in the UK installed an ATM which is said to be the beginning of a quantum shift from technology to digital technology. Fintech has become a global and familiar term these days. During the year 2021, transactions totaled $210 billion which suggests a quiet revolution is taking place in the financial services and banking sector.

Fintech is the innovative amalgamation of financial services and digital technology that delivers result unique financial services to end-consumers. It was initially developed as a support service for banks and financial services firms, however, it has grown tremendously over the years and now it offers many consumers related functions.

According to research conducted by Fortune, in 2021 90% of Americans used Fintech for most, if not all, of their financial needs. The global Fintech market capitalization stood at USD 133.84 billion in 2022 and it is expected to grow phenomenally over the next years with a forecast of 11% CAGR. (Compound Annual Growth Rate is the annual rate at which a company grows over a period of time, usually a year)

Most technology startups can benefit from the use of digital technology in offering services like mobile payments, peer-to-peer lending, crowdfunding, and much more. The growth trajectory of Fintech is so overwhelming that most brick-and-mortar banks have started pondering how best to counter these new entrants into financial services who are hell-bent on destroying their hold for more than a century. More and more people now don’t bother to visit a bank for their financial needs instead they log on to any Fintech who does wonder in the blink of an eye.

The pandemic saw the rise of Fintech when keeping distances was the order of the day and sometimes mandatory by state laws. It was Fintech, the genie in the bottle, who did all those messier things for you, from buying groceries to making payments of utility bills or pizza, Fintech was there. EY’s Global Fintech Adoption Index 2019 states 64% global consumer population uses Fintech for making their buying decisions. These shifts from traditional payment ecosystems towards digital payments are creating hurdles and opportunities as well for participants.

How Fintechs are changing traditional banking systems as they are known and what lies ahead when it comes to the global payment ecosystem? These are some of the questions which I have tried to answer below;

1. How Fintech Changing the banking industry’s Landscape

2. Types of Fintech

3. Who regulates Fintech to safeguard consumers’ interest

1. How Fintechs are Changing the banking industry’s Landscape

Fintechs have been taking the banking and financial services industry by storm since 2015. They have virtually changed the concept of banking we have been used to over the last couple of centuries. Their unique algorithms, software, and the ability to run on both personal computers and mobile devices make them go-to solutions for all our financial needs.

Be it like depositing a paycheck, transferring funds to another account, making investments, utility bills payment, or your children’s school fees, a Fintech is designed to do this all. Since Fintechs do not need to have a physical presence, they find themselves in a much better position to offer their customer better deals like cheaper credit facilities and loans because all those costs associated with having a brick-and-mortar presence and employing an army to run those huge buildings can be avoided. I opened a joint saving account with my wife in one of the largest banks in Pakistan in 2020. I only visited my branch once at the time of the application form signing and all those regulatory KYCs and CDDs procedures. Now it has been more than two years and all my banking needs are done within the comfort of my home through the mobile app of my bank on my smartphone. It has revolutionized the banking industry. I wonder who visits the bank branch.

The penetration of Fintechs into the public domain is increasingly getting deeper. According to research, 87% of Chinese consumers use one or more Fintech and around 100% of them know most of the online apps that facilitate money transfer, mobile banking, and non-banking fund transfers.

2. Types of Fintechs?

Following are some different types of Fintech companies according to their functional classification;

i. Insurtech

ii. Money Transfer

iii. Fintechs powered by blockchain technology

iv. Investment

v. Digital Banking (also known as Alternate Delivery Channels, ADCs)

vi. Crowdsourcing

vii. Peer-to-Peer Landing

viii. Billing / Payment Software

According to segmentation, Fintechs can be categorized into three main areas

A. Payment Industry

All physical modes of payment instruments which were prevalent during most of the 90s and early 2000s came under threat with the advent of the Internet. Traveler’s cheques, banker’s cheques, bank cheques, and credit cards are fast becoming redundant as e-commerce needs online payment. Many aspirants came to fill this space created due to the absence of market players in the online payment industry. First PayPal came which challenged the traditional banking industry for payment regime.

Mobile apps came later and as they say, the rest is history. Now we don’t visit our bank branches and all of our payment-related transactions are done on mobile apps. Bitcoin is also one of the payment systems which is fast gaining ground but due to its high volatility and lack of proper regulatory oversight, it will take time to pose a major threat to other more secure payment mechanisms.

B. Wealth Management

Presently an individual investor does not have more options when it comes to making investment decisions out of savings. Making investment decision by individual investors are even more important in these times of high inflation when your purchasing power is fast eroding. But more lucrative hedge funds or investments in private equity firms are not for the average individual who wants more control of their wealth.

Individual investors have unique needs and mutual or index funds given their high cost as management fees may not be an ideal solution. Many Fintechs are just catering to this need and offering investment solutions at less fees for portfolio management.

C. Lending Industry

All commercial banks make huge money by making lending money lying to the credit of their customers which are known as Time Deposits and Term Deposit. This lending is further channeled into either consumer lending or corporate lending. A loan Application Form takes ages at most commercial banks before the money reaches the hands of the user. To address this and to provide a quick solution to funding requirements of small, medium, and big corporates, many Fintechs have come forward with innovative solutions and provide much-needed funding in 2 to 3 days after loan application. The landscape of consumer lending is changing at a rapid pace by providing credit facilities to customers whom banks are reluctant to establish relationships.

3. Who regulates Fintech to safeguard consumers’ interest

The main drawback of Fintech is that no single regulatory body oversees its operations. Some Fintechs are operating outsides or on the border of current regulatory regimes.

You must be concerned with the security features it carries and questions like what happens if I erroneously transferred funds to someone’s bank account. Would I be able to get refunds of those funds and who oversees and protects my interests if any wrong is done to me? The short answer is the regulator who has given the license to operate and provide cutting-edge financial products and services to a broad spectrum of consumers. There is a concept of a banking ombudsman in every country with jurisdiction over entire banking and financial services providers.

With the help of a regulator you can file complaints of any financial wrong which is a rarity however, disputes might arise in any financial transaction which can be sorted out and settled amicably. The point is customers’ money is 100% safe if they are not negligent while performing transactions. There is a system of checks and balances and also an alert is issued in the shape of a pop-up message asking for going ahead with the transaction with a pin code.

Conclusion

Fintech has become so ingrained in our daily lives and many firms who provide financial services to businesses and consumers have been hiring tech people to create and introduce unique combinations of hardware, data, and software to deliver financial products and services. Its growth would continue to impact our daily financial lives in the future. How Fintech would be regulated and kept an eye on is a much-debated topic among financial regulation experts and regulators try to keep up with the evolving trends in Fintech with related rules of the game.