FinTech – A Game Changer for the Banking Industry - Prime

FinTech – A Game Changer for the Banking Industry

“Ignoring technological change in a financial system based upon technology is like a mouse starving to death because someone moved their cheese”

Abstract

Financial Technology or FinTech or Fintech as it is popularly known, has taken the center stage in today’s evolving-by-the-minute technological innovations and ideas.  Many investors are eager and queuing up to get their pie of action and are on a funding spree to the startups that are catering to a wide variety of financial activities.  It is undoubtedly the technology of the future and exhibiting most promise for offering innovative products and services.  The mushrooming of Fintech firms has been giving the traditional service providers in the financial space a run for their money and forcing them to keep up with the pace or lose out in the race.  In fact, many have realized that the only option left is to offer similar services either by themselves or collaborate with the Fintechs for mutual benefit.

A brief about Fintech

Fintech is the use of the latest technology to improve the financial services which are provided by traditional banks.  It includes the use of the latest technologies like blockchain, voice recognition, peer to peer lending, etc.  The term Fintech refers to the tools, technologies, apps, software, and other technology platforms that enable banking and financial sector firms to leverage technology for seamless and smooth operations.  Indeed, the term Fintech is itself a combination of the words, Finance and Technology, which indicates how technology can be best used to deliver a pleasant and frictionless experience to the various stakeholders of the Banking, Financial Services and Insurance firms.  The introduction of Unified Payment Interface (UPI) by National Payments Corporation of India Ltd., (NPCI) in India has further brought about drastic changes in the financial landscape in the country with the market flooded by many apps like Paytm, Google Pay, BHIM by NPCI, PhonePe, etc.  These apps were earlier offering the same services as wallets but with regulator guidelines regarding KYC (Know Your Customer) becoming stringent, they got a new life with UPI introduction.
Fintech

Introduction

Rapid strides in the technological space of today are drastically transforming every sector in the economy and banking is no exception. Thanks to the innovations in technology, the bankers of tomorrow are going to be completely different than the bankers of today.   Different in the sense that they will have a very different background and skill sets as compared to the bankers that we know and see today. The banking profession is also rapidly undergoing change, and Fintech is just acting as a catalyst to make the process faster.  Whether it is about the front-end retail banking software or backend maintenance platforms, Fintech would be extremely useful in actualizing efficiencies from the economies of scale and synergies from the integration.  It is also not over-the-top to say that without Fintech, banks and financial services firms would be hard-pressed to cater and deliver by scaling up their services that they offer now.

Why the popularity now?

Technology has been there for long and is not a new thing.  Why is then there is a huge number of startups that have come up now which promise tremendous value to the customer by providing unique products and services?
During the years when banks concentrated more on regulatory concerns, policy changes, mergers and acquisitions, technology took a back seat and investing in technology was not felt as important.  Almost all the private and public sector banks invested in technology and migrated to core banking solutions, offered internet banking and mobile banking to its customers, which is just an extension of their manual products and services with little innovation and value addition.  At the same time, technology started growing at an alarming rate and the fintech startups also grew exponentially. Since the opportunity was not properly utilized by the banks themselves, many outside non-banking companies saw a huge gap in the market. This is the gap that these companies are trying to serve with the help of massive funding from venture capitalist firms.

Should traditional Banks worry?

Well, yes for sure.  Suddenly they are being challenged in their own game and that too by the recent entrants in the market.  All Banks, in one way or the other, are facing this crisis and must buck up their offerings to retain and please their customers. 
The traditional industry is going through a lot of stress due to this unexpected and fierce competition.
  • Banking Model: Banks are of the opinion that this new model of banking brought about by the Fintech companies will drive the front-end interfaces with the customer and Banks will be forced to provide only the back-end services to support them. Take the case of UPI based applications where the banks are final touchpoints for holding the customer accounts.
  • Choice: Fintechs have the luxury of choosing the services they want to offer, unlike traditional banks where they must provide the entire bucket of banking services. They are bound by the regulatory framework and scrutiny that are more stringent and offer non-profitable services also to its customers.  All this comes at a price and increases costs for the traditional banks compared to significantly lower costs to Fintechs, thus making them more profitable.
  • Technology Friendly: More and more people today trust the technology companies and do not think twice before sharing their private details with them. Taking a step further, they will not hesitate to transact financially also and will be open to the option.  This is getting the banks worried as the easiness with which the Fintechs are engaging the customers is showing them in bad light creating a negative image.
Fintech has largely benefitted from the cautious approach of traditional banks to use the latest technologies for improving their customer service and aiding the growth of their business.

Why are Fintechs successful?

Fintech has revolutionized the world of banking and financial services by offering innovative products and services to the end-users which never existed before.  It has also contributed to the betterment of the less privileged sections of the society by offering the services through their mobile devices with fewer formalities and paperwork.  By virtue of being the new entrants with access to the latest technologies, Fintechs have achieved economies of scale and delivered products and services with speed and simplicity.  Also, they are successful in providing low-cost services owing to their low running costs compared to the traditional players.  They are even offering a wide variety of customized and tailored products in partnership with the other stakeholders.

Fintech landscape in India

The growth of fintech is one of the most significant developments in the financial sector in the past decade in India and elsewhere.  The technology Fintech brings has the potential to play a big role in increasing access to finance in the country not only to the financial literates but also to the unbanked populace.  It brings to the table a wide variety of services through technology like mobile payments, cryptocurrency, investments, insurance, peer-to-peer lending, etc.  According to a report by the World Economic Forum, fintech enterprises have set the foundation for disrupting incumbent financial institutions both now and in the future. 
India has made considerable progress in the growth of fintech products and services.
Payments: Fintech has significantly made its presence felt in the payments landscape. Companies like Paytm, Google Pay, Phone Pe, MobiKwik, Citrus and PayU are taking advantage of the rapid increase in the use of smartphones, affordable internet connectivity to create a payment ecosystem.  Some of the fintech firms are also applying for Payment Bank licenses, thereby giving way to a hybrid model where mobile services interact with banking services. Moreover, the introduction of Unified Payment Interface (UPI) has provided the necessary push to boost the payments sector in India.
Insurance: Fintech firms like PolicyBazaar, Acko, etc are providing platforms to consumers to purchase and manage life/general insurance products.  These firms are acting as aggregators of financial products and helping the customers in choosing the best out of the available options.  They even provide personalized financial advice on a variety of financial products.  Banks are also making themselves available under this distribution channel as it reaches more customers thus generating more income efficiently and at a lower cost.
Lending: Fintech solutions have the potential to transform the landscape in terms of lending and investment. Examples like crowdfunding, peer to peer lending have the potential to help secure finance for small and medium enterprises who otherwise find it difficult to get service from regular bank channels. Fintech companies rely on alternative data sources to assign credit scores or ratings to individuals with little or no formal credit history which is otherwise not possible in the existing system.  Similarly, transaction records, satellite imagery of the farms, weather forecasts and records, agronomic surveys and demographic features are among some of the alternative data sources that are being used by fintech companies for financing agriculture.
Aggregators: Aggregator services basically combine the financial data of a customer from various data points and leverage this data to analyze and manage their commitments effectively and efficiently.
Digital penetration in India aiding the rise of Fintech
Fintech

Internet users in India (January 2020)

  • Internet users in India were 687.6 million.
  • The number of internet users in India increased by 128 million (+23%) between 2019 and 2020.
  • Internet penetration in India was at 50%.
Social media users in India (January 2020)
  • Social media users in India were 400.0 million.
  • The number of social media users in India increased by 130 million (+48%) between April 2019 and January 2020.
  • Social media penetration in India was at 29%.
Mobile connections in India (January 2020)
  • Mobile connections in India were 1.06 billion.
  • The number of mobile connections in India was equivalent to 78% of the total population.

The win-win partnership

Technology has always been the game changer and especially so for the banking and financial sectors. In fact, banks and financial services firms were the early adopters of technology since the time the Digital Age started and were quick to adapt and go for accelerated usage of the same throughout. 
The dawn of Fintech 3.0, the next generation of Fintech, literally promises to deliver the unimaginable to the Banking and financial sectors in terms of technology platforms that provide one-stop solutions to the end-users.  For instance, only one App for all banking and financial needs of retail customers are already in the works.  In addition, both Corporate and Private Banking is set to become easier for customers with the latest tools offered by Fintech firms.  Also, the technology delivered by the Fintech can be deployed for security measures to monitor and raise alerts that can prevent unforeseen circumstances.
With the evolution of technologies like Blockchain, Fintech can be used to create a new generation of data ecosystems that are peer verified and where chances of fraud and mismanagement can be minimized.
In addition, simple, affordable and cost-effective products and services can be made available to the less privileged to improve their lives by making handheld devices and smartphones as gateways for banking and financial services activities.
 
 

Any Threats?

Apart from the convenience, speed and features offered by the Fintechs, there are also concerns about the inbuilt security and robustness in the platforms being used. While the use of automated and integrated functions will surely lead to advantages for all the stakeholders, concerns over privacy and intrusion into the personal lives of the customers will raise alarms over the control of the technology.

Conclusion

Fintech is definitely going to be the game-changer for the banking industry now and in the coming days.  To have a successful partnership and prosper, it is imperative to strike a balance between technology and user expectation by taking all the stakeholders into confidence and move ahead for a mutually beneficial result.

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