Banks Can Play the Fintech Game Too
Fintech, which is an abbreviation for financial technology, is often considered to be something new, however the use of technology to assist with financial services is not a recent development. Since the 1950s, financial services has been an industry that has facilitated credit cards, internet banking in the 1990s, and most recently, contactless payment technology post-2000. Yet, fintech’s place in the public conscience has really taken off in the past three years:
This term has gained momentum primarily from businesses outside of traditional financial services, who are now playing a more significant role in the system. Three core trends have led to this emergence:
Technology has been a hindrance to those wishing to join the financial services industry in the past, as there was a requirement for established assets such as physical locations to expand. Advancements in technology now make it possible for new companies to manage challenging processes digitally. For example, neobanks operate purely on technological infrastructure. Revolut, based in the UK, has been able to gather 1.5 million customers, of which 350,000 make daily use of the service, without having any sort of agent-customer interaction.
Clients: In the wake of the 2008 Financial Crisis and numerous other controversies, customers are asking more from their banking services. Modern technology makes it easy for customers to research and assess their vendors more intensively, while new enterprises use this technology to provide higher-quality service and customers don’t have to be restricted by older systems.
It is estimated that the six most significant US banks have to spend roughly $70 billion each year due to the enforced elevated control following the 2008 recession. Citigroup alone employs 30,000 within its compliance division. Besides following regulations, limitations on loans have raised the total borrowing expense for customers and weakened banks’ capability to give it. Because they do not have to abide by the same regulations as banks, startups can come up with enticing solutions that other institutions may not be able to provide.
The implication that can be drawn from the fintech world is that technological advancements are allowing new startups to challenge traditional banking entities. There is no cause to assume that banks are encountering their own time of downfall like Kodak and Blockbuster Video did. They still remain widely used, profitable, and cash-rich businesses. This piece is going to explore how financial institutions can react more suitably to the “fintech versus banks” cycle, because in my view, the reaction they have had thus far has not been satisfactory.
Up until now, fintech startups have not considered the comprehensive disruption of all financial services. A McKinsey study of a group of start-ups showed that the majority (62%) were engaged in retail banking, while a much smaller proportion (11%) were concentrated in large corporate banking services. Payments is the most popular area to usurp and lending is the most lucrative area of banking by revenue being targeted:
Banks have to react strongly to the fintech revolution going on now, since this new industry is still in an early stage of growth. Fintech startups commonly attempt to split up banks, providing one style of product/service and concentrating on doing it EXTREMELY well.
So far, the majority of innovations within these specialized deals have been aimed at enhancing the customer experience with financial services. Some examples of how this is being done are:
- Better service: A traditional bank largely ties a customer in by offering them a range of services that make them sticky, through increased switching costs. Without this luxury, specialized fintech companies follow a mantra of earning trust through better customer service and referral-based client acquisition. 90% of fintech companies cite enhanced customer experience as key to their competitive advantage.
- Better branding: With employees from non-traditional banking backgrounds adding an unbiased perspective, the fintech industry is refreshing the branding of the legacy services that it is trying to upend. Modern marketing tools like gamification are making mundane tasks like budgeting appear exciting and more palatable to consumers.
- Cheaper prices: Having a leaner virtual operation, more flexibility through not being regulated as a deposit-gathering institution, and cash from venture capital allows fintech startups to attract customers with competitive pricing.
Fintech in the Back-End of Financial Services
Attracting new clients will let a fintech firm verify their product, get feedback, and buy some time instead of concentrating on the second part: enhancing the back-end services for finances. The core of finance, the foundation of the industry, is constructed of the long-standing networks that financial institutions utilize to correspond and carry out exchanges like clearance (NSCC), payment (ACH), and communication (SWIFT) technologies. The disruption of these norms has yet to become widespread, though the capacity of blockchain technology among these sectors is great. An extraordinary moment took place in 2017, when ClearBank became the first clearing bank to be established in the United Kingdom after an impressive span of 250 years. This will allow it to construct and offer up-to-date rail systems to stakeholders in the financial services industry.
The backoffice of a fintech firm usually follows the same processes as a banking institution, even though they provide enhanced customer service and attractive apps. When utilizing Venmo for payments, SoFi for loans, or Betterment for investments, you are not working within a completely different monetary system. These companies hire and use the same traditional systems that banks employ. They bring about astonishing results to make the structure appear to be more attractive to purchasers, hiding any issues or red tape, sometimes with daring assertions like the person-to-person FX framework of Transferwise—almost an inconceivable accomplishment to genuinely attain in the discrepant world of international fund transfers. Startups’ front-end driven business model presents two existential threats to its fintech ecosystem :
The expenses incurred by them for utilizing the rails will always be more expensive than those of existing companies, since they are leasing them.
The people in control can turn off their lights easily since they act as go-betweens in the service.
In order for fintech to succeed in establishing itself securely and influential it will need to transition to the next level (fintech 2.0) and construct its own structure, which would require that it faces up to a solid strategic risk. Banks will then have sufficient wherewithal to take the necessary actions in order to adapt. For fintech startups to rise in the financial services sector, they will need to build a back-end based around advanced technology. By persisting with an out-of-date technology-focused system at the front and a rented, outdated process-oriented back-end, there will be a steady reduction in profit margins and high levels of risk associated with system operations.
Formulating new transactions for banking behind the scenes will be challenging, owing to the need for agreement in regard to acceptance of formats (like Blu-ray and HD-DVD) and authorities’ input. Yet attaining it and taking a spot at the conference will at least permit startups to vie on equal terms and reduce the life-threatening dangers that cast a pall over them. By the time they get there, they may still be on the outer edge, merely hiding the flaws in an aging financial services structure.
Given the present state of affairs involving fintech companies, I now want to concentrate on banks and how they can facilitate a more productive reaction to fintech advancements. The feedback they have given has been leaning more towards Kodak rather than Koninklijke Philips, who disposed of its music industry in the 1990s in the face of the MP3 breakthrough.
Fintech solutions benefits
FinTech businesses frequently present solutions that rival the services of conventional banks. In contrast with banking institutions, they don’t need to provide a comprehensive selection of services and products created for different types of customers. They have the capacity to completely concentrate on one issue and discover the optimal answer for it. An example that is applicable is the Kiva organization, which has constructed a system for supplying no-interest microloans of as much as ten thousand dollars.
Price very often is important when making purchasing decisions. FinTech companies often cost less than established companies thanks to their inventive strategies, up-to-date technology and computer programs that are able to handle tasks with no hands-on assistance. By making use of this method, the software takes the place of human work, meaning businesses can cut expenses by having fewer workers.
Atom Finance is a great model of an economical product compared to customary services. The answer distributes the customer’s finances and regulates its asset collection. This program takes user preferences into account and invests in numerous funds accordingly, regularly assessing changes in the portfolio. The company provides its customers with beneficial products instead of the services of investment advisors. For a mere $9.99 a month, customers can utilize features such as monitoring real trends in investment prices, being able to read analysts’ remarks and thoughts, and predicting what could happen.
The speed of the service
Discussions with a bank employee typically need to take place when obtaining a loan, as well as conforming strictly to certain requirements and signing multiple forms. It requires a substantial amount of effort, and the bank could decline to give out the loan for inexplicable purposes. Technologies in financial services delivered online are accelerating the process.
MoneyMan is an online FinTech loan company. The only step necessary to complete the loan application is to complete the online form. The program expeditiously verifies the data which was inputted and then returns a response. The transfer is completed quickly after the request is approved. It takes a brief period of time to go through the steps involved in the process, from filling out the form to having the funds credited to the account.
FinTech requires the ability to connect to the web and can be utilized at any hour. It is critical for those with a lot of tasks to attend to during the day and who find it hard to make it to the bank. FinTech services are able to reach a larger audience due to their more relaxed qualifications than what is needed in traditional banking.
FinTech solutions are applied in a variety of sectors and fields of finance and economics. Below are descriptions of such solutions.
Blockchain and cryptocurrencies
Both blockchain and cryptocurrencies are FinTech solutions. Blockchain is a system that utilizes data blocks linked together to create a chain, which holds records of online transactions. Blockchain technology is employed in loan programs and apps which allow individuals to buy and sell cryptocurrency.
Coinbase is a service used to purchase and trade well-known digital currencies like Bitcoin, Litecoin, and Ethereum. Investors can monitor the fluctuations in the worth of money and organize their finances. Also, they can plan investments several weeks in advance. Transactions can be made by both individuals and companies. Coinbase is a popular selection for cryptocurrency deals owing to its robust security. Coinbase is the first cryptocurrency exchange to be listed on the NASDAQ exchange in the latter part of 2021. Currently, the company is valued at around $100 billion
Fundraising through modern avenues is an effective way of getting the money required to launch an inventive undertaking. Entrepreneurs introduce intriguing business concepts and seek out financial backing. In exchange for contributing money, investors can receive items, reduced prices, and sometimes even a return on their investment later on. The aim of crowdfunding websites is to give a space where a fundraising effort can take place and where funds from several individuals can be gathered quickly. Start-up businesses are opting to use crowdfunding websites more and more frequently to acquire the capital they need.
InsurTech is a niche within the FinTech field that utilizes pioneering tech for the insurance sector. At present, the main sectors include cars, healthcare, welfare, and stockbroking. Insurance providers attempt to make available a plethora of options that simplify the selection of an insurance plan and simplifying the procedure of actually purchasing the policy.
Cuvva is one of the most prominent businesses in the InsurTech sector in the United Kingdom. The company provides an app which will allow customers to obtain car insurance on an hourly basis. This country has a law that forbids someone who is not the owner or part-owner of an automobile from driving it without having their own insurance. The rule is widely observed here. Additionally, an insurance policy that covers multiple individuals is very costly. With the Cuvva option, it’s easy to get budget friendly travel protection quickly. Cuvva also offers weekend, weekly, and monthly insurance packages.
Robo-consulting, a form of artificial intelligence, is a program that has been designed to take charge of an investor’s portfolio and make investments based on their specified preferences. At the first stage, the client must identify their financial objective, determine the investment timeline, decide how much risk they are willing to take, and calculate the total money to be invested. The procedure then alters the strategy based on individual preferences and commences to run the portfolio. This program incessantly monitors investments and can adjust the elements of the customer’s investment portfolio.
Applications to help manage and oversee users’ budgets which keep track of their income and expenditures at all times. Such a solution could not only assist with managing finances with greater ease but also help to grow savings.