New Bottle, Old Wine? – Separating The True Fintech Solutions from the Rest

A New World of Banking

The rise of fintech in the last half decade or so has taken the financial world by storm. Research suggests that there are now more than 7,500 fintech firms around the world which have raised nearly USD 109 billion in investment. The sector raked in a record breaking USD 54 billion investment in 2018 and USD 10 billion within the first quarter of 2019. 

Clearly, the hunger for fintech is growing, and with it, the fear among banks and traditional financial business about potentially lost revenue and customers. The fact that customers are increasingly preferring these non-traditional competitors does little to calm the uncertainty. 

As established players in the financial services industry wake up to this new business dynamic, the majority are attempting to collaborate with fintech: to leverage its ever-expanding ecosystem, turn the innovation to their favor, and address the concerns that arise with their business being at risk. Research reveals that as many as 82% of incumbents in the financial industry sector expect to enhance their partnerships with fintech players, going forward. 

Fintech – A Force to Reckon With

Fintech can be rightly characterized as a movement that has brought disruptive and transformative innovation in financial services through cutting-edge technology. Unlike traditional financial institutions, fintech startups have the advantage of not being burdened by age-old regulatory constraints, legacy systems and processes. This has allowed them to move faster and come up with solutions that compete directly with conventional methods of financial service deployments. 

Another aspect that has fuelled the rapid progression of fintech is an entirely new generation of well-informed and connected mobile consumers who continue to reshape financial service requirements. With time, fintech companies have managed to rope in these digital natives with smart banking platforms. This has given them a head start in the race to capitalize on the ‘1.7 billion billion adults, who according to World Bank’s Global Findex Database 2017 are naturally inclined towards smart fintech services.

On the other hand, major players in the financial services sector and capital market incumbents have failed to gain precedence on this front. Burdened with massive structural costs, hefty capital charges, and stagnant revenues, this sector continues to score low on the innovation index. Additionally, the relentless pressure to stay compliant and adhere to regulatory guidelines also leaves organizations short of bandwidth to invest time and resources in initiatives that can improve margins. 

There’s no denying that in the digital age, customer experience (CX) is the final battleground for businesses. And here, fintech has a natural advantage. By placing CX above everything else, fintech offerings have been able to provide their users with unending benefits. For instance, by leveraging smart application program interfaces (APIs), fintech companies are able to nurture a healthy community of third party partners around their native software problem. Open APIs allow fintech players to expand their customer services by enabling third party partners and developers to create their own apps and layers into the middleware. 

Apart from this, the algorithmic design and data-rich environment in this sector has proven ideal for machine learning (ML), artificial intelligence (AI) and blockchain-driven product deployments. Developers today are able to leverage these technologies to simplify and optimize cumbersome and effort-intensive processes such as compliance, credit checks, risk management, and P2P payments. 

But there’s good news. These technologies can yield similar results in capital markets as well, provided they are strategically implemented in the right areas. For instance, process automation with Robotic Process Automation (RPA) can help organizations working in the capital markets space replace manual legacy systems, make the systems compliant with Know Your Customer (KYC), Anti-Money laundering (AML) and other regulations, reconcile reports and connect middle and back office functions. On the other hand, more contemporary technologies like AI can simplify cumbersome processes such as trade settlement, compliance reporting, contract management and accounts payable. 

Blockchain, is another area which promises to yield unprecedented gains for capital market players. No wonder, the financial services industry has witnessed some of the biggest use cases of this technology. For example, in digital trading, blockchain is helping organizations reduce settlement times. In the current trading architecture, a single transaction can take days to settle. A blockchain-based settlement solution significantly curbs this turn-around time. A cryptocurrency token that serves as a proxy to a particular transaction is immediately transferred to the wallet of the beneficiary, confirming the completion of the settlement and ledger update.   

Extrapolating into the Future of the Financial Services Sector

With the gradual implementation of next-generation technologies like ML, neural networking with long/short term memory, Blockchain,  AI and robo-advisors, fintech will continue to gain trust and popularity among customers . 73% of millennials are eager to shift to a new financial paradigm where service products from technology companies like Google, Apple, Paypal, and Amazon are more exciting, intuitive, and CX-friendly than anything traditional financial players currently provide.   

The times are clearly changing. Fintechs are fast opening the virtual vault doors to innovation in the once impenetrable banking and the financial services sector. Can traditional players take the bold steps necessary to match the frictionless experience that’s the new norm, or will they eventually lose grounds to the new entrants? Only time can tell.