FINTECH has been a buzz word, especially for investors, for the past four years. FinTech refers to the Innovation in Financial Services with the: forming and arrival of numerous Fintech start-ups with a focus on innovative ways, impacting how consumers save, borrow, invest, move, pay and protect money, backed up by sound Technology. Fintech companies are responding and accelerating the change in the Customer preference around mobile and smartphones, and social media. Fintech companies have made robust business models with sound and dynamic CRM (Customer Relationship Management) software like Salesforce, thereby reducing operating expenses of their business.
Banking, has been one of the business sectors that’s historically most resistant to disruption by Technology. For centuries, banks have built robust businesses with high margins, high distribution through branches, unique expertise such as credit underwriting (underpinned by both data and judgment). The Banks have enjoyed the special status of being regulated institutions that supply credit, the lifeblood of economic growth and have got sovereign insurance for their liabilities (deposits). Moreover, the bank customers are slow to change financial-services providers. This has resulted in banks having a very resilient business model.
However, the status-quo is changing rapidly. First, the financial crisis had a negative impact on trust in the banking system. Second, the pervasiveness of mobile devices has begun to undercut the advantages of physical distribution that banks previously enjoyed. In India Mobile phones have an 80% penetration vis-à-vis bank penetration of just 35%.
Moreover, it’s the younger generations who are more techno-mobile friendly. According to the Encyclopaedia of Health Economics, 65% of India’s population is below 35 years. The aforesaid factors have led to a huge change in the customer’s tastes and preferences in favour of the new innovative financial products specifically, and environment in general.
In addition, the business processes are getting streamlined due to flexible, dynamic and low-cost CRM platforms like Salesforce and financial structures that are undergoing tremendous changes from building/branches to software/servers, Fintech companies have the advantage of reduction in both, operational and capital expenses.
Few examples of FINTECH ideas and companies providing innovative business solutions:
- Transferwise: Trans-border transfer of money without banks.
- Online-only banks: An example is GoBank which has no branches and is available only online. They can offer many of the traditional bank services with higher rates and lower fees.
- P2P lending marketplaces: One example is the Lending Club that provides a platform to borrowers and lenders for more cost effective and time efficient lending solutions.
- Robo-advisors like Lending Robot and Betterment offer lower fees, lower minimums and good returns to investors.
- New payment gateways like Paypal and Citruspay provide ease of access, lesser rates (transfer) and user-friendly apps with guaranteed fraud protection and data protection.
The benefits provided by the above mentioned application of information technologies to our financial system seem large. Banking seems inefficient, costly, riddled with conflicts of interest and prone to disruption by this new Fintech environment.
With innovative ideas and cost reduction Technology brought in by Fintech companies, the traditional banking environment and business will be disrupted, but at the same time, a new banking and financial environment is sure to emerge.
Banks will need to re-examine and reinvent themselves in order to stay ahead. It will be a WIN-WIN rather than WIN-LOSE or we can say it will be FINTEGRATION. Banks need to get innovation and technology and Fintech companies need scale and bigger client database. Fintech specialists in the fields of Payments and Transfers, Lending and Finance, Retail Banking, Financial Management and Insurance are going to tie-up with existing banks and lending institutions, reducing the time and cost and giving a better experience to the customers.
There will be strategic investments for this collaboration and investors are bullish big time on Fintech. According to Fintech Venture Capital Report by KPMG and CB Insights, global investments in Fintech companies totalled US$ 19.1 billion as against just US$ 350 million in 2010 – an increase of 5400% in a period of six years.
To conclude, Fintech is here for sure.
Banks must seek important signals amid the present FinTech noise in order to reposition their business models. Financial institutions and banks must consider what sections of their business they would like to retain, and in which areas partnerships would deliver better value to customers.
Fintech, being inherently digital, the banking sector’s wide scale investment in this area requires an increased focus on cyber security. By building their digital assets on the top of a holistic digital risk platform, banks will help to protect their brand, intellectual property, customer data and help to ensure availability and a strong customer experience.