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Fintech’s Approach Towards the Banking Industry

June 20, 2023

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A graphical image showing Fintech's value proposition approach in Banking industry

FinTechs are technology-first firms that help overcome specific challenges in the financial industry. The transition from traditional banking to neobanks is a landmark step in the personal banking industry, as it addresses a socially-relevant problem statement.

The financial sector has evolved rapidly, driven by technological advancements, most notably in the payments industry. The emergence FinTechs has resulted in various real-time and seamless payment methods. A majority of payments are now made digitally, via net banking or mobile apps, to simplify transactions. Even regular banking tasks, such as applying for a new account and checking account balance, can now be done from a smartphone, eliminating the need to stand in queues at a bank.

FinTechs forayed into the market as back-end technology providers for banks and financial institutions. Today, they encompass various customer-facing applications that facilitate buying and selling stocks, personal wealth management, paying for groceries, purchasing insurance, and much more. The paradigm shift of payment processing to the background has brought user experience to the foreground. The use of technology has enhanced the transparency of the historically complex banking system and offers the chance for legacy systems to become more robust and payments more intuitive.

Connected banking is a necessity in the digital world, without which it is practically impossible to have a scalable financial system. Customized mobile POS systems, location-based software, digital receipts, NFC, and other proximity payment method solutions have already revolutionized the financial sector and have immense future potential.

Here’s a look at the FinTech’s value proposition for the banking industry and how these IT-backed, digital-first start-ups are conquering the world of payments.

Increasing the Efficiency of Incumbent Businesses

Execution calls for forming alliances to jointly produce results that are superior to what can be achieved by individual companies, just as the pursuit of value creation is intrinsically tied to partnerships. Similarly, FinTech has been assisting established organizations in the integration of technologies for upgraded capabilities to meet the growing demand for faster payments and more streamlined financial services. Such strategic partnerships are required to address the complexity of a disrupted financial industry.

For example, loan provision and insurance pre-inspection surveys required physical visits, complex background checks and huge efforts to push the process further down the pipeline. But the internet and mobile apps have made alternate information collection easier and ML algorithms have made data filtering and analysis smoother, which have made loan application, approval, disbursal and tracking a virtual and quick process. These methods are continuously improved using analytics-driven insights and supported by intelligent automation.

The main goal is to optimize costs, while improving the business model by leveraging advanced technologies wherever possible. The existing banking models have been challenged by new-age FinTech, and not just to disrupt them. Better revenue streams are being unlocked through platform-based BaaS models, the market of which is expected to grow at a 32.9% CAGR, reaching $6,943.49 billion by 2030. This is especially true for corporate and investment banking (CIB), where trust is highly valued, business is capital intensive, and technical expertise is a necessity. So, the alliance between traditional banks and technologically agile FinTechs is mutually beneficial from the lens of B2B services.

Even in customer-facing apps, competence is achieved by deploying blockchain and AI, which can in turn be adopted in the long-term by incumbents and the industry as a whole to reduce operational friction.

Delivering a Differentiated offering While Bringing Additional Revenues

In recent years, digital wallets have grown in popularity as a means of payment because they make it easy for users to store and move digital assets like cryptos and fiat currencies. Digital wallets provide essential features, including instant money transfers, multi-asset (multi-currency) accounts, expense tracking, currency exchange, and spending visualization, that are quintessential for modern customers. To avoid carrying actual cards and cash, paying electronically has brought convenience, streamlined transactions and made them faster. These advantages make digital wallets significant in the banking sector and an invaluable resource for customers looking to handle their money well without worrying about the means. P2P (peer-to-peer) money transfer services, QR codes, and NFC technology are now increasingly used for payments. Through virtual interactions, these methods provide secured  payment processing along with more flexible payment alternatives.

Traditional banks are now making the shift towards API distribution to enrich their offerings and become a marketplace of unbundled services to compensate for their foregone revenues. Embedded and open banking are both examples of differentiated offerings that work in tandem with established banks to leverage network effects from social media websites and the doubling of ecommerce by 2026, according to a McKinsey report.

FinTechs also help smaller FIs achieve scale through on-demand infrastructure, such as cloud servers, that reduces set-up and maintenance costs and keep the server secured.

To consolidate and centralize digital payments from their current scattered state and stop the leakage of revenues via underregulated FinTech firms, central banks across the globe are working to introduce central bank digital currencies (CBDCs).

Improving Customer Retention

Neobanks provide banking services to the historically unbanked and help increase financial inclusion. Banking services for deposits and savings have proliferated since the penetration of mobile banking and the wide adoption of smartphones. Additionally, consumers can make payments, check account balances, and transfer money via digital banking apps even through dumb phones via USSD.

The possibilities offered by technology to enhance market penetration and counter resistance through intuitive UI/UX have improved customer experience, while AI is adding even more value by enabling hyper- personalization.

To enhance customer satisfaction and strengthen their relationship with banks, automated processes eliminate redundant tasks and enable quicker responses for customers. This streamlined approach not only saves time but also fosters improved engagement between customers and financial institutions. Obtaining necessary data to calculate credit scores, offering custom services, and reducing the workload of humans so that they can be engaged in strategic decision-making are just some of the numerous benefits of AI.

It has been found that the data-network-activity (DNA) feedback loop used by BigTech is more effective in assessing the creditworthiness of clients than credit bureau ratings.

Due to big data and artificial intelligence, FIs now have access to more information through an omnichannel approach. FinTech typically focuses on a single financial process but with much more insight than traditional banks. They grab client attention by offering custom services and catering to their changing preferences, thereby improving client retention. As financial technology develops, it will eventually be able to replace bulky banking entities with specialized micro-institutions in-line with the microservice architecture of software development.

The Future of Banking

FinTech represents a challenge to regulators, as they create an uneven playing field in the financial sector. In fact, many FS CEOs are concerned about the impact of overregulation on their prospective growth. However, the problems do not correspond to specific regulations, but rather to ambiguity and confusion in the face of a disruptive culture. Lower economic friction, the ability to reconfigure the value chain, new opportunities for entry, and shifting economies of scale and scope will affect different financial services providers differently. The impact will depend on their current market position and ability to leverage technology.

If you wish to make the most of technology by simplifying your payment funnel and focusing on your core operations to keep your customers happy and loyal, contact us right now. Embark on the path of experiential payments for better commerce.

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