The world has moved on to a new way of getting things done, through technology. In today’s date, there’s hardly any product or service that does not have an iota of technology woven into its being. So, when something so dynamic as technology enters the world of traditional banking and financial services, disruption occurs. Innovators and disruptors find out new ways to make old processes move faster and more efficiently. This is exactly what fintech disruption is all about. It is about mixing tech and finance to bring in the fourth industrial revolution to the financial market.
The banking and financial services sector has been the most traditional service sector to date. Known for its lengthy processes and the dominance with which it ruled both consumer and commercial markets, it was the one sector nobody saw adopting any of the technological changes. However, some thought leaders did see the fintech wave sweeping in the traditional banking sector into its fold. They predicted changes in one of the most important factors that drive change in any economy: the consumer. The moment consumers are aware of how technology can ease their everyday life, they will start demanding it from every industry that services them. The banking industry is no different.
In today’s date, fintech disruption is massively led by the thought of making the end consumer’s life easy. It focuses majorly on customer experience and improving it to garner market share. Competition is tough in the fintech market and the only way to gain an edge is by finding out new ways to improve the user experience for customers.
In this article, we talk in length about different ways in which fintech is disrupting banks and financial institutions, the impact of fintech on traditional banking, the various drivers of the fintech revolution, and the tools that companies are using to add an edge to their fintech disruptions.
In order to understand how fintech has disrupted the banking and financial services sector, it will help to understand the impact of the fourth industrial revolution on the economy.
The latest revolution has changed the way how people and companies communicate and their expectations from each other. Unlike the earlier industrial revolutions which were focused much on production and manufacturing, the fourth industrial revolution’s underpinning lies on good service experience. As such, both demand and supply sides have started placing a great deal of importance on consumer experience.
While vendors and service delivery verticals (companies) are trying their best to woo customers with the benefits of quality, speed, and price, the demand side (customers) are basing their purchase decisions on aspects like transparency, engagement, and speed and effectiveness of service.
The consumer profile for banks and financial services, too, has been changing over the years. It consists of more Generation X, Y, and Millennials whose demographics, behaviour and expectations are not much like that of Baby Boomers. This new set of consumers demand quality, speed, and price and all of that through the ease of their smartphones.
For the banking industry which has always extensively relied on paperwork and traditional methods of communication such as mails through couriers and faxes, embracing the fintech change is a big one. Fintech has not only taken over the backend offices of traditional banking, but also the customer-facing front desk. Right from blockchain-enabled contracts that remove unnecessary paperwork, to getting loan application verifications done in a moment’s time, fintech has helped the banking industry cut time and save one of the most limited and precious resources, manpower.
• Fintech is not only about developing new technologies; it is also aiming at proactively solving business problems by building solutions that create better customer experiences.
• Fintech is bringing in more transparency in the banking sector through technologies such as blockchain and digital wallets. Contracts based on Blockchain are still new in the industry but gaining momentum, nonetheless.
• Fintech has brought banking to the underbanked classes of developing countries. With more microfinancing banks and startups reaching out to these unbanked and underbanked sectors, more people now have access to bank accounts and loans, than earlier.
• Fintech has revealed a market that was otherwise dormant and non-existent for the traditional banking and financial services industry. With more innovations, demand for banking and financial services like loans and insurances have increased over the past few years. With a larger market insight, competition in the industry has also increased.
• Fintech has also identified data as a revenue model. It not only allows suppliers to use data as a revenue source but also helps them in using this data to provide better-targeted customer experience to the end consumers.
• Fintech has also allowed pooling in richer and more relevant data from end consumers, which when run through analytics and applied to machine learning and deep learning, can provide accurate insights to businesses to base their product, marketing and sales strategies on.
• Fintech is also making people use their time and money more efficiently by helping them manage their transactions through just a click on their smartphones.
• Fintech can help provide financial advisory services to a much larger pool of people using technology such as robot-advice. Financial advice does not have to stay limited to the UHNIs and HNIs only, anymore.
• Higher transparency and better security protocols will tighten security against money laundering. Thus, safeguarding money and payment systems.
Market onlookers often speculated that traditional banks might see fintech as a possible competitor and that fintech would indeed wipe out traditional banking as we know it. However, traditional banks worldwide have proved speculators wrong by embracing fintech instead of competing with it. The mammoths of the banking world (0.1%) who have access to 50% of assets understood the need of the age and why it’s time to introduce technology in banking. Many banks are looking to acquire fintech startups whose tools and products can give them an edge in the competition of wooing more customers through better service.
There are 3 good reasons behind the massive success fintech is enjoying.
• Smartphones: With over 3.3 billion people, worldwide, using smartphones, people now expect their banking activities to be as smooth as their online shopping experiences. They want access to easy fund transfers, multiple payment options, the ease of omnichannel banking, and the option to know their bank balance at any given point of time. It is expectations and demands such as these that the banking sector is trying to meet and live up to using fintech as a tool.
• Digital wallets: This feature has brought the idea of a bank to the underbanked and unbanked parts of the world. By using digital currency and digital wallets, more people are now moving towards paperless transactions and understanding the benefits of it. Startups and companies who are building these apps and services have created a major shift in how people use money. They also employ promotional offers to help people spend more and get used to their digital wallets, thereby making it more of a habit than just a fad.
• Security: When there is so much virtual money being transacted online, the security of the same becomes crucial. With cybersecurity breaches such as ransomware, phishing, and malware, the need for sophisticated security protocols is a must. Fintech companies have brought in innovative security products using ML, AI, and advanced fraud analytic technologies that help protect sensitive information and help both service providers and end-users transact with confidence.
With increased dependence on the internet and smartphones and knowing high-tech security is protecting their interests, most of the time, end consumers are foraying steadily into the world of fintech services. The more they feel comfortable using tech to handle their money and daily transactions, the more avenues for innovation opens up for fintech disruption.
Fintech boasts of quite a few tools that have disrupted the financial services market significantly. Here’s a look at some of the most prominent ones in use in every industry, especially the financial services industry.
The distributed ledger system brought forth by blockchain packs in a number of benefits for the financial sector. Its use in creating smart contracts and maintaining auditable data has made it theoretically fool proof and secure. Blockchain has also allowed the banking industry to help its users transact faster and cheaper, by reducing the time and cost of doing so. Among other notable features, blockchain promises transparency and accuracy, both of which are crucial for the growth of the banking industry.
• Machine Learning (ML) and Artificial Intelligence (AI)
ML and AI play an important role in detecting money laundering and fraudulent transactions. Traditionally, identifying either, required both software and manual effort. The software would first detect the possibility of a virus attack or a fraudulent transaction and then it would bring up the issue to the human investigators who would apply their due diligence to thwart the process. However, in today’s date with attacks that are far more sudden and sophisticated than the ones earlier, time is of the essence. It is here AI and ML do a chunk of work by analysing historical data to identify patterns and provide more accurate results by removing chances of false positives. Data aggregation platforms help further by providing clients with a 360-degree view of the transaction and the account data to enable quicker validation. Once this is done, the manual investigation takes little time, given the extensive research the fintech platforms have already undertaken. This has helped save time spent on a manual investigation by up to 50%.
Chatbots are software that employs machine learning and natural language processing to mimic human conversations. Chatbots have helped cut down mundane tasks and streamline front-desk interactions thereby letting humans focus more on the service aspect of the business. However, it is not only the mundane tasks that chatbots are good for. Bank of America’s chatbot, Erica, even provides investment advice to its clients. Some other robots are even capable of executing trading instructions left by clients via email. This kind of automation has reduced the time spent on such tasks from an hour to a few minutes.
• Omnichannel banking
As more banks adopt omnichannel banking and start providing services through digital channels, we will see more branches shut down or working with lesser manpower. This will not only make the banking process more efficient but also help extend more attention to end consumers as employees can focus on services that provide value addition rather than the mundane ones that can be taken care of by the machines. By providing more personalized banking experience and value-added services, traditional banks can hope to increase their market share and beat the competition.
The fintech disruption is one which no one can escape. Much like the astounding effect the fourth industrial revolution has had on humankind, fintech disruption spells similar effects. And why not, it deals with something that lies at the very core of every civilization: transaction. With the increase in the use of sophisticated technologies like AI, ML and analytics and the consumer’s need for the next best thing to make their lives a bit easier, the fintech industry will keep churning out more innovations that will keep disrupting the banking and financial services industry.