Fintech might be becoming a buzzword in the world just now, but it has been doing steady rounds in the banking and financial sector for a few years now. The US has been one of the foremost countries to spot the true potential of the fintech industry. It was cognizant of the potential fintech held and was one of the largest investors in helping the sector develop further. By 2015, the fintech sector had already surpassed $19 billion in investment. Out of this amount $13.8 billion was pledged by US investors, alone. Currently, countries around the world, especially the US, countries in Europe and the Asia Pacific are working relentlessly to help fintech attain the potential it deserves.
How fintech is perceived by the various stakeholders in the US financial sector depends on the role they are playing in the sector. As time flies by, more and more financial services companies are becoming wary of the advancements in fintech. A study conducted by Maryville University found out that about 82% of US-based financial services were worried about the effect fintech will have on their business. This percentage went up 13 percentage points from 69% in 2016.
To neutralize the perceived threat from fintech most banks and financial services providing institutions realized its best to enter into partnerships than the fintech wave washing them over. Ever since the financial sector has been seeing more partnerships between fintech and financial services providers.
Fintech is up against banks. This was the general notion most thought leaders and influencers had about the rise of fintech. They did not consider fintech a threat, however, they did think that if banks did not embrace technology the way fintech does, then that would be its undoing.
This thought hails back from the 90s when the phrase, “banking is important, banks are not,” was doing the rounds. The oldest form of an institution in the world, banks, had soon become all-powerful and its operations were centred around its offerings rather than the end consumers. Soon enough, banking seemed to have become restricted to upper and middle echelons of the society, leaving the majority of the masses, unbanked.
Soon after in early 2007, the subprime crises hit the US and brought the financial sector tumbling down. The biggest banks were facing uncertainty and the risk of closure as the world saw some of the goliaths of the banking industry tumble and disappear. Regulations were tightened as regulatory authorities started enforcing compliance and demanded better due diligence by the banks that survived. As a result, banks became further risk averse. They started signing out loans to bigger corporations that were asset-rich and reflected better credit scores.
This left a large portion of the population in a lurch. With no access to quick loans, a dearth of jobs in the market, and an economy that seemed to be caught in quicksand, people started cutting down on consumption, which affected business and the economy at large. Since the dollar economy dominated the world at that time, the ripple effect of the subprime crisis started reaching farther parts of the world.
Fintech had been brewing already. It was ready to make an entry into a world affected by a lack of proper banking system, large sections of unbanked populations, with little or no access to easy loans and debt. It was also ready to inject technology into a largely traditional sector. With a consumer-centric focus and technology backing it up, fintech soon started entering the US financial sector much like earlier predictions. Also, the absence of a regulatory authority meant that fintech could operate with much more autonomy and dynamically than traditional banks could.
Investors in the finance and tech industries soon saw the potential fintech held and started investing in small firms and startups that were coming up with lending solutions and analytics. Fintech was evolving fast, but its aim was not to destabilize the bigger players in the industry. Instead, it was looking at serving that portion of the population that was largely underserved at this point. Fintech had a huge target audience in front of them for whom procuring loans were a dream come true, let alone a quick loan application process.
Due to the complicated and formal banking processes, quick loan applications had become an oxymoron in itself. The time and interest rates associated with these loans were steep, as well. Fintech decided to disrupt this sector and make it a level playing field. It launched AI, ML, and data analytics powered solutions to make loan underwriting, a process that would take weeks at a time, a matter of just a day or two.
Fintech also made the complicated processes of verification easier, thereby making loan origination and subsequent loan repayment a much easier process. However, fintech did not just stop at making lending easy. It went on to disrupt numerous financial services following traditional banks, including the insurance sector. It has introduced and made concepts like peer-to-peer (P2P) lending and crowdsourcing popular, which has been tremendously helpful for product-based startups.
Different financial services providers have been affected differently by the arrival of fintech. Here’s a look at some of them.
• Asset & Wealth Management
As mentioned earlier, fintech is primarily looking at the unbanked and underbanked sections of the population. It is also trying to bring financial services that were not available to the majority of the population. Asset and wealth management is one such service. AWM firms mostly target HNIs and UHNIs portfolios. However, fintech is looking at building awareness among the general population by making financial planning services available to all. By using AI, ML, and data analytics, they can bring down the cost of servicing their clients and garner a fair share of the current market, too. 41% of AWM service providers already believe that their clients are consulting with fintech firms, as well. This has pushed AWM firms to seek collaboration with fintech firms and onboarding AWM solutions that will help them streamline their services and target a larger audience.
The insurance sector is one of the first financial services sectors that is going to be affected by fintech disruption. As insurance firms struggle to adapt to economic turbulence and maturing markets, they can integrate technology aka. fintech into their system that will help them ensure long term success. Fintech can help insurance companies provide their consumers with online insurance infrastructure, insurance comparison services, and mobile or product insurance. Additionally, fintech solutions can help insurance companies internally, as well, by:
1. Bringing down costs (operations & customer acquisition)
2. Improving customer engagement and customer journey
3. Using IoT to improve risk assessment
• Payment services
Payment services are also set to adopt fintech and blockchain to help improve their costs, processes and overall efficiency. Fintech has introduced digital wallets to people whereby the larger sections of the unbanked population now have access to quick and easy digital transactions. The scope to disrupt the payment services is a mammoth one, to say the least. Services such as virtual wallets, POS payments, billing, payment platforms, online payments, and mobile payments are already gathering momentum in markets, globally.
With the US financial sector understanding the importance of fintech in shaping future economies, more and more financial services providers will be joining the fintech bandwagon through partnerships and collaborations. Firms and larger financial institutes that are not collaborating with fintech are investing in building their own fintech-powered platform to achieve the kind of efficiency, fintech has proved it can reach. Fintech has pushed the US financial sector to move beyond its comfort zone and try out a new market. It has shown them a way to move beyond mature markets by adding to their product portfolio and providing better service to the end consumer.