How Fintech is Changing Financial Services and Reshaping the Industry
Experts all over the world are discussing how fintech is changing financial services. Is there a disruption threat to the traditional banking industry? Are there benefits?
Fintech, short for financial technology, is at the epicenter of a massive digital transformation in the world’s financial services. It is quickly changing the way people interact with financial institutions. There is a high chance that some disruption may occur for the consumer banking sector, but other economic businesses can also be affected.
Financial services can either brace themselves and wait for the losses caused by the disruption or hop in the trend and make changes. Although the benefits are plenty, banks face many challenges while adapting to fintech. Can custom financial software development help banks adapt to the disruption? This article will analyze the benefits and challenges brought by fintech to help business owners adjust to the new scenario.
What is Fintech?
Originally, fintech was used to refer to the traditional banks and financial institutions’ back-end technologies powering ATMs, debit cards, and other payments and transactions. As fintech companies, such as PayPal or AliPay, evolved separately from banks, the term dismembered itself and became a thing of its own.
Nowadays, fintech refers to all innovative front-end and back-end technologies implemented in financial solutions. It is now an umbrella term embracing software, algorithms, applications, or hardware used to streamline, augment, digitalize, and even disrupt traditional financial services.
Will Fintech Replace Banks?
Traditional financial institutions and banks are concerned about the rise of fintech because they used to have a monopoly over all money transactions. Fintech forced banks to innovate and get used to losing part of their market share with smaller players. However, the disruptive aspect of fintech can be good for businesses and consumers as it compels banks to rearrange and provide more efficient services. It seems like fintech is not likely to replace banks, but the discussion on how it will reshape them is thought-provoking.
The evolution of technology brought changes and disruptions to many brick-and-mortar industries. It gets more evident every day that future financial applications will likely not be traditional banks. Big banks are starting to play a smaller and smaller role in the financial system. Many traditional bankers are losing their sleep over the thought of fintech taking over, but is this concern valid?
How Fintech is Shaping Financial Services
The global fintech sector is not to be ignored, and experts say it will be worth $310 billion by the end of 2022, with a growth rate of 24.8% per year. Although some are pessimistic about this growth potentially being a threat, there is a massive untapped market and many opportunities.
According to the Global Findex database, in 2017, over 1.7 billion people were unbanked, meaning almost one-fourth of the global population had no access to bank accounts. In the U.S. only, there were over 60 million people unbanked or underbanked in 2019, which means they have little or no access to financial institutions. Fintech is helping change this scenario thanks to some of the benefits below.
One of the reasons to praise fintech is its ability to penetrate unbanked markets and bring financial services to people with little to no access to banks. People who did not have a steady income or a fixed address were in the dark regarding traditional banking. They were dealing with cash only and literally saving money under their mattresses.
Technology and mobile devices are now reaching even people in extreme poverty, while fintech also democratized financial services for this population. Technologies such as Know Your Customer (KYC) make it easier for people to quickly open accounts, receive and send payments, apply for loans, or even receive donations.
Faster and Easier-to-Use Services
Because they grew in a different global landscape, most fintech businesses started with a customer-centric view that simplifies access to financial services. These applications usually offer a better user experience at lower prices when compared to traditional banking.
More people and businesses can now easily access platforms to apply for loans and credit without setting foot on a branch or talking to a manager. The lower entry barriers are the main reason why all types of consumers, especially the unbanked, are open to fintech rather than brick-and-mortar banks.
Big Data and Risk Management
Fintech products and services can massively use artificial intelligence and machine learning solutions to manage risks. Some of the well-known uses of this technology in finance include bot advisors and security systems that analyze a user’s history to detect unusual activities and prevent fraud.
Many fintech applications use predictive behavior analytics, geotargeting, and big data to tailor insurance offers and adapt premiums to how someone drives or places they go. This allows consumers or business owners to receive quotes and compare insurance options within a few clicks.
Robot advisors use AI and machine learning to offer tailored asset management and financial advisory, making this service more accessible and reliable. Not surprisingly, AI trading is also spreading fast and has numerous uses in finance. These innovations can make such services more affordable than ever for a broader audience.
Challenges and the Future of Fintech for Financial Institutions
There’s no chance of running away from digital transformation and disruption. Fintech is not something to wait for in the future, it’s already here, and everyone is using it. Users are massively adopting and using fintech applications for digital or in-store payments, stock trading, crypto trading, loan platforms, crowdfunding, fundraising, health insurance claims, peer-to-peer lending, and, of course, digital banks. These solutions have two things in common: being user-friendly platforms and offering low-cost services for the end customer.
Having a fintech plan in place should be a priority not only for big banks. Small and medium businesses must also weigh in the results of this innovation when setting foot on any market. It is not likely that fintech startups will replace banks entirely, at least not in the foreseeable future. The possible scenario ahead includes more fintech businesses dealing directly with consumers, while banks remain crucial for the back-end transactions of the financial world.