By Pankaj Upadhyay, Associate Vice President, Key Relationships, Maveric Systems
We have been hearing the new buzz word almost everywhere in the modern financial technology space – The Fintech (Financial Technology). The Deutsche Bank describes the Fintech as the digitization of the financial sector. On a lighter note, Fintechs have also been also referred to as T-shirt-wearing-Whizz-Kids who are raising billions of dollars in venture capital to “disrupt” traditional financial services. It is interesting to look far back and see how and when the Financial Technology trend started and realize that it’s not just about the new startups, but the incumbents too who are adapting to this change.
The evolution
Even though the term Fintech has gained popularity only recently and is often thought of only in the context of latest mobile apps, the technology has played a key role in financial industry since early 1950s and has been continuously evolving ever since. Technology has been revolutionizing the financial industry in ways people do not see and often take for granted. For e.g., the ubiquitous “customer-facing” services like Credit cards and ATMs are nothing but results of financial technology evolution in 50s and 60s. Also in the background, not very visible to the common man, technology was used to build sophisticated “Back-Office” i.e. Core Banking, Risk Management, Treasury, record keeping and data analysis systems to support the needs of the financial sector.
Then came the global financial meltdown in year 2008, post which we saw new technologies emerge, with 3 key ones being i.e. Cloud, Blockchain and Open Source software, which are further aiding the revolution in financial services technologies.
Now, it is all about digitization in every sector around us, with the financial sector taking a lead. While we have seen banks going online and also providing services through mobiles, retail financial services are being further digitized via mobile wallets, payment apps, robo-advisors and online lending platforms to name a few. This level of digitization cannot be achieved with simple enhancements to current banking services, but demands re-thinking and re-design of the banking services as a whole.
If we look closely and delve a little deeper into the causes of this trend, technology and customer behavior (specifically the millennials) are the driving forces behind it.
The cause of revolution
Traditionally, we relied entirely on intermediaries like banks to perform all business transactions, clearing, settling and record keeping. Overall, the intermediaries have been doing a good job, but there have been growing problems. Traditional Universal Banks have become slightly inefficient over time by doing all the banking services under one roof i.e. starting from holding your savings, providing loans and other complex products, processing payments, and then managing the wealth generated.
Some other issues with the traditional banking services are:
1. Their nature of being centralized makes them prone to hacking.
2. They exclude billions of people who do not have bank accounts.
3. They slow things down, sometimes taking days & weeks to move money across the banking system.
4. They charge significant percentage of transactions as fee.
5. They capture a lot of consumer data, thus undermining the privacy of customers
The revolution by itself
Technologies such as social media as well as cloud computing have shaped customer demands and expectations considerably. Keeping up with consumer behavior, desires and demands, the financial sector is forced to fundamentally rethink their business model.
Globally, Financial Technology (Fintech) ventures are now challenging incumbents (the powerful intermediaries) with new services and solutions and are disrupting the status quo of traditional banking.
Fintechs have set out to solve the above listed problems using the advanced and mostly internet-based technology available. Global investment in Fintech already stands at a staggering $49.7 billion. They are creating a platform where customers can trust each other and transact peer to peer with great ease. 43.4% of people who use Fintech services choose to do so because of ease of access. Armed with Big Data Analytics, Blockchain, Machine learning and AI tools, Fintechs in segments such as P2P Lending, Payments, Personal Finance and SME Financing have been successful in acquiring large number of customers.
Goldman Sachs estimates that upstarts could steal up to $4.7 trillion in annual revenue, and $470 billion in profit, from established financial services companies. At least 4,000 Fintech startups are already active across 54 countries, having received more than $25 billion in funding to date; over a dozen of them are valued at over $1 billion.
Basics remain the same
While Fintechs are putting significant pressure on Banks by taking away their customers, it is hard to see banks becoming extinct or even irrelevant. Fintechs are still tiny when compared to Banks. In the lending context itself, while Fintechs have reached a lending figure of billions, the Banks often deal in trillions. The basics still remain the same, i.e., you need a bank account to use most Fintech services.
