By Prof. Avinash Ghalke, Associate Professor- Finance and Economics, SPJIMR, Mumbai
Financial technology, or fintech, represents the application of cutting-edge technology in financial services. Although the use of technology in banking is not new, with Automated Teller Machines (ATMs) being introduced as early as the 1960s, recent advancements have propelled fintech to the forefront, fundamentally challenging the very fabric of traditional banking. What has changed, and why is fintech causing unprecedented disruption in an industry that, until now, has been slow to embrace technological shifts?
From back-end support to consumer-centric innovation
Historically, the role of technology in banking was confined to back-end processes, invisible to the average consumer. Human-to-human interaction remained the cornerstone of banking services, with banks primarily investing in technology to streamline internal operations and reduce costs. Despite the introduction of internet banking, regulatory constraints and institutional inertia kept consumer-facing innovations on the periphery.
The tide began to turn following the 2008 Global Financial Crisis, which eroded public trust in the banking system. This created an opportunity for nimble, tech-driven firms to enter the financial services space, offering consumers more transparent and user-friendly alternatives.
However, the real inflection point came with the mass adoption of smartphones, which placed financial services at consumers’ fingertips. Smartphone penetration in India is expected to exceed 50%, having grown more than 2.5 times in just seven years (JM Financial Report). The widespread accessibility of mobile apps has made it easier and faster for consumers, especially younger ones, to conduct financial transactions, check balances, and manage accounts on the go. This shift unlocked vast amounts of actionable data, enabling fintech companies to leverage insights into consumer behaviour to provide highly tailored services, something that traditional banks struggled to replicate.
Digital trends reshaping the financial landscape: UPI, blockchain, and AI
Several pivotal trends have converged to accelerate fintech adoption. The JAM trinity—Jan Dhan, Aadhaar, and Mobile—became the cornerstone of India’s fintech revolution, enabling seamless, paperless onboarding and verification for financial services. Aadhaar-enabled biometric authentication, for instance, has transformed how identity verification is conducted, making the process entirely mobile-based.
Perhaps the Unified Payments Interface (UPI) is the most profound disruptor. Introduced by the Indian government as part of its push for a cashless economy, UPI has redefined peer-to-peer (P2P) and person-to-merchant (P2M) transactions. As of September 2024, UPI transactions have reached a staggering 15 billion per month, with transaction values surpassing INR 20.6 trillion, marking a 16x increase in volume and a 13x increase in value over five years. UPI’s convenience and speed have made it the default payment mode for millions, further marginalising the role of traditional banking infrastructure.
At the same time, blockchain technology is emerging as a force that could dramatically reduce bank operational costs. Decentralised, secure, and transparent, blockchain allows financial institutions to overhaul their legacy systems. Blockchain could reshape back-end banking operations by streamlining customer identification, fraud detection, and transaction validation processes, ensuring that banks remain relevant in the digital age.
Automation and personalisation: The new consumer expectation
Consumers increasingly demand personalised, real-time services, and fintech firms are excelling at meeting these expectations. Traditional banking models, which often rely on manual processes and physical branch networks, are being left behind. Automation, particularly in lending, has slashed approval times from days or weeks to hours, allowing fintech companies to capture market share at an alarming pace. Over the past five years, digital lending has expanded more than sixfold, with banks accounting for only 30% of this market.
Artificial Intelligence (AI) and machine learning have further empowered fintech platforms to offer hyper-personalised financial products. From AI-driven credit assessments using Account Aggregators (AA) and public data to Internet of Things (IoT) solutions that monitor borrower activities in real-time, fintech companies offer services at a previously unthinkable scale and precision.
This push for personalisation is not just meeting consumer demand; it’s redefining it. As fintech firms continue to offer customisation at scale, consumers are increasingly gravitating towards these platforms, further eroding the need for physical branches. Traditional banks, faced with shrinking foot traffic and rising operational costs, are being forced to rethink their business models to stay competitive.
The rise of cryptocurrencies: A threat to traditional banking?
The rapid growth of cryptocurrencies and digital payment systems has added another disruption to the traditional financial ecosystem. Cryptocurrencies, underpinned by blockchain technology, represent a fundamental challenge to the centralised control of money, a core function of traditional banking systems. While regulatory concerns continue to cloud their mainstream adoption, the increasing traction of digital assets is forcing banks to innovate or risk obsolescence.
In response, some banks are exploring the potential of Central Bank Digital Currencies (CBDCs). In India, the Reserve Bank of India (RBI) has already initiated efforts in this direction, introducing the Digital Rupee, which could further revolutionise the payment systems landscape.
Creative destruction in banking: The Schumpeterian Shift
Economist Joseph Schumpeter famously coined “creative destruction” to describe how innovation displaces old industries in favour of more efficient ones. This concept aptly captures the ongoing transformation in banking, where fintech innovations are leading to the obsolescence of traditional practices. Fintech is disrupting traditional banking models and replacing them with faster, more consumer-centric alternatives. Banks that fail to innovate are at risk of being left behind.
At the same time, fintech presents a tremendous opportunity for collaboration. Many banks are partnering with fintech firms to develop new services that combine the best of both worlds: the stability and trust of established financial institutions, and the agility and technological prowess of fintech companies. The future of banking lies in digital transformation, and those who adapt will thrive, while those who resist change risk being consigned to history.
Challenges on the horizon: Cybersecurity and regulatory hurdles
Despite the significant promise of fintech, the sector faces substantial challenges. Cybersecurity remains a top concern, particularly as the older generation and those with limited digital literacy become easy targets for fraud. In the first quarter of 2024, cybercriminals cost Indians INR 17.5 billion, according to the Indian Cyber Crime Coordination Centre (I4C). While fintech firms and banks are working together to bolster cybersecurity defences, the rise in digital payments has made consumers increasingly vulnerable.
Regulatory uncertainties also persist. Fintech firms often operate in regulatory grey areas, which has led to friction with regulators. For instance, the Reserve Bank of India’s recent guidelines on digital lending forced several fintech companies, like Slice, to pivot from their original business models. As fintech continues to evolve, regulators must strike a delicate balance between fostering innovation and safeguarding consumers.
Conclusion: The future of banking is digital
The banking industry is undergoing a profound transformation, driven by the rapid rise of fintech. As traditional banking models face unprecedented disruption, financial institutions must adapt to survive. Whether it’s mobile banking, UPI, blockchain, or AI-driven automation, the future of banking will be shaped by digital trends that prioritise speed, convenience, and personalisation.
Collaboration between fintech firms and banks will be essential in this new landscape. Those institutions that can leverage the power of technology while ensuring the security and trust that consumers demand will emerge as the winners in this rapidly evolving financial ecosystem. The age of fintech-driven creative destruction is here, and those who embrace change will define the future of banking.
