TechBullion is pleased to invite one of the leading FinTech and technology executives, Arsalan Sheikh, to share his expert insights on the evolving landscape of financial technology.
In this dynamically changing financial environment, the line separating the traditional players in financial services from purely tech companies is getting increasingly blurred. Banks try to be more tech-savvy, while large technology firms are going all out into financial services in a rather interesting manner. This place mainly occurred as a result of rising FinTechs and their new software products, democratising financial services for big and small to hold their own across the globe.
Arsalan, with his extensive experience leading digital transformations at renowned firms like Finastra and Oracle, brings a unique perspective to this discussion.
Financial Institutions claim to be Tech companies with Financial Services licences, while Tech companies aim to become “supper apps” that also offer financial services. The proliferation of FinTechs and associated white-labelled software products are democratising the financial services industry, enabling players of all sizes to compete and offer services within and outside their ecosystems. This has been made possible through cloud, mobile, data, and now AI innovations, complemented by evolving customer journeys, enhancements in regulations, and the desire for efficiency. Once a newcomer that ruffled the incumbents, FinTech is now a pivotal contributor to the financial services and banking sector.
With over two decades of experience leading digital transformation and delivering enterprise solutions in the banking and finance industry, I have seen a period of rapid acceleration and innovation driven by FinTech startups and established software providers. This written piece will examine the adoption of digitalisation in the banking sector, analysing its impact on traditional business models, the emergence of new financial services, and the resulting benefits for both businesses and customers.
The Disruption of Traditional Banking Models
Legacy banking models traditionally relied on brick-and-mortar branches and physical engagements, with limited financial inclusion. FinTechs disrupted this model by bringing banking and financial services into the modern digital age, offering a hyper-personalised and inclusive access to financial services around the clock. Eventually, incumbent banks were forced to transform due to the weakening of economies of scale associated with their physical engagement model.
The FDIC published detailed branch and deposit data for different geographic levels for all U.S. banks. EMI’s analysis of this data revealed the following trends:
The same phenomenon will have repeated itself around the world: Accenture predicts that up to the year 2025 in developed markets, 20-30% shrinkage in branch networks will happen.
FinTech Enablers for Banking Transformation:
- Mobile Banking: Access to digital services from anywhere and anytime is no more a novelty but essential requirement. Financial Institutions with the most convenient, intuitive, and secure mobile banking services are surging ahead thanks to FinTechs;
- Digital Onboarding: A frictionless, straight-through, and seamless onboarding experience is a key differentiator when it comes to acquiring most customers with lowest cost. FinTechs and associated white-labelled software products excel in this area, as customers expect such digital experiences without physically engaging with a bank representative;
- Remote Customer Service: Due to the advancement of AI-powered chatbots and virtual assistants, banks can now offer 24×7 customer support on digital channels. This reduces the dependency on human centric engagements and limitations;
- Automation: As consumers of financial services, we typically experience the digital engagement channels of a bank. However, this is just the tip of the iceberg, as most of the FinTech action happens at the mid and back-office layer of a bank. For example, core systems process the transactions, risk systems that determine the eligibility of a relationship or a transaction, and payment systems route transactions across multitudes of networks, and many more.
An Overview on Challenger Banks
Another significant source of disruption to the traditional banking model is challenger banks. Fully digital with no physical branches, they use technology to offer customer-centric, fast financial services. The agility of these new entrants has garnered considerable attention, particularly among younger demographics seeking convenience and digital-first experiences.
In the United Kingdom, for example, challenger banks, including Starling Bank, Monzo, and Revolut, have gained millions of customers in just a couple of years. To the point where they are said to be holding 14% market share of the UK personal current account market, from just 1% in 2018 according to Competition and Markets Authority reports in 2022.
Challenger banks are disrupting the banking industry through means like:
- Lower Fees: By eliminating the overhead from brick-and-mortar setups, challenger banks most of the time offer lower fees and have better interest rates compared to traditional banks;
- Enhanced User Experience: Challenger banks sporting applications that strictly possess a friendly, digital, and mobile interface are also quite easy to manoeuver, bearing rich innovative features;
- Personalised Services: Analytics and data intelligence enable challenger banks to offer customised financial products and services, targeting individual customers’ needs and preferences.
The Transformation of Lending
Fintech is transforming lending and disrupting the fundamental premises of credit scoring models and underwriting processes. Moreover, increasingly, online lenders and platforms for peer-to-peer lending are using alternative sources of data supported by sophisticated algorithms to score creditworthiness, which increases avenues to credit for individuals and businesses that otherwise would have access to conventional banking.
This trend is evident in the growth of “Buy Now, Pay Later” (BNPL) services. These services give short-term financing for buying things and often have interest-free periods. The global BNPL market is growing fast, expecting a CAGR of 27% from 2023 to 2032. In 2022, the market was worth USD 6.1 billion, and by 2032, it could be USD 25.7 billion. This growth shows that more consumers want flexible ways to pay, and BNPL is changing how traditional loans work.
This is further exhibited by a TransUnion report, which says that online-originated loans in the country will rise to $70 billion in 2022, displaying that alternative lending models continue to be in good favour.
Case Study: Rise of Mobile Banking
Perhaps the most notable example of disruption by FinTech is the widespread adoption of mobile banking. A report by Allied Market Research on the mobile banking market states that the mobile banking market size was $1.5 billion in 2022 and is projected to reach $7 billion by 2032, expanding at a CAGR of 16.8% between 2023 and 2032.
The growth of mobile banking is on an exponential trajectory due to the efficiency and convenience it offers to customers in handling virtually every type of financial transaction. In essence, bringing benefits to account checking, balance transfers, bill payment, and obtaining loans, among others, everything shifts into one’s palm with this service.
The Emergence of Innovative Financial Services
Traditional banking models have also been heavily disrupted by FinTech, providing high-level gateways for new kinds of financial services. From peer-to-peer lending, robo-advisors, crowdfunding platforms, and digital wallets, these are but examples of new FinTech products that totally balance the equation toward something more democratised than ever before in favour of the people.
P2P & SME Lending, would in effect be a revolution in the lending business, connecting individual and business borrowers to lenders directly apart from those traditional financial institutions. The borrowers get to enjoy lower interest rates, whereas the lenders benefit with high returns-a win-win situation for both parties.
Robo-advisors have transformed investment management, rendering it more accessible and affordable. By saddling the power of algorithms and automation, they offer personalised investment advice at a fraction of the cost typically associated with traditional financial advisors.
Crowdfunding websites changed the world for entrepreneurs and creatives alike by letting the former raise money for projects from the contributions of many in small amounts. This democratisation of access to funds left some room for innovation.
Digital wallets have transformed the landscape of payments, offering a seamless and efficient way for users to store their payment information securely to make transactions with nothing more than a tap on the smartphone or a click of a button.
Benefits for Business and Consumers
In fact, business and consumer benefits alike have not stopped flowing forth with the restructuring and digitization that comes with FinTech.
In precis, the FinTech revolution enabled companies to better serve customers at a personal level and reduce friction, with data analytics and artificial intelligence powers. That drove customer satisfaction and loyalty through the roof.
- Efficiency and Cost Savings: FinTech has automated numerous financial processes, reducing or eliminating the need for manual intervention and paperwork. This has increased efficiency, reduced cost, and accelerated operations for businesses;
- Increased Inclusion and Access to Finance: FinTech has managed to make financial services accessible and cost-effective for much more of the population and businesses, including underprivileged communities. This is also part of what more inclusion means and greater economic empowerment;
- Innovation and New Business Models: Fintech has created an environment of innovation that has been able to facilitate the introduction of new business models and revenue streams. This has opened up more avenues for growth and expansiveness to the firms.
Challenges and the Way Forward
Despite the advancements and digitization it has brought to the banking industry, Fintech still faces challenges:
- Regulatory Compliances: The speed at which innovation in FinTech takes place has thrown challenges to regulators, as they are always required to play catch-up with new technology and emerging business models. Establishing a fine balance between fostering innovation and ensuring consumer protection along with financial stability remains onerous.
- Cybersecurity and Data Privacy: Increased digitization of financial services rightly increases the vulnerability to cyber-attacks and data breach. This makes data privacy one of the key issues along with protecting sensitive financial information and challenges for both FinTech companies and financial institutions.
- Competition and Cooperation: FinTech is a very competitive field, with new firms emerging daily. The classical banks and FinTech companies have succumbed and sought means of cooperation in line with leveraging the two to their advantage so that they can stay afloat in this displacing arena.
In other words, FinTech has a bright future irrespective of any challenges. The financial technology revolution in banking is already happening, with technology still on the improvement radar, changing consumer expectations, and a friendly regulatory environment that opens new vistas for companies and consumers.
Final thoughts …
The development of FinTech software products presents an admirable transformation and digitisation that the banking industry has undergone. Disruption of traditional banking models and catalyzation of new financial services because of this FinTech revolution have released a plethora of benefits for businesses and consumers alike. Though much remains to be done and many challenges are yet to be faced, the future of FinTech is no doubt very bright. It will be interesting to see how technology keeps evolving and the consumer expectations dynamics change the face of finance in the emerging market in the years going by with FinTech.
