We are joined by guest expert Arsalan Sheikh, a FinTech Executive with over 20 years of experience leading digital transformations within the financial services industry. He has held key roles at major global firms like Finastra and Oracle, specialising in areas such as core banking systems, digital banking, and financial analytics.
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Editor: Hello, Arsalan. It is really nice to have you joining us today as we engage in this very interesting coming together of two worlds: finance and technology. Having been at the edge of the FinTech world for years, I look forward with keen interest to your take on two forces of nature that increasingly seem just like each other.
FinTech Executive (Arsalan): Thanks for having me. It’s an exciting time to be part of the space as these two industries converge and change each other in real time.
- So, let’s start with the big picture. What is really driving this convergence between traditional financial institutions and tech companies? Is it just about survival, or is there more to it?
FinTech Executive (Arsalan): It’s a confluence of factors. We cannot deny the fact that the digital revolution has transformed how we live, work and interact with each other. Consumers now demand seamless, personalised experiences in every aspect of their lives, including financial services. This puts colossal pressure on traditional banks to adapt or risk being left behind.
Not to mention the technology itself, which has included cloud computing, mobile revolution, artificial intelligence, and blockchain, among many others, which have opened new doors for financial institutions and technology companies alike. These innovations opened new ground not only for better efficiency, customer improvement, but also led to developments in new financial products and services.
- Can you give us some concrete examples of how banks are trying to become more like tech companies? It seems like a pretty big shift for them.
FinTech Executive (Arsalan): Absolutely. Banks are adopting a variety of strategies in order to keep up with the times. Companies like Goldman Sachs are launching entirely new digital products like Marcus, their online consumer banking arm. This platform allows them to target new customer segments and experiment with innovative approaches without disturbing their core business. Others, like BBVA, are investing heavily in their applications and integrating features like AI-powered financial advisors and personalised spending insights.
Beyond digital channels, banks are also rethinking their physical presence. For instance, Capital One has been at the leading edge of this trend, opening “Capital One Cafes” that combine banking services with a coffee shop experience. These spaces were designed to be more inviting and engaging, fostering deeper relationships and attracting digital-native customers.
- Now, let’s flip the script. How are tech companies muscling into financial services? Are they trying to become banks, or is it something different?
FinTech Executive (Arsalan): Tech giants have one enormous advantage: hundreds of millions of users. Now they’re using that to build out payments products, digital wallets and even lending and investment services. Apple is a great example of this transformation. The company has embedded financial services into its ecosystem with Apple pay and Apple card, blurring the lines between finance and tech. Also, look at Walmart: it greatly expanded its financial services in 2022 with its acquired and merged FinTech ONE, created in partnership with Ribbit Capital. ONE offers everything from checking accounts and savings to debit cards and personal loans, all woven within the Walmart ecosystem. Certainly, with the huge number of customers, Walmart already has, along with its existing financial services like Walmart Pay, it will be quite attractive compared to the services offered by the traditional bank.
Last but not least, Amazon is extending credit to small businesses selling on its platform, using (so far unique) insights into their sales data to assess creditworthiness. This creates a direct challenge to traditional lenders who rely on conventional credit scoring methods.
My point is that these examples illustrate that tech, or more appropriately, data-centric companies, do not necessarily aspire to be banks in the classical sense, but leverage their technology, user bases, and data to develop innovative financial service propositions that seamlessly integrate into their existing platforms and ecosystems. This provides an unusually powerful value proposition for consumers and a very substantial challenge to traditional financial institutions.
- This convergence seems pretty disruptive. What are the potential upsides and downsides of this convergence?
FinTech Executive (Arsalan): The convergence can lead to more people getting access to financial services. In the past, banking used to be where you would go to get financial services, but now it is something you do. In other words, it can lead to increased financial inclusion for underserved populations, personalised financial advice, more efficient and faster transactions, and a wider range of innovative products.
However, there are risks as well. Data privacy and security are paramount concerns as more personal information is shared across platforms. Moreover, cybersecurity threats are becoming increasingly sophisticated, and both banks and tech companies need to invest heavily in robust security measures.
Another challenge is the potential for algorithmic bias in credit scoring and lending decisions. If algorithms are trained on biassed data, they can perpetuate existing inequalities. Addressing this requires careful data selection, algorithmic transparency, and ongoing monitoring.
Besides this, it could also be a cause for an increase in illegal transactions, including money laundering. Digital banks that have loose regulations or those relying heavily on cryptocurrency-based payments may inadvertently become avenues for illicit activities. Finding the right balance between innovation and regulatory oversight will be key to mitigating this risk.
Financial and wire fraud has always existed from the early days of banking, which is now being perpetuated with increasing digital transactions. Many customers are falling victim to cyber fraud, and it is becoming an arms race amongst banks and tech companies to implement preventative measures to avoid reputational and financial risks for themselves and their customers.
It also risks further compounding the problem of inequality because those who are excluded due to lack of access or skills in using technology may be left further behind through rapid technological changes. Only digital literacy and equal access can bridge this chasm and make any financial system truly inclusive.
- Looking ahead, what do you think this convergence will mean for the future of financial services?
FinTech Executive (Arsalan): The boundaries will continue to fade. We are moving towards a more integrated and personalised financial ecosystem. Embedded finance will become progressively prevalent, with financial services seamlessly woven into our everyday activities. Imagine buying groceries and instantly accessing personalised credit options at checkout.
Decentralised finance (DeFi) also has immense potential. By using blockchain technology, DeFi aims to create more transparent and efficient financial systems. We are already witnessing innovative apps in areas like lending, borrowing and trading.
Open Banking is another factor that is creating a promising difference. It ensures the secure sharing of information between banks and third-party providers, leading to innovation and increased competition in the financial service space. Innovation implies the improvement of products, bespoke services, and more inclusion for consumers. Just imagine being able to compare loan rates across all providers or having your various accounts combined into one integrated interface. That is Open Banking at work.
- What’s your advice to traditional banks? How can they survive and thrive in this new world?
FinTech Executive (Arsalan): Traditional banks facing challenging but thrilling times where being quick and innovative is key. For them to keep going well, they need to make big moves toward a future focused on digital stuff.
Embrace a Digital-First Mindset: It’s essential for traditional banks to put digital change in all parts of what they do. This is not just about having a decent app; it means creating a culture of continuous improvement, providing employees and customers with new tools, and using data for decision-making.
Promote New Ideas and Value to Market: Traditional banks must be faster and improve how they respond to shifts. They can achieve this by adopting adaptable approaches, experimenting with fresh ideas, and investing in modern technology. It is vital to create an environment where employees are encouraged to think outside the box and challenge standard practices.
Partnering with FinTechs: Collaborating with FinTech companies helps traditional banks access new technologies, reach new customer segments, and explore innovative business models. These kinds of partnerships can speed up digital change, improve how customers experience, and boost innovation.
Leverage Data and AI: Using data and AI power can help regular banks understand their customers better, customise what they offer, and make their processes work better. This leads to better customer interactions, safer risk handling, and smarter decision-making.
Focus on Compliance: It’s critical for traditional banks to have robust compliance frameworks to navigate changing regulations and maintain customer trust. Also, continuous investment into compliance tools and processes is crucial to make sure they reduce risks .
- And what about the tech companies? What do they need to watch out for?
FinTech Executive (Arsalan): Tech businesses going into financial services must recognise that it is a landscape characterised by complexity and stringent regulations. It’s not just about offering a nice and easy-to-use interface; understanding how financial systems work, the associated risks, and all the rules is paramount. They need to really understand compliance rules, data privacy laws, cybersecurity, financial fraud prevention, and consumer protection to avoid costly missteps and regulatory repercussions.
Trust is extremely important, and tech firms need to prioritise building and maintaining it. Experts suggest that people are becoming less trusting of tech companies, which means being transparent, ethical, and handling data responsibly is more critical than ever. Building trust with consumers, regulators, and everyone in finance requires real actions to address concerns about data safety, bias in algorithms, and misuse of personal information.
Working together with incumbent banks can give tech firms helpful know-how and access to needed systems. Teaming up with financial groups that have strong knowledge and good compliance practices can make dealing with tough regulations easier and help reduce risks while building credibility.
Data security is a huge worry in finance since customer information and transactions can be sensitive. Tech companies need to put strong cybersecurity plans in place, check their systems often for problems, and follow strict data protection guidelines to protect against hacks and fraudulent attacks. Being proactive about data safety and cyber security along with clear understanding on how data will be used can help gain user confidence.
Summing up my thoughts, I want to highlight that tech companies entering the finance world face a tricky challenge needing deep regulatory understanding, a focus on truthfulness and clarity, smart partnerships with established institutions, data privacy, and constant care for security of financial transactions. Those who meet these challenges well can use their technical skills to create new solutions that improve user experiences in a more open finance system.
- Fascinating! What’s your perspective on the role of regulation in this scenario?
FinTech Executive (Arsalan): Regulation is key. It ensures competition is fair, keeps consumers safe, and supports financial stability. We will probably encounter fresh rules that focus on issues arising from this merging.
Moreover, it’s a delicate balance. Regulators must encourage innovation but not suppress it, plus they have to collaborate with banks and tech firms to build a system that benefits all parties involved.
- What tech or trends do you think will matter a lot in the next few years?
FinTech Executive (Arsalan): Obviously, AI and machine learning will keep changing finance, making experiences more personal, better risk management, and limiting fraud. The World Economic Forum forecasts that AI will contribute up to $1.2 trillion towards the banking industry by 2030.
Evolution and innovation of currencies are also expected especially in a multipolar world. Central Banks and economic trading blocs are exploring digital currencies to improve upon their domestic and cross-border payments.
Neobanks and challenger banks will continue to compete with the traditional banks, especially with their digital and mobile first approach to banking while being able to offer hyper-personalised Financial Services.
We are also seeing the advent of super apps where traditional and non-traditional financial services providers are increasingly embedding investments, insurance, payments, and lending products in e-commerce and online purchases that we now heavily engage with.
Beyond those, I think a few other critical trends are emerging:
- More emphasis on cybersecurity: As the volumes of digital transactions increase and become more sensitive in nature, robust cybersecurity is needed. We will see investments in technologies such as multi-factor authentication and encryption to ward off cyber threats;
- Sustainable and responsible finance: People are more and more concerned about the environmental and social consequences of the financial choices they make. So, we will find a greater interest in sustainable investment opportunities and ethical banking services;
- The rise of RegTech: Regulation technology will continue to assist financial institutions in dealing with an increasingly onerous regulatory environment. Examples include compliance solutions, reporting, and risk management.
- The final question – what’s your bold prediction to make about the future of this convergence?
FinTech Executive (Arsalan): The separation line between financial institutions and tech companies are going to keep fading away Furthermore, merging of technology into the more traditional businesses.
Customer experience will be top of mind, and ultra tailored financial products and services will rapidly become a part of the new normal. Data analytics and AI shape a new way of approaching innovation, opening access to the future of financial services.
Ultimately, the blending of finance and technology will result in a more robust, efficient, and user-friendly financial ecosystem. Also, this significant potential has been illustrated by a report of the Boston Consulting Group which estimates that the convergence in FinTech markets globally will grow to $1.5 trillion by 2030.
