Jun 11, 2019
The financial services industry is at a crossroad of digital disruption in Fintech and legacy systems. The wave of digital transformation which has impacted several industries including retail, media, and transport is making great strides in the financial services industry with several non-banking innovators providing both clients facing and back office technologies.
The last few years have also seen several acquisitions of finance technology software providers by banks and holding companies. These acquisitions have the potential to define the norms in the industry and the way in which software is deployed and utilized by money management firms including wealth management firms, RIAs, hedge funds or pension funds, fund managers, and large banks.
As these money management companies embrace technology, their bet is on offering their clients great solutions that deliver fully-integrated workflows. Even though this sounds compelling, there are several emerging industry trends that currently pose a challenge to this ostensible emerging paradigm.
This article will explore some of the challenges and opportunities provided by Fintech in the banking and financial services industry.
To begin with, the likes of computing power, extensive connectivity, large data storage, and advanced analytical solutions provide a feasible digital alternative to both financial institutions and customers. It also poses several challenges for these money management firms. Even though this was inevitable, banks are finding it difficult to strike a balance between its legacy operations and the emerging technologies.
For decades, financial institutions have been dependent upon localized ‘on-site’ computing technologies. Therefore, the rate of adoption of disruptive Fintech solutions has been restricted by various factors, including a lack of better understanding of the technology in financial services.
As money management companies are witnessing fee compression; the financial services industry is shifting its focus towards cost containment. This has seen several physical manifestations of this including the rising number of merges in the asset management space. This poses a unique challenge to the bank and software solution provider model as their acquisitions will mean that the companies can only achieve their ROI by significantly cross-selling to their client bases.
Think of it this way, as a money management firm facing razor-thin fees, what will be your priority? Not boosting your spend on technology in Fintech. On the contrary, investing in software to provide comprehensive solutions to the client doesn’t seem a great idea when there is a constant pressure of reducing costs. Such money management firms will then need to either charge extra up front or charge more on the back end.
Lack of Specialization
The myth that software solutions increase efficiency falls flat particularly in the financial services industry since most software solutions that are known for doing everything generally often lack specialization. In other words, most technology in Fintech cannot handle one particular functionality if it is known for having a great feature in another area.
This poses a great risk to the money management firms since investing in a software solution may help them at a given point in time, but not in the longer run. As the requirements of companies continuously evolve and as the industry’s priorities change, the technology that might appear ahead of the curve today may probably be behind the curve in months to come.
Innovation is another challenge facing the large bank and software provider model. Technology in financial services has been changing as fast as the blink of an eye. So, when the vendor sells their solution, it is usually nearing the end of its innovation life cycle. The seller usually sells the software to the larger banks in the hopes of being able to continuously innovate and keep abreast with the latest technology to maintain its growing market share.
But there is a fundamental glitch: most of these large banks that use these software solutions serve a huge client base, who operate on different software versions. This makes technology updates even more difficult. With digital transformation in Fintech, the future of software is moving towards artificial intelligence, big data, advanced analytics, machine learning, and cloud computing. However, in reality, the technology currently being used by the clients mostly do not align with this model.
New Business Models
The rise in technology companies has forced several large money management firms to acquire these start-ups in order to remain relevant. However, there are emerging business models as well, which pose a challenge of inconsistencies within the industry. The digital disruption is causing banks and solutions provider to rethink their business models that align with their goals.
For instance, one way of operating is when the bank continues to be the face for customer interaction android offer products in a segment where they do not have the capabilities. While this is great for the customers, who will benefit from more product choices, it will also allow the banks to generate fee-based revenues from the software provider. This is one such model, and it is up to the money management firm to decide whether they want to acquire, partner or outsource Fintech provider. But these different models eventually create differences within the industry and provide inconsistent experience to the customers.
The rise of digital banks is another shift that the current banking industry is witnessing. According to a study, visits to bank branches are expected to drop 36 percent between 2017 and 2022, while mobile transactions are expected to grow 121 percent in the same period.
One such digital bank Revolut provides a finance app that enables currency and cryptocurrency exchange. Users can also control their finances by setting up a budget and tracking their daily spends. In 2018, Revolut has more than 2 million users. Another such mobile bank N26 allows its customers to open a bank account and manage money using their mobile devices.
The digital transformation in Fintech provides a great opportunity to large banks who can automate much of their manual tasks. It can help banks provide comprehensive solutions to deliver services directly to their customer’s mobile devices. Such technologies can also help banks to send sensitive communications with the help of encrypted Internet transmissions and also broadens the horizon for the banks to use cloud computing and save cost spent on data centers.
As rightly quoted by Jamie Dimon, Chairman & CEO of JP Morgan Chase “Hundreds of startups with a lot of brains and money are working on various alternatives to traditional banking.”
In addition to this, several Fintech companies like OpenLink, TransferWise and Poynt also provide point solutions in areas such as remittances, payments, savings and investments, trade and invoice finance, lending, and insurance. There are robust models being created for Anti-Money Laundering-Know Your Customer (AML-KYC) compliance, underwriting and risk management, credit scoring, collections and recovery, customer service, capital markets activities, etc.
Traditional banks are also collaborating with the new-age FinTech to create a mutually beneficial partnership.
For instance- Goldman Sachs works with Symphony, which develops a secure way for sell-side and buy-side firms to collaborate keeping compliance in place. Blend Labs works with banks and financial institutions to develop an efficient underlying technology for mortgage lending. BBVA Compass has teamed up with OnDeck to offer loans to small businesses that would not otherwise qualify for bank credit.
PayTM one of the largest e-commerce payment system and digital wallet company of India, has partnered with leading banks to offer traditional services augmented by technology. The company has partnered with ICICI Bank, to announce an all-new initiative where users can get interest-free short-term digital credit. Called Paytm-ICICI Bank Postpaid, the new offer lets Paytm customers get instant credit for things like paying for movie tickets, bill payments, flights, as well as physical goods. It has also collaborated with Induslnd Bank to introduce a facility that creates a fixed deposit when the customer balance exceeds $16K (INR 100K) at the end of the day.
All the opportunities and challenges posed by Fintech in the financial services industry call for a new model for large banks and conglomerate. Instead of offering monolithic systems to the customers, it is time that these money management companies along with challenger banks look at customized and specialized solutions that have the capability to offer a suite of functionalities integrated with by APIs.
Innovation and competition will play a leading role to shape the future of digital transformation in Fintech so that they change according to their clients’ requirements. Least to mention, that this digital transformation in Fintech will eventually lead to the lowering of total systems cost.