The current FinTech 3.0 era has been all about innovation and startups. Affordable infrastructure, increased access to data, platform interoperability, Alternative and Embedded finance are the driving forces of these innovations. These startups have unlocked the market potential by targeting specific underserved segments in Debt Funding, Equity Funding, Wealth Management, and payment processing by providing “As-a-Service” (BaaS, WaaS, LaaS) solutions. Lending Club, Fundersclub, Stripe, and Wepay have made a remarkable presence in the current financial ecosystem.
With FinTech growing at lightning speed, BigTech companies are not far behind in claiming a piece of the pie by offering their payment solutions such as GooglePay, ApplePay, and AmazonPay. Demand for contactless and online payments has increased rapidly due to the pandemic, accelerating the finance sector’s overall digital transformation.
The Impact: 73% of Americans view FinTech as their “new normal,” and 67% percent plan to continue managing their finance digitally even after the pandemic.
From Traditional Services to Modern Inclusivity
Customer Centric: Traditionally, financial institutions have had processes and applications best suited for their own needs. Focus is now shifting to customers in this customer centric digital economy.
Form recognition tools, secured document viewing, document signing, image cleanup, and document alignment software are now available to ensure secured and clean data is captured. Thus, improving the user’s digital experience.
AI and ML provide the ability to record interactions and identify financial frauds and threats accurately. P2P transfers, international remittance, contactless credit cards, and the ability to buy various cryptocurrencies like Ethereum and Bitcoin are available for virtual banking.
Financial inclusion: FinTech solutions like agency banking and mobile money are improving financial inclusion in developing countries where people lack access to financial services.
Faster Data processing and Analytics: Financial organizations collect an enormous amount of data via loan applications, tax documents, and bank statements. Data insights powered by Big data, AI and ML, are available to help firms make better strategic decisions.
Backend Infrastructure improvements: The established payment rails (ACH, NSCC, Card Network, RTP) that financial organizations and banks use are being integrated with SaaS products, APIs, and blockchain infrastructure for easy and secured access. Products like onpaysolutions and opeach provide modern ACH integrations. NSCC has developed the ACATS system, replacing the previous manual asset transfer system.
Adoption of RPA digital workers is on the rise automating back-end office processes such as security checks, account maintenance and close, customer onboarding, trial balance, mortgage, and credit card processing. Open banking is providing data networking across financial institutions. Blockchain has made critical security solutions available, especially in cross-border payment transactions.
Compliance and Security: Traditional Financial institutions’ compliance processes and audits have been very resource intensive. It is exciting to see the RegTech evolving alongside FinTech, offering SaaS platforms that leverage Big Data and Machine Learning for compliance and insights.
Fintech 3.5 will focus on changing consumer behavior and their access to the internet in the developing world. China and India have the highest fintech adoption, faster than their Western counterparts.
The uncertainties and opportunities
Customer perception and preferences: New FinTech products may initially be more appealing to the Millennials but failing to tap into the older segment that own retirement funds could be a missed opportunity for FinTech companies.
Innovation and collaborations: Payments via Venmo or investment in Betterment go through the same legacy infrastructure payment rails that traditional banks use. With their beautiful user interface, mobile apps, real-time insights, and less bureaucracy, these startups are attracting more customers than conventional banks.
While more than half of the financial institutions are open to FinTech startup partnerships, others want to build their in-house capabilities. Implementing the right strategy and innovation culture at the desired pace is a struggle for them. FinTech companies, on the other hand, struggle with funding.
Progressive partnership may be a win-win for both players. By partnering with startups, traditional banks may be able to engage their existing customers over new channels and attract new customers. Start-ups may be able to benefit from the resources offered by established firms.
While BigTech has entered the financial industry, they do not want to be Sachs regulated like banks and look for partnerships.
Trust: Customers prefer personalized experience and human interaction in their finance management. When it comes to trust, transparency, and quality of service, traditional financial institutions hold an advantage over FinTech companies.
To become a trustworthy financial resource, FinTech organizations need to be upfront and transparent with customers. They must follow a customer service model with the right balance of human and machine (chatbots).
Financial Regulations: Regulations like PSD2, GDPR, AML, and KYC touch every aspect of the Financial Industry. As globalization picks up in this industry, more global regulations are being rolled out.
Due to the lack of streamlined compliance processes, FinTech companies struggle to keep up with compliance. Adopting regulatory platforms such as Ascent and ComplyAdvantage offers insights and crucial data on financial crimes and fraud activities that can help FinTech companies comply with compliance needs.
Net Neutrality: Policies around an open culture of the internet and data sharing equally across the globe has been a hot topic of discussion. These policies vary by country and by the ruling government. With most of the financial services now being delivered online, not knowing how internet usage will be regulated in the future creates uncertainty. FinTech startups rely heavily on their access to open-source, decentralized tools and data. Many of them claim that this may not be possible without net neutrality.
The absence of universal net neutrality continues to pose challenges in the financial inclusion and global expansion of FinTech companies. Thus, making it extremely expensive and time-consuming. While net neutrality remains a moving target, financial services should focus on protecting their profitability via the best possible chargeback management.
The Bottomline: Global FinTech is predicted to reach a market value of around $305 billion by 2025. While some traditional financial institutions may undoubtedly suffer due to the new entrants, the opportunity remains for others to thrive by leveraging the advantages of strategic partnerships for inclusive growth.