The Fintech Effect: How Digital Innovators are Disrupting Banking
The world stands on the brink of a 4th industrial revolution that will fundamentally alter the way everyone functions, which includes the complete disruption of many industries and their business models. Banking is one such industry which has experienced major turmoil when it comes to digital services and mechanisation. Every transaction, be it online shopping, foreign currency exchange, stock investments, or money transfers, is possible digitally at our fingertips. At the intersection of finance and technology lies this altering phenomenon, Fintech, which has been accelerating the pace of change at a remarkable rate and is reshaping the industry’s status quo. ‘Fintech’ is a term that has become the new trend in the media and in technology circles. Yet, despite being widely discussed, many – including tech-savvy and clued-up entrepreneurs – don’t quite have a handle on it.
While traditionally fintech was used for back-office functions to help banks manage customer databases, facilitate transactions and record accounts, today it has DIY modes where customers have a plethora of digital platforms at their disposal, almost eliminating their dependence on a brick and mortar bank. With 24/7 device-sceptic access, virtually every transaction is now digitally possible. The relevance of having several brick and mortar bank branches is reducing as banking permeates all digital channels (cell phones, social and online channels). According to some studies, in the European Union itself, more than nine thousand bank branches were closed at the end of 2016 due to the wider introduction of electronic payments and online/mobile banking.
Digital Disruption: What next?
Legacy financial institutions looking to become digitally-enabled encounter two main problems. First, the business models and personal skills that have been imbibed in the industry for decades have been disrupted by digital innovation, and no longer hold the same degree of importance in the new banking ecosystem. Second is “the innovator’s dilemma”. The innovator’s dilemma implies that when companies adopt new technology and allocate the resources accordingly, they end up disrupting the existing methods, something which they were already nurturing. Hence, they might prefer to focus resources on existing methods to avoid disruption, which, in turn, might make them uncompetitive in the long run. Tackling this dilemma distinguishes successful firms and how they react to change or ‘innovation’. For banks, attempts to create new models for the digital age will wallow unless people and organisations are willing to disrupt themselves.
Fintech affects or disrupts the financial sector in many ways which are beyond our supposition. For instance, the mechanism which works behind the software of chatbots is designed to capture natural language and human interactions through machine learning and artificial intelligence. They assist banks to direct customers to relevant departments more efficiently while handling queries. Leading banks in Japan have chatbots that guide customers to information on its website. Erica, the Bank of America’s chatbot provides investment advice too. Customer emails containing transaction orders or details can be scanned and executed within two minutes by robots which would otherwise take over 45 minutes. This process reduces costs, improves customer satisfaction and saves time.
The next big development: a blockchain for digital transactions - cryptocurrency - is triumphing over the financial industry by providing consumers with a speedier and cheaper way to carry on transactions. According to NASDAQ, the greatest visible application of blockchain will be in how it moulds the payment mechanism for the banks and users in order to dwindle away the transaction time. In addition, with a unique trust system, blockchain offers a complete trading platform for exchanges of securities which is achieved through transparency, minimisation of risk, human error and transaction costs.
The importance of fintech will increase as the next few years will see the disappearance of the Baby Boomer generation and the coming forth of the Millennials or Gen Y (people born between 1980-1999). As they gain purchasing power, they will cause drastic changes in client pattern, behaviour, decision making, demographics and expectations. Their preference for a state-of-the-art customer experience, high speed and convenience at the click of a button will further accelerate the inculcation of fintech solutions.
However, digital disruption is not only about the positives. Cyber-crimes are ever growing (malware, ransomware, phishing, etc.) along with digitisation. So, stereotyped verification mechanisms are no longer enough to thwart fraudulent attempts. The answer to this problem also lies in technology. More secure protocols and extreme and extensive real-time, cross-channel fraud detection systems are now available to protect the industry. There exists machine Learning as well as artificial intelligence for disclosure of fraudulent activities. The security softwares generate alarms on the plausibility of a fraud. Thereupon, it is up to the investigators to figure out whether the transaction is a false positive or an actual peril. The adoption of data aggregation floors, machine learning steered statistical modelling and process automation can revamp anti-money laundering activities by inculcating advanced efficiencies. Data aggregation platforms can provide a 360-degree client view and facilitate speedier transaction validation as already discussed. Further, machine learning algorithms can leverage historical records to ascertain patterns and foresee the happening of fraud and attacks, curtailing human endeavour by nearly half of what it was.
In search of a safe and personal banking experience, as well as applications for mobile devices, smartphones, and online payments, a new chapter of introducing financial technologies in the financial services sector is being adopted. Today, fintech covers everything, from chatbots to customer service, from machine learning algorithms to blockchains for fraud analysis, from digital transactions to biometrics. Retail banks have become a new player in providing all this to their customers, forcing traditional banks to strategically invest in innovative technologies. All of this will eventually lead to higher consumer retention. While fintech, like any other technology, brings with it its set of disruptions, the best is yet to come.
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