FinTech & Financial Institutions: Disruption or Evolution

There was a time when people equated traditional financial institutions with every monetary action – especially lending and borrowing. With changing times, cutting-edge innovations and evolving market demands, FinTech and its exponential growth is revolutionizing life as we know it. So what is FinTech?

FinTech or Financial Technology is a popular catchphrase loosely used to describe organizations that make use of technology for making efficient and effective financial decisions.

Globally speaking, both established companies and startups face a variety of challenges when it comes to FinTech. Existing Financial Institutions have their enormous size, which acts as a hurdle in successfully implementing FinTech innovations at an organization-wide scale. Startups, on the other hand, have to mine through the regulatory landscape and find ways to scale-up while controlling increasing costs.

FinTech has a variety of sub-categories, largely because of the different kinds & types of problems these companies are trying to solve. From crowd-funding, thematic investing, credit-scoring to digital currencies, many organizations are using FinTech to transform the way money is managed. KickStarter for example (a crowd-funding platform) started operations in 2009, and over 11 million people have pledged over $2.5 Billion to back 100,000+ projects on its platform.

Some of the more established product categories falling under FinTech include:

• Lending: By taking the traditional model of lending by its horns and disrupting it with more attractive services like alternate credit score and data sources, these companies are providing a faster and smoother access to capital

• Payment Services: How many times have you taken a moment before you enter your credit card information online? Things have generally improved from before, but in a COD (cash on delivery) obsessed country, these companies have a long way to go before they improve their drop rates

• Remittance Services: Most people think of remittance services to be both cumbersome and expensive. Startups today are looking for problems to solve and this is one area where we could do with a few solutions that can break the monopoly

• Personal Finance: You now not only have better options for investment but also better resources on how to maximize your return on every rupee you invest

• Banking: FinTech has solved infrastructural issues faced by traditional banks, by increasing access to information, analytics and digital data

• Equity Funding Services: From potato pies to upside-down umbrellas, many crazy and creative projects have managed to see the light of day because of crowd-funding. Needless to say, the current market is right for startup innovations

• Crypto-currencies: Bitcoin claims to have the potential to make a major mark in the financial world as we know it. Its international craze is yet to catch up in India.

From the categories listed above, the lending and collections space has seen some interesting twists over the past decade. Payment gateways with free setup options, good customer service and extremely low transaction fee have made it possible for bootstrapped startups to fulfill online sales orders. The rise of such eCommerce startups has given rise to other FinTech solution providers like vendor finance & management solutions. The growth in the online market space has also resulted in aggregators that allow you to make a quick comparison between different loan or insurance providers, before you make the purchase decision.

In the Indian context, our cash preferring consumers are slowly being introduced to mobile wallets and cashless transactions.

Big Developments in FinTech:

One of the biggest changes that FinTech has brought about is that financial institutions are now starting to realize the value of Blockchain. Blockchain is a technology innovation arising from Bitcoin, wherein a distributed database of a continuously growing list of data records is maintained in a tamper-proof manner. In fact in 2015, 42 of the world’s leading banks got together to discuss common standards for Blockchain in global financial markets.

Another major change witnessed last year is the growth of the industry as a whole – startups, VCs, accelerators and incubators. This support system, which powers FinTech grew exponentially in 2015. Alternative lenders (other than banks) efficiently leveraged technology to make better financial decisions on lending capital. Others in the insurance sector are effectively using crowdsourcing to bring down both claims and costs.

Leveraging FinTech to get Future Ready

FinTech is not just offering a single solution to a problem. In most cases, it handles an end to end customer journey by leveraging partnerships that provide a seamless customer experience throughout the customer’s lifecycle.

The future is being imagined as a customer who uses the digital medium to look for a house. From the first instance itself, he is hand-held through the entire process of buying a house, truncating his paperwork and eventually enabling him to make the purchase online. One real estate company offered a waiver on various taxes if the purchase was made online. Another firm offered a furnished apartment, and yet another made an audacious and unheard of offer of Buy One Get One (BOGO) on a house when purchased online. What may seem impossible today can well be the reality of tomorrow, all thanks to FinTech.

Moreover, digital analytics is another area, which companies can successfully leverage to increase productivity by over 25%. Data captured from a large number of SMEs who sell online in the next 5 years will become a key source for creating straight through lending systems. Similarly, aggregator platforms that offer a clear pricing comparison on products will boost transparency levels for customers, and easily spark price wars and enhanced service offerings by competing brands.

The increased digitization also makes Big Data on borrowers to be available electronically. This non-financial information in tandem with smart analytics, can cleverly interpret credit risk. Further, as this information accumulates, over time it would become a very credible source to expedite loan offerings.

The Evolution of FinTech

Global investment in FinTech ventures tripled to $12.21 billion in 2014. This figure clearly indicates its rising popularity. FinTech in many ways has already changed the world as we know it. A recent TV commercial of a mobile wallet showed a grandmother doing a virtual wallet transfer to her teenage grandson as a birthday gift. It may represent a small, but a growing segment of users who are using FinTech to pay for everything from taxi rides to salon services. In this case, companies have successfully picked up on a latent need and extrapolated it into a market idea.

For banks and traditional service providers that have monopolized such services till today, FinTech comes as an improve-or-die wake up call. Some believe that it’ll force financial institutions to adopt better technology; others speculate that the industry will simply disaggregate, and yet others feel that big players will lose their market share to agile startups that have used their small size and plush funding to create new benchmarks in innovation and service.

The current trends clearly suggest that those who want to remain must adopt FinTech to survive & grow. It’ll mean not only changing systems but also workforce mindsets. For companies using FinTech, success or failure may arrive quicker, and a few would remain on top for very long. The more responsive and dynamic you are, the better your chances. However, regulations may present a few challenges which could cause a few hiccups, but these hiccups may end up yielding newer & better opportunities.

From a customer perspective, FinTech is here to improve your life. It’ll allow you to make purchase decisions with ease, provide access to comparative solutions, and help in making better investment choices. The risks, if any, are outweighed by the advantages; as FinTech will provide superior outcomes and greater value for our future generations.