In many ways, the emergence of fintech has posed a threat to traditional banks. Traditional banks have been operating in a VUCA (volatility, uncertainty, complexity, and ambiguity) environment, with existing processes becoming obsolete due to new measures that must be followed, an increasing volume of data, and a growing customer base.
FinTech emerged shortly after the 2008 global financial collapse and grew rapidly as a result of demonetization and financial inclusion initiatives. FinTechs have capitalised on the following gaps in traditional banking to create a new and niche industry. Let’s take a look at the list of challenges that traditional banks face.
Because they relied on legacy IT infrastructure, traditional banks have been constrained. Some of these banks are still weighing their options for transitioning from their old legacy systems to new technology.
FinTech has quickly adopted cutting-edge technology such as AI, ML, and IoT to fill the gaps that have emerged. This has resulted in a significant disparity between the two types of banking.
Lack of Accessibility:
For a long time, a large portion of the Indian population was excluded from the extensive traditional banking system due to high banking fees, a lack of awareness, and a widespread lack of trust.
FinTechs were able to tap into a portion of this segment, which included Gen Y and new tech-savvy customers, with measures such as financial inclusion and demonetization. According to an IMF report, while the Pradhan Mantri Jan Dhan Yojana scheme provided access to bank accounts for a large portion of the population, FinTech met several pockets of unmet demand due to its niche products or ease of use.
Although banks have begun to upgrade their technology to meet the aforementioned demands, full tech integration within the overall services provided to end customers is required.
Public Sector Unit (PSU) banks with large customer bases must urgently adopt a holistic approach to their offerings to develop and maintain long-term relationships with their customers. Private Indian banks, on the other hand, have been more proactive, engaging with FinTech start-ups since 2017, and their innovation teams have evaluated over 1,000 ideas so far.
Lack of Customer-Centric Model:
Being truly customer-centric entails getting to know your customers intimately. Creating a 360-degree view of each customer, including needs, key life events, product portfolio, circle of influence, complaints filed, satisfaction level, and so on. Banks’ service offerings have gradually expanded, with a growing emphasis on meeting customers’ expectations.
This shift can be attributed to the entry of several FinTechs into the market. According to a 2019 study, 91% of retail bank CEOs recognized the need to become more customer-centric than they had been in the past, but only 29% of consumers stated that they had positive customer-centric experiences in their interactions with Indian banks.
Gap Between Performance and Promise:
The financial services industry is transforming. Traditional banks have failed to maintain a balance and a desired credit pattern over the years. As a result, they were unable to fill credit-related gaps in a variety of sectors.
Furthermore, before the FinTech revolution, bank employees remained static, and the procedures they followed were antiquated. Traditional banking’s overall performance is deteriorating in comparison to newly introduced fintech-based banking systems.
With increasing competition and complexity in the financial services sector over the last decade, and especially in light of the pandemic, a collaboration between financial service providers and FinTechs has resulted in a win-win situation for both. Fintechs have aided financial service providers in a variety of ways. FinTechs now offer a variety of services that can be classified into six categories based on their capabilities and services. Payment and credit lending providers have expanded significantly in recent years.
FinTech startups have undoubtedly disrupted the retail banking sector as a whole. Traditional banks, on the other hand, have been proactively integrating new technology into their products and services. With a predominantly young population and increasing technological adoption by the remaining population, there has been a significant and visible shift in demand for financial services. The new generation expects improved and faster technology-based services. As a result, FinTech start-ups have rapidly disrupted traditional banking models.