Fintech is the technological solution to finance-related issues and problems, it aims to fill the gap between the ways of finance management and the adoption of new technology. Fintechs are financial institutions that provide sector-specific services and products to ease financial management for consumers as well as providers. Several startups are entering the field of fintech due to its increased popularity and adaptability among users. We can define it as the 21st-century generation’s way of banking. Earlier the term fintech was used to describe technologies used in back-end activities, but with time it made its way as a mainstream method of finance management. However, they have not yet surpassed traditional ways of banking as fintech technology is still in its nascent stages. Although banks are welcoming technology in financing with their open hearts, building users’ trust is still a far fetched goal. It is being considered as a revolutionizing technology because major applications have taken birth with the advent of fintech, including cryptocurrencies, mobile banking, and other ways of online money transfer. Fintech possesses the power to completely transform the way of traditional Banking. To fulfill the ever-growing demands of customers, banks have no other way but to upgrade their IT systems and infrastructures to become compatible for providing digital services. Entering the IT sector for finance management is the foremost responsibility of banks right now.
Globalization of Traditional banking
Traditional banks have been a ruler in terms of financial institutions for a very long time. These reputed banks are highly trusted by users as well as the government for their regulation, honest working, and compliance activities across the globe. Banks perform a huge role in shaping a country’s economy. They possess the capability to raise excessive capital with the help of government organizations and private institutions to expand their infrastructure and increase their network to connect with the clients for providing an extensive variety of services, hence establishing excessive loyalty and belief among its customers.
With the beginning of globalization, banking services revolutionized with notable effects. After globalization, the banking sector was flooded with huge competition, larger market reach, huge client base, and advanced back-end technologies, thus filling the geographical gaps and opening the doors of communication for numerous offers. Banks were forced to provide users with a high-end banking experience in order to survive a sector growing at a fast pace.
Evolution of Technology in banking
After the advent of globalized banking, technology was inevitably required to enter the domain. Banks started providing online banking services, which then evolved into mobile banking and now turning towards digital banking. Accessibility of smartphones and the internet at affordable prices have played a major role in imparting success to emerging technologies. Such a vast network of technology has helped fulfill customer expectations with enhanced security and user-friendly e-commerce platforms. The technological boom helped non-banking financial services enter the finance market. These non-banking financial startups gained huge popularity in a very short span of time as they focussed on eliminating the existing problem of users and started earning huge revenue. With so many people shifting to these financial service platforms, banks are feeling excluded and thus are working towards the betterment of their services with the use of technology.
What is fintech?
The term ‘Fintech’ describes a compilation of two sectors i.e., Finance and Technology. This business sector accommodates various firms that incorporate technology to provide numerous financial services to their users more efficiently. Such start-ups are powerful enough to disrupt well-established financial institutions that are not technologically advanced.
The Fintech sector was born in 2008 after the great global financial crisis took place. Due to the global crisis, people lost trust in the traditional banking system and were eager to try their hands on emerging technology. Within such a short span of time, fintech was able to establish itself well in the market.
How do fintech companies work?
The main aim of fintech is to provide easy tech-based solutions to a customer’s financial problems. With the help of large capital funding, fintech companies are able to meet public demand as well as their business growth. Fintech companies established themselves by attracting customers by offering them decent deals. They are designed while keeping today’s youth in mind, innovative approaches are being used to provide products and services to this tech-savvy generation. Also, fintech organizations develop partnerships with various business sectors so that all the needs of a user can be fulfilled with a single application. And with time people get used to their services and the consumer base increases.
Issues with traditional banking that led to the fintech revolution
Here is a list of problems with traditional banking that led people to shift to fintech services-
- Highly strict, time-consuming rules and regulations.
- Large operating costs because of various branch infrastructures.
- Low levels of transparency.
- No involvement of innovative and creative strategies to expand the user-base.
- Absence of collaboration with different business sectors.
- Traditional banks are not focused on providing individual-based profits.
- Rigid regulations and infrastructures built over time are not susceptible to change.
Areas that need a change in Traditional Banks
It is time that banks become more welcoming of new technologies if they want to survive a highly competitive market. Here are a few aspects discussed that banks should consider for technology to perform their functions:
Artificial Intelligence in Data Management-
The banking sector is generating more and more data every day as the user-base is increasing. Banks ought to analyze, manipulate and examine this information gathered for smart decision making and betterment of the banking system. It is not wise to rely on traditional methods of data management and policymaking in a highly competitive and technologically advanced world. Data handling is a very complicated task, hence artificial intelligence and advanced analytics prove to be must-have tools for decision making. These cutting-edge technologies can assist banks in their vital tasks such as KYC, money exchange controls, restricting transactions, preventing money laundering, etc. However, some banks have already started incorporating such technologies in their banking system.
Cryptocurrency is the new reality of the digital world. Crypto is gaining huge acceptance among various financial organizations and earning their investments swiftly. It is very important for banks to align with regulations, approaches and supervise Central Bank Digital Currencies. It is a method of adopting blockchain technology to provide alternatives to physical currency in the form of digital cryptocurrency. Many banks are already working on introducing a central bank-issued digital currency.
Cybersecurity is a major concern today across the globe. Every other sector including banking has been targeted by cyberattackers and such assaults are anticipated to increase in the near future. It is highly essential for banks to equip themselves with security systems depending on the gravity of the situation. Banks must be well prepared to design policies for boosting cybersecurity and have a robust IT infrastructure. In case of a security breach, banks must be prepared with a risk management system to effectively tackle cyberattacks.
Financial institutions are always at the radar of cyberattackers, thus need special attention and extra security measures. Cyberattacks possess the power to disrupt an entire nation’s financial stability. If adequate measures are not taken in time, it may lead to disastrous consequences. Following steps can be taken by a bank in order to prevent such a situation- Robust consumer authentication, Dynamic linking requirements, Virtual applications safety, Payments directive, Encryption standards for data, etc.
Digitalization of Central Banking Services-
Conventional methods of providing banking services are transforming. All essential services of a bank must be performed digitally such as data collection and policy implementation. Traditional ways of collecting data and keeping user records on papers must be replaced with modern digital services. Internal bank processing can be improved by installing digital channels with artificially intelligent workflows. It will be a huge help in understanding the workflow management of a bank.
Adapting Modern Cloud Infrastructure-
Cloud technology can help banks achieve their goal of becoming resilient, scalable, and agile in a cost-effective manner. Banks on a global level have already started taking steps in adopting Cloud infrastructure. However, it should be the central banks’ responsibility to guide state banks and private banks on policies of cloud technology such as data security, data storage, data recovery, risks associated, and role in an investigation. Numerous regulations have been given for banks to undertake cloud services but at the same time not making a bank responsible for outsourced IT services.
Banking has drastically evolved over the years, accelerated with the help of technological innovation. System re-engineering and digitalization through rising technologies such as artificial intelligence depend upon cloud computing. Banks must project this technological challenge towards working on planning and strategizing that can bring about technological digital changes in banking. They have to discover approaches to collaborate with fintech companies, start-ups, and other key players in the market which will help them sustain in a highly competitive world.