The Impact of Fintech on the Future of Banks and Financial Services

The development of technologies served as an engine for the transformation of macroeconomics. The key segment in the development of financial markets has become the introduction of new financial technologies that appear as a result of conservative financial management when using digital technologies. Over the past few years, the financial technology industry has developed at a significant pace, but despite the rapid development of this phenomenon, the exact definition of fintech has not yet been derived. Fintech (financial technologies) is a business direction that uses new technologies and innovations in the financial services market, which involves such advanced areas as digital, mobile payments and transfers, e-wallets, online lending, P2P platforms, crowdfunding, online funds, online insurance, etc.

• The first meaning of fintech is presented as a new branch of the economy, consisting of young companies that provide improved products and services to the financial market.
• The second meaning of this concept is expressed in the aggregate of new technology companies that, on the basis of their own funds, are developing mechanisms for introducing innovative technologies into the traditional financial sector of the economy.
• The third understanding of the essence of fintech lies in the practical activity based on the use of software to meet the demand for products of the financial market.

Having decided on an understanding of the essence of fintech, it is advisable to study the history of its development for a deeper analysis of this phenomenon. The evolution of fintech development can be conditionally divided into 3 stages, which are clearly shown in the image below.

It should be noted that the emergence of Fintech 3.0. was provoked by the global financial crisis of 2008 and was caused by the transition of financial market participants to low-capital-intensive business models, modernized in accordance with modern market realities. Subsequently, the equalization of market conditions contributed to the emergence of innovative participants in the financial services market - fintech companies. The current state of fintech is characterized by rapid digital transformations based on the proliferation of robotization, artificial intelligence and other innovative technologies.

Thus, we can say that fintech has evolved from the initial stage of introducing technologies exclusively into traditional sectors of the economy, to the point at which it is a unique mechanism capable of determining user expectations. In turn, fintech service providers are not viewed solely from a start-up perspective but are professionally managed companies with broad operational capabilities, a comprehensive product portfolio, and an international presence.

Fintech is changing the way the traditional financial market operates and is one of the fastest-growing segments at the intersection of financial services and innovative technologies. In this segment, technology startups and new market participants are applying innovative approaches to products and services, shaping preconditions for the effective development of fintech.

In this article, we will look at how fintech affects banks, how will fintech affect the financial system, main effects of fintech on banking industry and fintech impact on financial services.

The global financial crisis has exposed serious problems and weaknesses in financial regulation and supervision. As a result, the Financial Stability Board is undertaking a comprehensive and ongoing review of the global financial regulatory architecture to set standards. One of the weaknesses identified by the crisis was poor risk data collection and reporting in banks. This led to the Basel Committee on Banking Supervision publishing its Principles for Risk Aggregation and Risk Reporting in 2013. This was a key development as the principles set minimum standards for data collection and management, which may require additional investment in technology and organization restructuring. The increasing complexity of the global regulatory framework, growing regulatory reporting requirements and the risk of costly penalties as a result of tightening post-crisis standards have contributed to higher compliance costs in financial institutions. This has become especially important for international banks faced with formidable and sometimes conflicting regulations.

The concept of "financial innovation" is much broader than Fintech, and, accordingly, not all financial innovations are financial technologies (for example, the creation of a new derivative, etc.). At the same time, the concept of financial innovation can be partially included in the concept of "digital economy" (Fintech completely, since its functioning without digital technologies is almost impossible).

Fintech today is often viewed as a unique segment of financial services and information technology. However, the relationship between finance and technology has a long-standing relationship, often complementing and reinforcing each other. As we wrote above, the global financial crisis of 2008 was a turning point and the reason why Fintech is turning into a new paradigm. This evolution creates challenges for regulators and market participants, especially in balancing the potential benefits of innovation with the potential risks.

Currently, Fintech includes numerous technology startups, as well as large organizations trying to improve and optimize financial services provided. At the end of 2014, investments in this segment reached 157 billion dollars. After that, the term began to refer to a large and rapidly growing industry.

Most of the development of financial technology is modernizing traditional financial services and products in several areas:

• payments and transfers: online payment operations, online transfer services, P2P currency exchange (transfers between individuals), B2B payment and transfer services (transfers between legal entities), cloud cash desks and smart terminals, mass payment services;
• financing: P2P consumer lending, P2P business lending, crowdfunding;
• capital management: robo-advising, programs and applications for financial planning, social trading, algorithmic exchange trading, money-saving services.

The new wave of Fintech over the past 10 years tends to develop from the bottom up, i.e. it is born mainly in agile startups that seek to break traditional rules, do business, compete or are acquired by existing financial institutions. This new startup trend has a lot of advantages and coupled with post-crisis regulatory reforms that have spurred structural change in the industry, is pushing incumbent financial institutions to increasingly focus on technology to compete against the threat posed by new Fintech startups.

Fintech can influence the financial market in several main areas:

1. By increasing competition, empowering consumers, democratizing access to financial services, especially in developing countries and, as a consequence, stimulating further innovation. Innovation creates new product / service opportunities, new strategies and commercialization channels;

2. By improving efficiency through innovation in:

• Relevant infrastructures such as payment system infrastructure, credit information systems and public registries. One example is the Know your customer utility. That is, these are funds that can be used by several financial service providers, and that optimize the collection and exchange of customer identification data;
• Back - office and frontline procedures in traditional financial institutions, as well as in their decision-making process. This includes improving risk management and regulatory compliance. More often than not, institutional innovation relies on partnerships with fintech companies that take on specialized roles such as providing credit scoring, insurance pricing tools, managing prepaid accounts, and automating communications.

3. By creating new investment opportunities for existing financial institutions. Banks and insurance companies are increasingly investing and buying out fintech companies as part of their (broader) investment portfolio, and some are also sponsoring fintech incubators to create investment opportunities;

4. By improving financial supervision;

5. By improving and optimizing the risk management process.

When assessing the impact of new technologies on the financial market, 2 factors have recently acquired particular importance:

1. the level of acceptance of basic technologies by society;

2. degree and prevalence of technological know-how among the general population.

Fintech and banking industry sector includes the following technological trends:

• cloud technologies and big data (Bigdata). Cloud technologies provide access to data without installing special applications on the device, which allows banks to offer their products anywhere in the world by centralizing services on the network. Big data, in turn, provides customers with personal target offers based on the analysis of heterogeneous and fast-moving digital information, the sources of which are the Internet, corporate document archives, readings of sensors, devices, etc.;
• API (Application Programming Interface, i.e. application programming interface, application programming interface), integrated into the systems of interaction with clients. An API is a collection of classes, procedures, functions, structures and constants that are provided by an application, service, or operating system for use in external software products.
• social media and mobile communication with special applications. Integration of the banking business with social networks allows obtaining information about customer preferences for the purpose of using it when proposing new financial products, establishing trusting relationships with each bank's client, accelerating the implementation of blockchain technologies in relationships with customers. Examples of successful implementation of such relationships in retail are Amazon, in banking - Deutsche Bank.
• The main advantage of omnichannel banking is that customers' troubles can be resolved very fast. Using the Internet and TV device, they can avoid in-person interactions in bank branches and get to their point quickly and efficiently. Delegating a part of the tasks to digital tools such as chatbots will save costs and provide customers with more personalized service by digital financial services. This approach is flexible and adapted to customers' unique needs. As an extra advantage, you can find the opportunity to improve your bank experience and get much higher loyalty from your customers, leading to fewer drop-offs and better conversions.
• Payment systems are adjusted with tools with artificial intelligence, defining the future of payments globally and on any device. Analyzing customers' operation history, spending habits, and behavior, we can predict their activity in the future and suggest payment methods with reduced fees. One of the most significant rends is voice-activated transactions. They require special approaches to security and verifications, which now are one more substantial area for growth. The most valuable resource now is financial data. Integrating payment solutions with other systems can help understand shopping behavior deliver relevant recommendations, increase retention and deliver better experiences.
• Open banking is the ability for third-party providers to access customers' financial information securely. There is a standard format for the process, specified by open banking, available only with the customer's consent. It can help companies get an accurate picture of their consumers' financial situation to offer their services. Also, it allows consumers to get a clear picture of their finances.

Reasons and prerequisites for the development of financial technologies in the banking sector.

The development of financial technologies, especially noticeable in the last five years, was caused by the following circumstances:

1. Loss of customer confidence in the traditional banking sector during the 2008 global financial crisis and stricter regulation. Trust is an absolutely necessary category for the successful functioning of the financial system, and its loss has accelerated the process of development of financial technologies inevitable in any case. Against this background, there is a demand for services provided by Fintech startups, as well as for the optimization of services caused by a decrease in their profitability due to stricter regulation.

2. Raising the level of expectations for the services provided, including financial. The consumer becomes more and more focused on constant updating and acceleration of processes, greater availability of technologies and greater convenience of services in the conditions of obsolescence and limitations of traditional financial services both in form and in essence. The development of information processing technologies has determined the development of such fintech segments as blockchain, P2P lending, online scoring, algorithmic trading, etc.

3. The spread of the mobile Internet, leading to the fact that the focus of the bank's customer acquisition strategy is shifting from opening another branch to creating online services and supporting the mobile version of the site.

4. The desire for innovation, increased requirements for ease of use of services, quality and speed of obtaining information, characteristic of the largest generation of millennials in world history (born in the period from 1980 to the early 2000s), is a powerful catalyst for changes in the financial sector.

5. Banking legislation, for which consumer rights are always a priority, but their protection does not impede the implementation of innovations and flexibly adapts the rules to the requirements of the financial sector (in the UK, Singapore, Australia). On the contrary, in other countries, the financial sector is highly regulated, which hinders the development of the financial services industry.

6. The success of tech companies in other sectors of the economy (retail, entertainment, etc.). The emergence of successful companies that have significantly changed their markets and offered more competitive products and services has sparked the interest of entrepreneurs, including in the financial sector.

How fintech affects banks? Consulting experts from McKinsey & Co predict that over the next ten years, commercial banks may lose up to 60% of profits in favor of new financial companies. Among the areas of banking activities that can primarily be replaced by fintech startups are consumer finance, microloans, and payment services.

Why fintech and banks should work together:

The way people use financial services and banking has evolved. Technological changes of recent times provoked changes in people's banking behavior and now we already see the changes, which indicate the significant fintech’s impact on the banking industry. Let's list several of them:

• The use of mobile devices increased a lot. According to Pew Research Center, 81% of adults in the U.S. own a smartphone, and more than 50% own a tablet. So any business who wants to have a good connection with their customer should consider developing their products and offers mobile-friendly. That means that we can reach any information quickly from a device that has an Internet connection. Same with the banking details, which bank clients can access from pretty much anywhere. And a great advantage is that nowadays, the updates of information don't need to settle overnight: transactions are speedier, and the information is the most up-to-date.
• More services are available online. Some people still prefer visiting a physical bank branch to maintain financial services. Others are already used to transferring money between their accounts, deposit checks, and track their transactions online. In the beginning, the banks offered some perks to get their customers to use online services primarily. Now lots of customers consider online services more convenient as they can take place at any time.
• Great attention to security issues in FinTech is called to emphasize that this new approach to banking is safe and this cooperation is reliable, and customers' private financial data is protected. Traditional banking at the time might not invest a lot of money and resources into focusing on data protection and raising attention to making customers aware of the necessity to decrease the vulnerability.

According to a Marketforce LIVE experts, UK banks see fintech startups as a major threat to the business models of traditional financial companies and institutions. To find out the attitude of banks to fintechs, about 600 representatives of the financial sector were interviewed.

• According to 81% of respondents, quality of service outpaces customer trust in a brand in the race to acquire and retain users.
• 79% of participants believe that fintech startups have the most attractive brands.
• 59% see fintechs as a global competitor to banks that can replace traditional forms of providing financial services.
• At the same time, 46% of the respondents see a big threat in fintechs, since in order to compete with them, it is necessary to optimize the business model in the near future.
• Banks are inferior to fintechs in terms of speed of service provision, convenience and simplicity, as stated by 71% of survey participants.
• 30% of respondents believe that fintechs will run banks, and 31% believe that fintech will benefit traditional financial institutions.

What does fintech mean for banks? In general, the industry has seen various forms of collaboration between classic banks and Fintech. If some time ago Fintech was viewed as a potential threat to banks and the banking industry in general, now they talk about cooperation and mutual benefit. Fintech companies can support banks by providing specific services, solutions, such as risk analysis services. Baltic International Bank also uses Fintech companies as service providers. The Bank is currently in a process of change, successfully implementing a new business model, so many new ideas and methods need to be adapted. Here is one example of how a classic bank can partner with Fintech. Baltic International Bank is a client of the American rating agency Sigma Ratings, which uses an advanced technological approach to assess the management efficiency and risk of financial crimes at the organizational level. In early 2020, the company also carried out an independent assessment of Baltic International Bank, assessing the risks of organizations related to the prevention of financial crimes, governance, sanctions, corruption and reputation. All of this was done online by the company using a methodology based on industry best practices.

How does fintech affect banks? Fintech perfectly complements classical banking, helping, for example, to use the available data more intelligently and offer data analysis services, since data is more valuable than gold and oil today. An increasingly popular term is the Insight Driven Organization (IDO), or knowledge-based organization that uses analytics, data and the input it makes to all decision-making processes.

New technologies are changing the way people use fintech banking and financial services. Unlike previous historical episodes of heightened competition in the banking market, alternatives are now evolving too quickly.

The banking industry has existed for centuries, and during this time it was predicted an imminent end more than once. For example, in the middle of the XX century. in the United States, the threat to traditional banking came from alternative credit institutions in the 1970s. mutual funds offered an alternative to deposits, and in the early 2000s. banks faced competition from large trading and industrial companies, which began to obtain banking licenses and offer services in addition to their core business.

But what is happening now differs from the periods of aggravation of competition in past years in scale, speed and global nature. The scale of innovations is unprecedented, they are introduced at an unprecedented rate and spread with ease around the world, ignoring boundaries. This changes not only banking business models, but also the principles of financial services.

Regulatory implications

Impact of technology on financial services is testing not only the existing banking business model, but also the traditional scheme of financial regulation. Regulators need to balance many forces to ensure financial stability, a competitive and efficient environment, and proper data handling.

For example, it is not yet clear to what extent financial stability is sensitive to technology as such. The “ungrouping” of services traditionally united by one bank, inherent in the current technological breakthrough, can lead to the formation of a new type of risk. For example, some activities will fall outside the perimeter of prudential regulation and supervision. In addition, fintech projects using wholesale funding may be vulnerable to liquidity shocks.

It is also unclear how artificial intelligence and algorithmic provision of financial services based on new types of data will behave in a disrupting time of crisis. At the same time, the growing dependence on digital processes and systems increases operational and cyber risks. Now they are perceived and regulated as specific, but the digitalization of financial services turns them into systemic ones, which may lead to the need to revise the regulatory approach.

The Geniusee team has extensive experience in developing financial applications. Below we will provide some examples of our work.

1. Crypto analytics.

Due to the high volatility of the cryptocurrency market, a trading company faced with an issue that traders need to quickly analyze cryptocurrency market information.

We were faced with the following tasks:

• Financial dashboard for traders allowing to analyze cryptocurrency exchange rates on different platforms.
• Visualization of such information in a more user-friendly way allowing to quickly conduct buy/sell decisions.
• Possibility to purchase cryptocurrency on this platform.
• Visualization of such information in a more user-friendly way allowing to quickly conduct buy/sell decisions.
• Possibility to purchase cryptocurrency on this platform.

Result:

2. Digital Bits Wallet.

DigitalBits™ is an open-source project supporting the adoption of blockchain technology by enterprises. The technology enables enterprises to tokenize assets on the decentralized DigitalBits blockchain; transfer & trade those tokenized assets on-chain; and enables fast payments & remittances.

We were faced with the following tasks:

• Development of the Web/mobile wallet prototype allowing to transfer money through an internal wallet.
• Development of the financial dashboard allowing to track financial performance and history of the wallet.
• DevOps services on AWS for blockchain infrastructure.
• Automation quality control.

Result:

3. TradeSmarter.

Tradesmarter is leading in providing white label trading solutions offering a web responsive trading platform that enables top financial companies to unleash a new era of competition, revolution and user experience.

We were faced with the following tasks:

• Сreating the necessary conditions in the infrastructure for the normal functioning of software.
• Organizing environment for making changes.
• Process automation.

Result:

Fintech is a complex system that unites the sectors of new technologies and financial services, start-ups and the corresponding infrastructure. The financial services sector is increasingly using new technologies and tools to perform its functions and implement fundamentally new solutions that consumers are interested in. Today, new financial technologies are penetrating the manufacturing sector (including retail, telecommunications, pharmaceuticals, agriculture); exert their influence on the segment of insurance, lending, accounting services, mass appraisal of real estate, asset management, investment, tax administration, etc. Government and regulatory organizations are showing increasing interest in them, their close partnership is determined by operational solution of emerging legal issues, the speed and breadth of the promotion of fintech products, comprehensive solutions to security issues, increasing the financial literacy of the population and the availability of financial services.

The impact of fintech on banking and impact of fintech on financial services gives the banking sector an impetus for development.. The existence of an internet site, a mobile version of a site, a user's personal account has already become a standard for a modern bank — and the user, by default, waits for such services as, for example, an SMS message about the movement of funds or the ability to manage his account online. Already nobody will be surprised by the possibility of online payment of bills, including utility bills and fines. Fintech is already developing what banks are only planning to experiment with. Most likely, some innovations will take root, others will not: this is facilitated by the competition between new financial enterprises. To compete with fintech projects, banks in a new market must either quickly rebuild themselves or look for areas collaborating with financial technology. However, despite the differences and difficulties, fintech companies and banks can mutually benefit from cooperation. Over the long years of their existence, banks have gained tremendous experience of interaction with clients and created the functionality of the financial sector.