HUBUC CEO Hasan Nawaz explores how FinTech disruption continues to challenge the traditional banking industry
How has the banking sector reacted to the disruption created by fintech innovation?
The fintech disruption in banking was brought on by how consumer behavior has changed over the past three decades – think back (if you’re old enough) of life in the ’90s.
Your local grocer would know what vegetables you tend to buy; your pharmacist would know about the prescriptions you have taken; and you would probably have a personal relationship with your local bank manager. If you didn’t bring your wallet to a local store, you might have been able to add it to the tab to pay for at a later date.
All was not rosy, however. Customer service was often slow. There was no “all the time” or “as a service” economy. Instead, you would be at the mercy of the closing hours of your local stores. Consumer choice was much narrower. And often, if you didn’t have money in your wallet to pay, so be it.
The Internet has revolutionized – or more exactly digitized – all of this.
Suddenly you could order equipment online. Not only could you purchase goods and services beyond your immediate locality, the whole world was at your doorstep. You can find and connect with like-minded people who have the same niche interests as you. And, when you were ready to make a purchase, you could pay digitally.
But the banks have fallen behind. They have struggled to meet the new demands of online consumers. Their legacy back office technology couldn’t cope and suddenly their internal cultures had to undergo a drastic change – something that often turned out to be nearly impossible. And these factors played a role in the rise of the first wave of fintech.
There were three engines that powered the first wave of fintech, or Fintech 1.0.
The first was the rise of the Internet. Constantly improving speeds and widespread access have given hundreds of millions of consumers sudden access to digital services.
The second was the rise of the smartphone. This material has transformed consumer behavior beyond recognition. Apps and other software products with significant upfront value have made smartphones indispensable – just think of Shopify, Google Maps, and Uber.
The third factor that paved the way for the success of FinTech providers was the 2008 financial crisis. banks.
The new generation of financial service providers were not limited by existing infrastructures and, with smaller teams and flexible IT infrastructures, they were more agile. And it made it easy for them to bypass new regulatory and compliance requirements introduced in the wake of the financial crisis.
Fintech providers have sought to solve problems that banks cannot. Or at least to do what the banks do, only better. Huge levels of investment have been put into the fintech industry as start-ups take banks out of business.
But the first wave of fintech, Fintech 1.0, had its limits. Service providers have tended to disrupt only at the periphery of the bank. Of course, they were in competition with the banks, but they did not change the basic infrastructure of the bank. The incumbents have not fallen. Far from there.
Many large banks have updated their offerings by introducing new digital services. Others have created incubation programs, supporting ambitious fintech start-ups. And this collaboration will be alive and well as we move towards Fintech 2.0.
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The regulations exist for a reason. And recent policy changes specifically targeting fintech groups have not only fostered transparency and collaboration, but also provided an opportunity for new players who adhere to the rules to build consumer confidence and strengthen their legitimacy.
Introduced by the European Banking Authority, the PDS2 legislation aimed to strengthen competition by obliging banks to share the data of customers who authorize it with third parties. And this has led to the rise of open banking, the use of open APIs that allow third-party developers to build applications and services around financial institutions.
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And, as a consequence of open banking, we are now seeing the rise of banking as a service.
Bank as a service
You are probably familiar with the term software as a service. Instead of paying for entire apps or building them in-house, Software as a Service lets you run an app on a pay-as-you-go model. Think of Dropbox, for example. Instead of buying hardware to store your data on, Dropbox lets you do it in the cloud. You only pay for the space you use.
It is a revolutionary model that swept through the service industry. And that’s where the bank is headed. Banking-as-a-Service applies an on-demand plug-and-play model to financial services. And that means we’re going to see lots of other non-financial websites offering relevant financial services to their audience. Some of the most forward-looking companies have expanded their product offering with Banking-as-a-Service.
Take Shopify, for example. Shopify, which provides infrastructure for e-commerce stores, has launched several financial services products. And if they don’t make the company a fintech, they are certainly helping to blur the lines between retailers and the financial services industry. In particular, US merchants on Shopify can offer installment payments to their customers for purchases between $ 50 and $ 1,000, without interest. And added to that, the merchant receives the full amount immediately.
The e-commerce company has recognized that cash flow is an important consideration for its customers and that, in turn, the ability to borrow interest-free for the end users of its customers will encourage further sales. By using integrated loans, Shopify has increased its retention rates while strategically strengthening its distribution network.
As the example above shows, the financial capabilities of bank as a service extend far beyond those associated with traditional financial service products. They can create new revenue streams, reduce cart abandonment rates, and improve customer retention levels.
Open banking has led to the rise of an entire ecosystem of regulated applications that share transaction data to improve the customer experience and offer consumers new financial products. And the big banks should take note. If they do not meet the growing demand for intuitive and personalized financial services, they risk falling behind their more innovative counterparts.