Fintech Innovations: Disrupting Traditional Banking Models

The revolutionary changes brought by Fintech Software Development in the financial services sector have caused severe turbulence in the operational and service activities of ‘traditional’ banking organizations.

Aside from the strong shift towards digitization, which allows for request processing in real-time, and the customer-centric approach powered by big data analysis, digital bank and neobank business models have eliminated high degrees of operational costs as they are fully online.

The banking business model continued uninterrupted, arguably, for centuries, but now, the Fourth Industrial Revolution, a technological revolution, is fundamentally altering how we live, work, interact with each other, and evidently, how we handle money.

This article discusses the evolution of the current fintech advancements in well-established financial institutions, and how traditional banks are responding to this disruption.

The Rise of Fintech

Financial Technology, or Fintech, has been a revolutionary force in the financial sector, using technology-driven innovations to bring about a paradigm shift from how the industry used to operate.

Using online and mobile banking applications, peer-to-peer lending platforms, digital wallets, and instantly processed financial transactions have made financial services more accessible and convenient for their customers, reducing the need for them to visit physical locations.

The impact was so severe that media reports between 2015 - 2017 were full of predictions about banks becoming extinct. Banks essentially were slothful in reacting to big changes, but soon had to find a good Software Development Company to incorporate fintech of their own to stay relevant.

A 2018 research paper showed that China’s FinTech transactional value that year amounted to approximately 1.6 trillion USD, just ahead of the United States and the United Kingdom coming with financial technology transactions worth approximately 1.26 trillion U.S. dollars and 216 billion USD, respectively.

KPMG revealed a lull in investments in fintech, dropping from $95.4 billion in 2022 to $78.3 billion in the Americas. However, according to the Statista research published in March 2024, the global user base of fintech is forecast to exceed 3.5 billion this year.

It should also be noted that the same KPMG article also mentioned that subsectors of insurtech and AI in fintech saw massive growth in investment despite the overall fall in investment.

To summarize, it seems that despite a change in the technology and subsector favored and predicted to be most profitable, the interest in the innovative and profit-making abilities of fintech has not diminished. We can be sure to look forward to the evolution of how technologies are used in the financial industry and the rapid growth of fintech in the years to come.

How Fintech Disrupted Traditional Banking Models

Customer-Centric Approach

The business model of traditional banks has historically been product-centric, focusing on delivering financial products and services. Fintech turned this approach around by instead prioritizing the needs and preferences of users.

Customer-focused products not only became more desirable from a marketing perspective but were also able to capitalize on market trends and immediate customer needs. Traditional banks have had to adjust their strategies to compete with these innovations by actively leveraging data analytics to understand customer behavior and preferences better.

The resulting personalization of services, product recommendations, and marketing efforts were able to enhance customer satisfaction and loyalty, while also increasing conversion rates.

Digital Transformation

This shift towards digitalization makes modern-day facilities like real-time transactions, remote KYC filing, paperless account opening, and online customer support possible. Applications accessible through online and mobile platforms along with digital transactions that are processed instantly became revolutionary conveniences.

The incumbent legacy institutions now invest heavily in fintech software development to upgrade their digital infrastructure into one that can offer online and mobile banking services that can compete with fintech. The increase in investments in cloud computing, artificial intelligence, and big data analytics is helping them improve their user experience by concentrating on agility and innovation.

Regulatory Compliance

The rise of fintech companies has brought several regulatory challenges to how traditional banks operate. To maintain stability in the financial system, financial compliance rules and regulations have evolved rapidly in response to innovative products and services led by fintech.

Traditional banks are now navigating a complex web of regulatory requirements to comply with anti-money laundering, KYC, and data privacy regulations. They have had to revise policies and incorporate technologies to automate and manage meeting these regulatory requirements.

Risk Management

Partially owing to a startup risk appetite, but also driven by data analytics and modern metrics of rating creditability, fintech ushered in a new era of what was accepted as established risk policies.

The levels of risk established by traditional banks could no longer stay competitive with the new and unique risks that were being taken by fintech which raised concerns about credit risk assessment and fraud detection.

Traditional institutions have had to revise their risk management policies and models to address these challenges, incorporating advanced methodologies of analytics powered by machine learning. This helps better assess creditworthiness as well as power pattern recognition that can detect fraudulent activities in real-time.

Financial Inclusion

Financial inclusion refers to the providing of access to financial services to the population for whom such services were not feasible earlier due to geographic, demographic or regulatory reasons. This had an incredible impact on the financial sector that not only tapped into an untouched market but also brought people the power of banking.

Facilitating access to financial services through smartphones using mobile banking and digital wallets and offering the ability to avail loans through microfinancing facilities with a risk appetite higher than traditional banks were crucial in promoting financial participation in underbanked segments.

Traditional banks recognized the potential of financial inclusion right away and started revising their policies to expand their reach by leveraging technology and increasing their online presence.

Adaptation Techniques Used by Traditional Banks

1. Embrace Technology

Incorporating cloud technology, artificial intelligence, and hardware advancements like contactless technologies are just some low-hanging fruits that can instantly pull a financial institution out of the dark ages and into the race for technological superiority.

Cloud technology can make a host of capabilities available including, but not limited to, the handling of vast amounts of consumer data and increasing the speed of data processing. Traditional banks have always been reluctant to move to the cloud owing to data security and compliance concerns, but it is now a necessity to stay competitive.

2. Enhance digital banking

The digital presence of banking institutions has become much more important than traditional physical branches, offering customers greater personalization and 24x7 access to real-time account information. Digital banking services allow consumers to make transactions and handle other banking activities online or through apps.

Consumer expectations are evolving, and the expectation of more bespoke and hi-tech services is pushing institutions to use the latest technologies that provide real-time analytics, financial advice, and transactions.

Investments in UI and UX to develop easy-to-use apps and dedicating resources to a software development company that explores fintech solutions like blockchain, AI, and other emerging technologies also help keep banks relevant in today's digital age.

3. Buyouts, Partnerships, and Collaborations

Strategic alliances and acquisitions allow banks to tap into cutting-edge technologies used by fintech. Such collaborations can prove mutually beneficial, with fintech gaining scale, and banks gaining access to innovative business models and operations.

In 2016, JPMorgan Chase entered a partnership with OnDeck to leverage its technology for small business lending which uses data analytics and algorithms to assess creditworthiness. The collaboration helped JPMorgan Chase make quicker lending decisions and expand its lending capabilities.

In 2022, Goldman Sachs in a massive $2.2 billion acquisition bought out the BNPL online loan platform Greensky. Although they did sell it again in mid-2023, the purchase helped them make substantial strides in furthering their online presence.

4. Cybersecurity, compliance, and regulation

As mentioned before, fintech have brought with them new and extensive regulatory and cybersecurity requirements which although challenging, are very necessary. To stay proactive to these changes and enhance the efficiency of their compliance framework, banks must make robust investments in technologies that can automate and regulate these needs.

While banks are also actively engaging with regulators to shape policies that support innovation while safeguarding the financial system, the complexities of today's regulations, compliances, and cybersecurity needs are not something that can be handled effectively and sustainably without technologies such as AI and ML.

Conclusion

The rapid transitions in the financial services sector due to disruptive innovations led by fintech have drastically changed the world of financial services. Providing resources and abilities overlooked by legacy banking systems and by diving into untapped segments of customer potential, fintech has changed what we knew to be the banking sector.

Now, traditional banks are using the solid assets in their repertoire, like the bonds with their customers, the years of accumulated wealth, and the yet remaining sentiments of the generations up to Gen Z, to quickly press their use of technology and catch up to opportunities they had missed and face the challenges now stacked against them.

The fintech revolution, however, fuelled by a large emerging segment of a tech-savvy generation of customers with rapidly evolving needs, is sure to ignite more exciting developments in the years to come.