It is agreed that the emergence of Fintech has a clear fingerprint in reshaping the banking landscape. However, some banks view the development of Fintech as threat to banks’ existence, while others have the belief that these challenges are just the keys that will unlock big opportunities.
This could be contributed to the different types of Fintech companies and the services and products they provide. Some Fintech companies are essential for banks in providing technology-based offerings that enhance the banking services and link customers to banks. While some Fintech companies compete traditional banks by providing advanced and more efficient financial services and products. “FinTech firms are now penetrating nearly every financial services segment, driving both innovation and disruption”. This includes BankTech: which is related to using technology in retail banking such as digital payment, online lending and others.
Romanova, I. and Kudinska, M. mentioned in their research that the development of Fintech companies has growing effect on banking sector due to the fact that many banking products are information-based and that the technology-driven providers are increasingly providing easy web and data based financial services and products which with the help of the IT can be individualized especially in the field of less knowledge-intensive products and services such as payments, current account, simple saving. The threat on traditional banks comes from the ability of the Fintech companies to influence the perception of the customers of what banks can do through concentrating on delighting customers and thus gained reputation on “customer-centricity”.
The major challenges associated with the emergence of the Fintech can be outlined as follows:
• Losing market share to the new Fintech companies: This is due to the high speed, personalized and attractive services and products. Also the introduction of new business models such as P2P Lending (peer-to-peer), and substitute payment channels such as mobile wallet, Paypal, Google Wallet, M-Pessa and others that are easier for customers and at lower cost.
• More pressure on traditional banks’ margin: Fintech companies enjoy a better margin especially with the few regulations and the lower overhead costs due to the use of technologies and online services that facilitate the connection with customers without the need to physical branches. They also have no legacy infrastructure and thus are more able to give better deals to customers and keep good margin. Furthermore, “Fintechs often offer their services for free or with long promotional periods. They also proactively display any fee they would charge upfront.”
• Higher competition, and higher pressure to transformation: Fintech firms have the advantage from the big data and various analytical tools to predict customers’ needs and tailor their services and products based on customer’s profile and preferences. Their advanced data analytics allow also them to do better than traditional banks in risk assessment. With the innovative distribution, high quality/speed services and operational efficiency, these companies are putting pressure on traditional banks to use the technology-based solutions. In fact, this would expose the traditional banks to additional risks, which are:
o Operational risks: One possible operational risk is related to the IT risks that could be escalated to systematic risks when new player don’t have sufficient experience to manage those IT risks. The other possible risk is the “idiosyncratic dimension”, that is when the bank rely more on third party either by outsourcing or partnering with Fintech firms. This makes it difficult for banks to manage and control the complex operation and thus increases the related risks of data security, privacy and customer protection.
o Outsourcing risks: Where, more ambiguity about responsibilities and thus increasing possibility of incidents, require banks to do ongoing control assurance and monitor outsourced parties’ operations.
o Cyber risks: The increasing interconnectivity between parties; through APIs or cloud computing could expose customers and sensitive data to cyber risk and breaches.
o Conduct risks and compliance requirements: This is due to the complexity of operations. Where higher level of automation reduces ability to determine responsibilities and thus bank could stand at the end accountable for Fintech’s actions.
o Liquidity risks: The opportunity customers have to switch between different accounts and mutual funds may result in high volatility in deposits and thus expose banks to unstable funding source.
All the above risks and challenges were behind the perception of the Fintech being threat to some banks. However, as mentioned before, the other point of view of the Fintech as opportunity has been addressed in several reports and articles. For example, the BNY Mellon report (Innovation of Payment: The Future of Fintechin, 2015) concluded that: “Fintech-fuelled change offers unprecedented opportunities for banks”. Thus it is now critical to explain why reasons behind this perception:
• Access to under-served groups: The use of technology such as web-based and other forms of digital financial services (such as online payment, cross-border transfer) has overcame the geographical borders and enable business to reach out more people with higher speed and more efficiency in remote locations.
• Enhance focus on customers’ experience: Banks can benefit from the use of the technology-based financial solutions to better serve their customers with greater accuracy and efficiency such as the use of robo-advisors and the Robotic Process Automation and Chatbots. Beside the use of intuitive user interface that is simple, rich and easy to understand, customers could enjoy the virtual reality using different innovative interactions.
• Tailored products and services: Banks have a long-term and accumulated experience in providing financial services and products. This is a comparative advantage to banks; which Fintech start-ups don’t have. Thus, banks have the opportunity to better understand customer wants and tailor their services/products with the help of the data-Focused technologies such as the Analytics, Artificial Intelligence and Aachine Learning.
• Exploring innovation: Banks can benefit from the rise of Fintech in exploring new technology that enable them in cutting transaction costs and provide on time services with higher quality such as the Blockchain, Open APIs and Cloud-based sarvices. For example, Fintech can serve banks as service providers as banks can’t build their own platform.
• Cutting costs: The use of machine learning and intelligent back-office process reduces the need for some branches and the number of employees that are needed to contact with customer, in addition to lower transaction costs such as the cross-border transfers which is fast and cheaper than traditional banking account transfers.