Bridging the Fintech and Legacy Banking Gaps

What is Fintech Industry?

Any organization that uses technology to improve, extend, or automate financial services for businesses or consumers is referred to as a 'fintech company.'

Fintech Impact on Banking Industry

Fintechs (businesses that provide technologies to facilitate or enhance financial and banking services) aren't anything new. In 1999, PayPal released the initial version of its digital wallet and payment system. PayPal had grown to a revenue of about USD 2 billion yearly in less than a decade.

Countless fintechs have joined the financial services industry during the last two decades. Larger firms also entered the industry, creating alternative platforms that endangered the banks' conventional dominance in some areas. These companies began as innovative technology firms and weren't typical financial services providers.

PayPal alone already has a market capitalization of $25 billion, which is still growing, and who knows what the near future holds. Credit and debit cards can now be stored in Apple and Google wallets for a cost, compelling banks to either "get with" their digital services by allowing their cards to be saved in such wallets (for a fee) or risk losing access to vast numbers of clients.

Fintech's arrival, coupled with economic and regulatory reforms, altered the game for financial services companies. For some banking institutions, this meant a loss of revenue as customers seek out other financial services, while for others, it meant a hesitant alliance or agreement with newer competitors. Traditional financial institutions are now faced with developing new business models for the world's oldest industries. Do the traditional FIs have any reason to be concerned? Both yes and no.

How will Fintechs Change the Future of Banking

Banks always have to evolve to meet the needs of their customers. Digitalized banking and transactions, which were once simply a pipe dream, are now so commonplace, particularly in the consumer market, that most people can't envision life devoid of them. Some people can't even remember the last time they used a bank machine, which was a novelty just fifty years past. People now can conduct practically all of their financial activities online.

Naturally, the pandemic hastened the existing trend toward 'touchless' payment systems. In most instances, banks were already well-equipped in their digital platforms on most fronts – their digital consumer experiences were well-entrenched for a greater percentage of customers, and the transition from checks and cash already had taken place. In other words, the world's economies didn't implode because consumers were unable to get their funds due to bank branches closing or providing only a handful of services for long periods. There were probably queues for toilet rolls, but there were no queues for cash.

While this could be true (at least on the surface), it indeed differs from the fundamental payment infrastructures and wholesale and corporate banking, which are now hurrying to keep up with market expectations and legislative adjustments.

How did Fintechs Make their Headway?

This isn't a footrace. Traditional financial institutions (FIs), local regulators, and domestic and cross-border market infrastructures have all acknowledged the need to adapt to ever-changing client needs, speed, traffic, and market trends while maintaining system safety and effectiveness. Even if they make some personal changes or work together, none of the traditional players can risk failing frequently (the public, especially shareholders, are wary of such changes), so they are less likely to risk depositor and shareholder funds.

Traditional financial institutions sometimes complain that fintechs don't have to fulfill similar regulatory and compliance criteria, allowing fintechs to move into certain lines of business. Although this may be true, the reality isn't limited to that.

Traditional financial institutions are, in fact, heavily regulated: In just about all jurisdictions, deposit-taking is restricted to FIs that meet a slew of legal and regulatory standards to ensure that deposits and loans are only provided to legitimate people and businesses. Governments have effectively turned banks into police forces to achieve the system's goals of confidence, safety, and soundness.

This isn't to say that traditional financial institutions can't innovate. A lot can and do, but they do so on a lesser, progressive scale such that any failure has a limited public or shareholder consequence.

Fintechs, on the other extreme, rarely take deposits or lend money; thus, the same regulations don't apply to them. They usually can take more chances, and they rely on a single individual or a small group of innovative entrepreneurs to develop a fresh idea that may or may not succeed. Even if they fail, the number of casualties is usually reduced. Furthermore, the innovative entrepreneurs that head fintechs would often be uneasy in a more traditional setting.

As a result, fintechs play an essential function in the financial services industry, serving as the sole legal research and development wing. Fintechs also benefit from their use of cutting-edge technology; without the constraints of mainframe and legacy architecture, they can innovate swiftly at a relatively short time and cost for traditional banking institutions. Technology thrives at communicating, and a significant portion of banking is a communications industry. Payments and investment transactions rely on effortless digital platforms and straightforward messaging between parties. Fintechs have surpassed traditional financial institutions by processing messages quicker and delivering more client-friendly interfaces.

How Can Banks Improve their Performance?

A traditional FI, and even its big service providers, are thus forced to decide whether a fintech is a possible partner, takeover target, or rival — or whether it can safely be ignored.

When addressing this issue, it is beneficial to think about it from the perspective of fintech companies. Because of the access to customer connections and the amount of business that comes along with them, fintech companies need to work with banks or the service providers that work only with banks. A fintech company's ambition is to 'make it big,' but this can only happen if it can access a considerable client base. Rather than fintechs trying to grow their own client base, banks and their service providers provide a much simpler route to that goal. To achieve the desired objective of enhanced and expanded market access and growth, the banks and the fintechs need one another's skill sets.

Legacy banks require agility and flexibility that their existing platforms and systems do not provide to accommodate and incorporate fintech offerings. Banks have already begun to adopt platforms that leverage newer codebases, deployment models, and APIs and do not rely on conventional mainframes with their batch tasks and files on a global scale, where some improvements are more advanced.

The change is difficult, but banks (and particularly their service suppliers, such as IBM) can make it happen if they do two things properly:

● Creating a financial platform that can handle traditional approaches while also delivering and moving to new ones.
● Letting the service provider act as the bank's eyes, hands, and ears by incorporating fintech features into the platform's ecosystem, lowering the FI's adoption barriers while avoiding the agony of integration.

Success in this field is not only dependent on replacing fintech services. Banks and fintech companies have already been effective in explicitly filling gaps that the traditional financial institution cannot fill on its own in non-platform-shifting ways. However, because of the flexibility to connect more frequently and quickly, a versatile core banking and payments platform and ecosystem will undoubtedly be the more successful path in the days to come.

We are living in interesting times in the financial services industry, as banks and fintech firms continue to look for partners that can help them achieve their strategic objectives. To achieve future mutual success, eliminating the barriers between fintechs and legacy banks requires individuality and cooperation among banks, service providers, and fintech firms.

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