What is Fintech Banking?

Fintech and Banking

Fintech is a phrase that is increasingly been used about in media and technology circles, although in fashion lately, it’s not that commonly used among entrepreneurs, investors and venture capitalists. Fintech although working in the background, is radically changing how we live as a society and how we do business professionally.

“Fintech” has become a very catchy word around every corner of the world lately. Anyone working in the fintech sector is considered as working on something totally new and groundbreaking technology that will revolutionise the world.

But what exactly is Fintech and what are Fintech Banks? Let’s dig a little deeper and get a know-how of the Fintech Industry, what it truly means and how it contributes to the economy?

Fintech – the new Swag word

Fintech – this word is essentially a merger of two words Finance and Technology. This actually holds true in reality, where Fintech is a marriage between two sectors – Finance sector and the IT sector. Well, that’s pretty obvious that the point where the Finance and IT merge is how Finance utilizes IT and its services to enhance and digitize its offerings. In crude words, Fintech is the digitization of financial services.

Fintech is applied to the sector of the technology startups that are the most disrupting sectors such as mobile payments, money transfers, loans, fundraising, asset management and more so on digital banks.

What do we need Fintech in Banks?

The banking industry, in their hunt to create newer cash cows for themselves are looking forward to serving customers in a better manner. With the influx of newer banks, increased competition, Banks are finding unique ways to interact with customers and create a niche market. That is where technology steps in. Financial service industry that introduced credit cards in the 1950s, internet banking in the 1990s and since the turn of the millennium, contactless payment technology. Yet, fintech’s place in the public conscience has really taken off in the past three years.

This word took off from startups, making a more prominent role within the ecosystem.

Three core trends have led to the emergence of Fintech space:

  • Technology: Financial services traditionally were an industry that required fixed assets (for example, branches) to scale, acting as a barrier to entry to newcomers. Technological advancements now allow basically anyone to run complex operations virtually. For example, “NeoBanks” operate purely on technological infrastructure. UK-based Revolution has amassed 1.5 million customers (of which 3,50,000 are active daily) without any kind of live customer-facing function or a physical walk-in location.
  • Customers: In the aftermath of the Financial Crisis of 2008 and various other scandals, customers are demanding more services, transparency, and security from their respective banking partners. Technology now empowers consumers to scrutinize their providers more heavily and upstarts are harnessing it to provide cleaner and more effective customer service that too free from the shackles of legacy technology.
  • Regulation: Consider this, Citi Bank group alone employs 30,000 within its compliance division. Aside from complying with regulations, restrictions on lending have both increased the borrowing costs to consumers and diminished banks’ ability to offer it. This has allowed startups who, because they are not de facto banks (and thus under less oversight and regulations), step in and offer compelling alternatives at lower costs.

Ground Zero: What does Fintech Banks really bring to the table?

With all the traditional Banking services, they bring in everything that can be done by the consumer at home, without ever visiting the Bank or leaving your comfort zone. Want to open a Bank Account? Just download the app, type in the required information, take a selfie, and click a picture of your government ID and Voila! You have successfully opened a Bank Account within minutes and without any documentation. Not just this, Fintech has introduced a lot many additional services that are worth mentioning:

Immediate Payment Service (IMPS)

  • Since its launch in November 2010, IMPS has clocked high growth.
  • Remittances through IMPS grew 73.6 % in FY19 and 78.2 % in value terms.

Unified Payments Interface (UPI)

  • UPI was one of the flagship initiatives under the “Digital India” program launched by the Modi government.
  • Similar to the IMPS, UPI is also an immediate money transfer system available round the clock.
  • Since its commercial launch in August 2016, it saw a mammoth rise in volumes, far exceeding it in terms of transactions done on the IMPS platform
  • UPI volume reached a peak of 799.5 million in March 2019, 4.5 times of March 2018’s volume.
  • In FY19, total volume was six times larger than the previous fiscal year, while value saw an eight-fold increase over the previous year.

Cards Acceptance Infrastructure

  • One of the oldest modern payment systems existing for more than a decade.
  • The number of cards used in point-of-sale (PoS) transactions grew 30.1 % in FY19 and in value terms by 30.2 %.
  • FY19 also saw debit cards rising by 19.5 % and 16.3 % in volume and value terms, while credit cards shot up by 25.4 % and 31.4 % respectively
  • During 2018-19, debit card PoS usage grew by 32 % and 29 % for volume and value respectively

Mobile Banking

  • One of the most modern front-end tech spaces that came in limelight.
  • Mobile Banking has witnessed a sharp annual increase in transaction volume of 227.7 % in FY19 as against 91.7 % in FY18
  • Acceleration in value terms to has been remarkable at 99.5 %, substantially higher than 12.5 % witnessed during 2017-18.

Some of the most active areas of fintech innovation on which Banks are working upon are:

  1. Cryptocurrency and digital cash.
  2. Blockchain technology, which is a distributed ledger technology (DLT) that maintains records of transactions on a secured cloud.
  3. Smart contracts, which utilize computer programs (often utilizing the blockchain) to automatically execute contracts between buyers and sellers.
  4. Open banking – it a concept that works on the blockchain and works on the objective that third-parties should have access to bank data to build applications that create a linked network of financial institutions and third-party providers.
  5. Insurtech, which seeks to use technology to simplify and streamline the insurance industry.
  6. Regtech, which aims to help financial service firms meet compliances, especially those covering Anti-Money Laundering and Know Your Customer protocols that fight fraud.
  7. Robo-advisors, such as “Betterment”, utilizes algorithms to automate investment advice to lower its cost and increase accessibility.

Fintech Banks and their Expansion around the world

Not just in India, the below stated instances would tell you why Fintech is the next generation in Innovation for Banks:

  • Bank of China launched its first global fintech innovation lab last year in Singapore to harness the power of AI, blockchain, big data, and cloud technologies. While the People’s Bank of China is pilot-testing a trade finance blockchain platform to assist SMEs getting access to broader financing options to provide seamless and efficient inter-bank transactions, help banks conduct business authenticity audits and reduce costs.
  • In January, the Global Financial Innovation Network (GFIN) was formally launched by an international group of financial regulators and organizations as a global sandbox enabling regulators to share experience and knowledge. It aims to create a new framework for co-operation between regulators on fintech-related issues, provide a platform for joint regulatory monitoring, reporting, and compliance and create an environment to facilitate cross-border fund transfer experiments.
  • The Federal Reserve Bank of New York also launched a Fintech Advisory Group to provide bank leaders with a high-level platform for collaborative efforts, find solutions to emerging issues related to financial technologies, their application and impact and to integrate them with New York Fed’s regulatory and supervisory tools.
  • Bank of England set up a permanent FinTech Hub last year as a nodal authority and to help integrate fintech into the Bank’s functions.
  • The Bank of Canada and the Monetary Authority of Singapore (MAS) conducted an experiment on cross-border and cross-currency payments using central bank digital currencies. The first such trial, it has the potential to increase efficiencies and reduce risks in cross-border payments.

How do you (the consumer) get impacted?

Turns out every innovation help us lead a more comfortable life. From a simple mobile recharge done on Paytm (yes that’s Fintech too!), to doing cross border high amount money transfer by just a few taps from your phone, to getting a student loan by uploading your details from your laptop, every financial service delivered with the help of Computers is Fintech and believe it or not it touches you every day, this is because Fintech becomes the backbone of every other industry, strengthening it, securing it and making life more seamless for the consumer.

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