Are Fintech companies a threat to banks?
Banks have always been of economic importance, contributing to the growth of the nation. They standardize the financial system of the country, for both the urban and rural areas alike, ensuring even growth throughout all the geographies with a unified financial system. They have been the backbone of the country making way for industrialization and agricultural development.
Banks are making huge investments to keep up with the current technological advancements and offer improved customer service. In the recent past, banks have been affected by the Financial Technology Companies, also known as Fintech companies or Fintechs, for the user-friendly features and functionalities they offer, which was otherwise not available with the banks. This growing competition with the Fintechs and to stay ahead of the curve, led banks to rethink their strategy to improve their working model and offer complete customer satisfaction.
Traditional banking focuses on saving, deposit, transfer, and other related services; these form the core of the banking system. The introduction of Fintechs bought a fresh wave of technological advancement to financial systems offering a simple and easy way to handle all banking transactions with just a few clicks. Further, they introduced dynamic payment systems and improved transparency of transactions, which eventually made them attract enormous crowd. This created a sense of insecurity among the banking sector to reconsider the traditional banking model and incorporate new technological advancements to suit the requirements of the modern millennial and Gen-Z generation.
Some of the popular Fintech companies are Google Pay, PayPal, Chime, SoFi, Paytm, Razorpay, and PhonePe among others.
The threats posed by the Fintechs on banks are:
- In recent times, banks are facing continual threat from Fintechs, this is a real-world scenario, and the trend will continue for a few more years. One of the major impacts Fintechs have on banks is dissociating the services. Fintechs offer an easy and interactive way to conduct a wide range of banking services like money transfer, paying EMI, loan originating system, savings, etc. Fintechs are offering innovative solutions to initiate new services, easy usability, link with the third-party source to complete a transaction on a shopping site, and so on. This had led to creating immense pressure on banks to reconsider ‘strategies’ for collaborating with Fintechs to offer similar services. To implement the collaboration, banks have to look deeper into the system to ensure complete data security and enhanced customer experience.
- The banking landscape generally lacks the hold on giving customers feasible alternatives for lucrative services like investment advice, credit guidance, and foreign exchange. With these services being provided by Fintechs, customers are turning towards them to use these services and avoid taking on bad credit or falling into overdraft. Lacking such lucrative services is another reason for the increasing threat of Fintechs on banks.
- The collaboration of banks with Fintechs has increased the ‘outsourcing risk.’ Now, with the Fintechs involved in the banking operations and having control over the customer data, is posing a threat to the operational risks in the banks. Banks are strengthening their monitor operations and risk management to ensure the outsourcing activities are safe.
- ‘Cloud Computing’ has revolutionized the financial operations by creating agility and reducing operational risks. Banks are developing dependency on the third-party for ‘Cloud Sourcing.’ Since banks withhold sensitive customer data, the risks on privacy, data security, and money laundering are on the rise. Such scenarios are increasing risks for banks on the issues of customer data protection.
- The current trend has witnessed the heavy dependency of banks on the third-party tech companies to adopt new technologies like API and increasing presence on the digital space. With such a move, the instances of cyber threats and data breach is on rise. To stop the banking system to be vulnerable to potential breaches, data management and other associated risk should be incorporated. Such security risks are on the rise with the increase of Fintech collaboration with banks.
- To keep up with the trend, banks are launching new products and services to improve the customer experience. The complexity to manage and control the new products are posing threats of operational risks. Banks should consider new platforms and strategies to eliminate these risks and ensure that the new products/services are operating smoothly without any risk of performance or security.
With the increasing use of open-source platforms for API, Cloud, etc., by the banks, it is important to implement a strong QA process to ensure that the end-product/service is performing flawlessly. Any discrepancies in the end-result will lead to unhappy customers, eventually affecting the brand value. There are a number of QA service providers available in the market who’ll ensure to offer a powerful testing service for banking and financial systems.
The popular QA tools include Tricentis, Katalon, Tenjin, Eggplant, and LambdaTest to name a few. Among these, Tenjin forms an exclusive banking/financial software testing platform and preferred by many companies in the BFSI industry. Recently Tenjin was rated a top ‘test management software’ on FinancesOnline.com. You can choose the right testing tool based on your requirement.
How can banks overcome the threat posed by the Fintechs?
The banks and Fintechs partnership are on the rise, with banks collaborating with the Fintechs for implementation of advanced services like mobile banking, ATMs, online banking, etc. The threat from the Fintechs will prevail until banks reduce the growing dependency on the Fintechs and start creating similar technologies within their organization. This may be quite challenging for the banks who have always operated in a conventional way, but this can pave new path for banks to evolve, reducing the dependency on Fintechs, and lead the market without the threat of fellow tech companies.
To sustain in the age of Fintech revolution, banks much rethink their strategies and adapt advanced operational strategy. It should, further, invest in risk management operations to tackle the challenges associated with adopting to new technologies.
When looked at a broader spectrum, the rising focus on Fintech companies is an opportunity for the banks to improve their operational system. The otherwise traditional banks with conventional operating systems have seen a huge advancement in the last few years. Such advancements would have been impossible without the increasing competition from the Fintechs. The threat of losing the customers to Fintech revolution has led the banks to strengthen their technological aspects, and allowed them to grow to newer heights than anyone have ever imagined. Hence, the Fintech companies should be considered as an opportunity rather than a threat.
