How Fintech Affects Banks

April 26, 2021
Jacques Potts

Financial and technical startups have exploded into the banking sector, led by IT giants, mobile operators, and others.

The development of new financial technologies is presented in two vectors of direction: as independent projects, thus they constitute a competing link for traditional banks; and as catalysts for the development of bank innovations. Thereby, new financial technologies are being introduced into the modern banking systems.

Now, lots of banks have rushed to develop payment platforms or built-in messengers, which can take years for customers to adopt.

Banks are attempting to be creative by investing a small amount of capital in a variety of businesses, with an emphasis on financial IT.

Bank executives spend a lot of time on new products for young people and neglect the development of key banking systems.

The size of the fintech business is not yet comparable to that of banking, but fintech developers have experienced rapid growth by supplying consumers with more favorable conditions, resulting in increased customer loyalty.

Technology platforms (Amazon, Apple, Facebook, Google, and others) create an even greater danger, as they are either already encroaching on bank territory or considering doing so, especially in countries where the requirements for granting banking licenses are relatively liberal.

So a technology company can more easily become a bank than a bank can become a technology company. There is a risk that new market players will dictate retail bank strategies, robbing banks of their leadership position in the financial system.

In such circumstances, there are four possible scenarios for the banking sector:

  1. Limited destabilization. This is a fairly benign scenario: disruptive entrants can only take major positions in a few items, such as credit cards, shares, and bank deposits.
  2. The development of a new system. Banks will lose some income in some markets, such as consumer loans, as a result of the coup. Clients may determine which framework is most convenient to work with as bank collaborations with fintech startups become the standard.
  3. Elimination of intermediaries. Significant improvements are taking place in customer-facing operations, which means that banking distribution networks are coming to an end. Leading tech companies such as Apple and Google are beginning to play an increasingly important role in customer relationships.
  4. Replacement of the whole system. Consumer contact will be shifted to big technology companies, which will also begin to handle the majority of banking operations in many countries, eventually transforming into banks. In addition, traditional banking technologies and networks will no longer be used.

In certain niches, China has already eliminated intermediaries and replaced them completely. Many segments of the conventional banking industry in Europe are now open to competition, thanks to European regulators. Regulators in the United States, Canada, and Australia, on the other hand, require a banking license for most operations and are wary about issuing licenses.

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