How the banking system and the financial system should prepare for changes in the fintech world.
Against the backdrop of the new fintech world, financial companies are trying to usher in digital banking. However, we are seeing a new innovative yet different trend that is changing the perception of how traditional banking works.
In a recent study done by Mckinsey, about 80% of executives in leading banks, insurance companies, and financial companies are starting to prepare and anticipate change in the market, especially in AI.
Banks and financial companies around the world are setting up a subsidiary that will deal with integrating technologies and connecting fintech companies to the financial systems in which they operate in.
Open banking has existed so far among the banks, that enable each other to communicate information and is supposed to allow fintech companies, who receive a license from the Securities Authority, to gain access to banks. They in turn let fintech companies access their customer’s data and together they offer the customer advanced services and financial products.
Concerns & Thoughts On Open Banking
The initial premise was that open banking ostensibly threatens banks and financial companies, as it has the potential to increase competition between banks/insurance companies and lending companies themselves and against fintech companies.
Some banks and financial companies have decided to address the threat through a “hug” of fintech, offering a broader platform than required by law in financial systems.
For example, companies in digital banking such as Sofi / Nu Bank, insurance companies like Lemonade / Hippo who do automatic underwriting, and Upstart who give automatic loan offers, have advancement in technology that has enabled them to be at the forefront of fintech. Now banks and financial companies want to also be involved.
Banks and financial companies around the world examined the issue of competition and concluded that in the end, most fintech companies direct their activities to cooperate with the bank / financial companies. We saw this with Tradeshift & HSBC, which enabled HSBC to manage their global supply chains from any device, using one simple digital platform.
Therefore, the potential for direct competition with the companies themselves is limited. In addition, the new platform and technology will allow companies and banks to be exposed to innovative ideas in the field of finance, some of which the bank and financial companies will also be able to adopt.
What Can Banks / Financial Companies Offer?
Banks and financial companies can offer the same technology companies which connect to their systems in different areas:
Automatic customer identification, underwriting, data verification, predicting customer behavior, when the customer will repay the loan, how the business will behave in repaying the loan, risks of the customer, and more.
The companies/banks can offer advanced AI technologies, information security, and the like, which are approved by financial companies and banks under the regulatory laws in each country.
Preparation By Banking Systems
Banks/insurance companies and financial companies around the world set up accelerators. A marketplace of fintech products that are approved by the bank or insurance companies, brokers, etc., and there the services of fintech companies, that are connected to traditional legacy systems, will be offered.
About 65% of banks and credit unions entered into at least one fintech partnership over the past three years, and 35% invested in a fintech startup. The goal of financial companies is to maximize the vast knowledge accumulated over the years and integrate them into advanced systems while maximizing the potential for both parties.
FinTech companies will be able to benefit from regulatory approvals and maximize sales potential from exposure to additional markets. Financial companies will be able to save on the development of advanced systems and also use AI systems for internal use, the use of these systems will march the financial systems to the new digital age.
The Possible Business Model
The trend of banks and financial companies is not to charge a fee for the services but a connection to the fintech companies who will decide whether to offer the service for a fee. The connection will be made directly between the fintech company and the customer, but the customer will know that in terms of regulatory compliance the company will meet and uphold service standards, like information security or data protection laws. In return, the fintech companies will pay a fee or a commission to the bank or financial company or will enable the bank to use the systems of the company free of charge.
Another business model could be in creating a business flow where the bank / financial companies will make use of the capacity of the fintech company. For example, if there is a company that will develop a product that allows underwriting, data validation, or automatic analysis more quickly. This increase in efficiency from the current situation enables banks and financial companies to adopt the same technology and save costly development of expensive AI systems.
In Conclusion
Banks and/or insurance companies and financial companies understand that they must adopt a new approach and cooperate with advanced technology for most of the services they provide and are working to implement it in practice.
Fintech companies need to think about changing their business model and adopting a new approach to collaboration with traditional financial companies. Maximizing knowledge while combining technology will bring about a fundamental change in the coming years.