Technology advances fast and steadily. It is dramatically changing the way we study, work, interact, research, shop, and even our relationship with money. In recent years, traditional banks have already incorporated digital tools provided by fintech companies, and customers, and financial institutions themselves, are managing money in different ways.
Fintech’s attractive solutions are disrupting banking as we know it. Traditional ways of paying, transferring, investing, lending, borrowing, etc. are already changing and becoming easier, cheaper, and more comfortable. It sounds attractive but still, there are big challenges ahead.
What is fintech?
Fintech is the abbreviation of financial technology. It refers to a new industry that is using the Internet and advanced technology to enhance financial activities. It is a direct competitor to the traditional methods for offering financial services.
A lot of companies are already offering fintech solutions and a wide variety of services.
What kind of tech does fintech use?
Fintech uses the Internet and the most advanced technology available, from robotic process automation (RPA), big data, and artificial intelligence (AI), to the blockchain.
- Robotic process automation helps to automate specific constant activities. Processing information about clients, accounts, receivable and payable, etc. can take a lot of time, it doesn’t really have an end, and it’s highly repetitive. Through this kind of AI tech, processing can be automated.
- Big data is useful for many different activities: Creation of marketing strategies, fraud detection, analysis of customers’ habits (for spending, complying payments…), predictions of clients’ investments, or market modifications.
- Artificial Intelligence’s algorithms supply important information related to clients’ habits. There is a common application for sure you have already seen; the chatbots. They are an AI tool used by financial institutions for customer service.
- Blockchain is an innovative technology that supplies architectures and systems for executing transactions without the need for a third party involved.
Some of these technologies are already used by traditional banks as well.
Fintech business models
To get a wider picture, let’s look at some of the fintech’s business models that are already popular.
- Gateways for payments. Digital platforms are used by e-shops for customers to pay for products or services. To execute transactions, through the traditional banks’ service, is expensive for most online sellers. Fintech companies concentrate different payment methods (credit and debit cards, cryptocurrency, digital wallets, etc.) in applications easy to afford and install on their websites.
- Digital-only bank. This is the model banks could operate in the future. No more offices, employees, desks, etc. Instead, clients have online access to a completely digital infrastructure to do all the processes they need.
- Digital wallets. This a mix of payment gateway and digital bank. Users put some virtual money on an account (wallet application), for paying online and offline to get products or services. The only requirement is sellers or shops accept this as a payment method.
- Credit scoring. Some people – even having a stable income – are not qualified for credits based on the traditional criteria still in use. Fintech credit companies are trying a different rating analyzing the social behavior of potential clients, through AI and self-learning algorithms. Like this, they can make safer decisions about giving credits only to positive profiles to avoid money risks.
- Peer-to-peer lending. Fintech companies develop platforms to match lenders with borrowers. Investors seem to be getting more returns using this model than the debt markets where they can only lend money to examined and pre-approved clients.
- Digital insurance. There are criteria in traditional companies that leave people without a chance of getting insurance. Blanket policies are applied equally across all applicants and that doesn’t satisfy individuals’ requirements. Fintech companies are working with computing, AI, self-learning algorithms, to personalize insurance offers and prices for clients based on their specific lifestyle, medical profile, and social signs.
Fintech’s security risks
The diversity of fintech’s business model is already big. They cover many of the services traditional banks offer and from that angle, it seems everything is ready for banks to go to the next step with fintech as their new infrastructure, but still, there is a massive concern: security. And this factor splits into several risks to consider.
- Money Laundering. The use of new types of not yet regulated currencies is common in fintech banks. As some institutions that process transactions through fintech operate with pseudonyms, the beneficiaries can’t be identified. This has opened the door for money laundering.
- Online attacks. Money is the most attractive bait to lure cybercriminals. Every institution or system that transfers money is a potential target for hackers. From malware to DDoS attacks, all kinds of weapons can be used for attacking them. As an example, the popular SWIFT bank’s system, to make electronic or card payments among different banks’ clients, has been already a target.
- Security on applications. Many financial institutions, banks included, have applications for constantly accessing customers’ financial information. Like all software, these applications can be hacked by cybercriminals. Stealing of money and data are a real possibility.
- Mobile-based financial services. This digital alternative has become widely promoted by banks. Fintech infrastructure supporting this can be hacked. Codes and passwords required for clients to access their own accounts are easy enough for criminals to crack. A little vulnerability on the system could be enough for them to badly exploit it.
- Cloud systems. Cloud-based is key for fintech. All companies – but especially financial ones – require a maximum level of security. If the cloud provider has vulnerabilities, the risk for clients’ data and funds is big and scary.
Financial institutions and banks are totally aware of technology risks. They have the most robust security defenses to protect their clients. But still doing so, the world has witnessed many successful criminal attacks on big ventures. Institutions incorporate more modern and ambitious tech solutions, but criminals know them, and they are permanently looking for holes, vulnerabilities to abuse and take advantage.
What are the main challenges for fintech?
Fintech is a modern and disrupting industry. And banks are one of the most conservative and traditional institutions. For fintech to be the future of banking there are important challenges to face.
- Improving security to missile-proof level. Yes, customers’ data, identities, and money are not a minor thing, and they are at risk with every login or transaction. Security bullet-proof is not enough. Hackers won’t quit, but clear and legal guarantees and better security must be offered to clients. If crimes like stealing sensitive data, frauds derived from the malicious use of such data, stealing of money, etc. keep affecting customers, it will be hard to make them jump on-board a digital-only bank. Especially the older generations.
- Getting customers’ trust. Disruptive technology is not easy to digest. Especially when your pension, savings, and money in general, is at risk. Security in the terms we described is totally necessary for customers to trust. To accept technology requires to be trained on it and to clearly understand it; How does it work? What risks do I face? How can I protect myself to avoid risks? What kind of guarantees do I have? Customers rely a lot on the face-to-face interaction at banks; making them accept the transition to banks where everything is managed through computers, smartphones, applications, robots, chatbots, codes, passwords, clicks etc won’t be easy without offering proper guarantees of protection, legal regulation. Not only financial institutions but also governments must be involved.
- Customers’ experience. A transparent, comfortable, and friendly online experience must be offered to customers. Clear guidance must be included to execute the different bank processes customers need. Technology is astonishing. No doubt almost everything can be done through it. But there is a human factor involved that should not be forgotten. Not all customers manage digital tools with the same proficiency level. There should be ways to make them feel protected, supported. It can be really frustrating to try to solve a problem with a bot that just repeats pre-programmed answers.
Traditional banks’ pros
Most traditional banks have a well-known name, reputation, and a solid client portfolio. Their strong presence with high street branches and offices provides customers certainty, a tangible relationship. They can afford the addition of new technology solutions for their customers’ comfort.
Traditional banks’ cons
Lack of honesty really harms banks’ trustworthiness. Different factors have affected their relationships with customers. Money laundry scandals, frauds, dishonest practices and employees, abusive commissions, etc.
Some processes take a long time for customers. Research, approvals for credits, loans, etc. can require several visits to a branch, waiting in lines, paperwork, and more.
Lack of flexibility. Some processes, even basic ones like personal data confirmation, still require physical presence. Many customers have physical disabilities, overseas addresses, etc. that don’t make such visits easy – the current pandemic has clearly shown this disadvantage. Many clients were pushed to visit a branch to solve problems, for their account not to be blocked, etc.
Fintech banks’ pros
The fintech industry is quite new. It has the chance of building a good reputation from zero, to establish honest relations with customers. Trust is not gained in a few days and honest actions are a necessary base.
Processes are faster. Most of them can be solved or processed in 24 hours and everything can be done from your preferred device, no matter your location.
Tailored solutions for customers. The use of self-learning algorithms allows a more complete knowledge about customers. Therefore, more personalized proposals and costs can be offered to them.
Fewer costs for business owners. Fintech can mean no more expenses on offices’ rents, employees’ salaries, maintaining hundreds of different branches, etc.
Fintech banks’ cons
The fintech industry involves different providers specialized in different processes. It’s not comfortable as a customer to have different providers for almost everything you need to do – loans, transfers, investments, etc – sharing sensitive data and having multiple log ins with several companies rather than one point of contact can be frustrating. Banks could be the ones concentrating everything in just one place.
Honestly, fintech is already part of the present for banking, and for sure it could be its future, but the definitive jump into fintech (or digital-only) for traditional banks has some serious considerations to think about.
A transition like this one won’t be easy but it has big chances to happen; just think how skeptical customers were about online shopping, and after a few years, e-commerce is getting in everybody’s lives, becoming an unstoppable industry.
What about you? As a customer or business owner, are you ready for digital-only banks?