Filling the Gap: Fintech in Traditional Banking

May 2018 | Team Rubique

You must have read about it many times already. Fintech is here to disrupt traditional banking. There’s no denial about this fact. But today, I am here to discuss how Fintech is currently filling the gaps in traditional banking.

The world over, most banks are collaborating with fintech companies to unlock endless possibilities for their customers. There’s isn’t any war between banks and Fintech companies as pointed out by a section of media, at least now. Both are working together in harmony to improve the financial sector. The Fintech sector is working at lightning speed and coming up with new technologies every other day due to their nimble and agile structures. Banks being financial goliaths are also changing but at a much slower pace. But yeah, the elephant has started to dance, not just for the sake of survival but also to stay ahead.

Let’s take a close look at the major gaps in the traditional banking space.

Credit Scores

Let’s start with credit scoring mechanism. Both banks and fintech companies have robust credit scoring mechanisms. Banks, being traditional have a more conservation credit scoring mechanism relying largely on factors like CIBIL score, income, FOIR, repayment ability etc. This means a large number of SMEs and individuals with no credit history can’t avail bank loans. On the other hand, many Fintech companies are able to serve the unbanked population due to their comparatively simpler credit appraisal norms. Of late, many banks have started relying on Fintech companies for credit appraisal ratings.

Payments

One area which has garnered the highest interest world over is payments. While banks were smart enough to quickly adopt online banking they weren’t quick enough in alternate payments space. This is where alternative payment channels like mobile wallets, mobile PoS, cryptocurrency and other Fintech technologies made a dent. Luckily, banks adopted these technologies too by partnering with such payment providers and are able to offer much more payment choices to their customers.

SME Lending

Since the 2007 global financial crisis, banks have become averse to certain industry sectors and particularly small and medium enterprises. SME lending has mostly been ignored by banks, so much that SMEs are wary of banks. Most SMEs rely on non-banking finance channels to meet their working capital and growth capital requirements. Many Fintech companies operating in the SME lending space have closed this gap. Up to 25 percent of banks’ revenues and 35 percent of profits will be at risk from fintech companies by 2025 under SME lending, according to a McKinsey report. Banks are also taking a relook at their SME funding strategies. For sure, the future for SMEs looking for capital looks better.

Chatbots

Another important addition to the banking world off late has been the widespread use of chatbots for digital assistance. Chatbots developed by fintech startups are being deployed by banks worldwide for real-time assistance for customers. While, its early days for artificial intelligence based chatbots but customers seem to like them, even the current chatbot avatars.

Wealth Management

Wealth management and investments were always ruled by banks and wealth management firms who would provide personalized investment advice to their patrons. Of all, fintech companies armed with super smart algorithms have automated portfolio allocation and wealth management. What’s more, these fintech companies have eliminated the human bias which always was a tough cookie.

Gone are the days when you would be required to carry hard cash for making purchases. A few decades back card companies eliminated the need for cash by introducing card-based payments. This decade will probably end with the death of plastic cards and the rise of the mobile payment apps. Businesses will be able to collect payments faster and customers can pay easier, thanks to the payment apps.

It’s easy to forget the innovations fintech brought into traditional banking, as these technologies have merged and become synonymous with banking. But a new wave of Fintech technologies is coming in to change that. These Fintech companies will not just support the banks but also acquire customers for their services and grow rapidly, much to the discomfort of the banks. But yes, the winds of change have started blowing and for now banks are playing a defensive game, just trying to defend their turf and Fintech is slowly expanding its footprints.

The Near Future

Both Fintech and traditional banking is here to co-exist. The primary reason is regulation and secondly, customers are averse to rapid changes. The banks have time to change but not for long. The future definitely belongs to tech-savvy banks and agile Fintech companies who can continuously delight the customers.