Should Fintech and Traditional Financial Institutions Collaborate and Innovate Together?

Jun 2018 | Team Rubique

Fintech or financial technologies are a new set of innovative technologies which are capable of performing most of the traditional financial operations, mostly delivered online through specially designed gadgets and systems. These technologies in the current context are primarily used to replace conventional banking and the methods of providing financial services. They can change the financial services sector in several ways because of their decentralized and accessible nature.

Moreover, they have been able to reach a much larger clientele in a much shorter period as compared to conventional banking and other financial institutions. They have been able to provide different alternatives and have revolutionized the sector. However, in this changing landscape, how the two forms of the industry (one banking on manpower and traditional expertise and the other on cutting edge technology) would interact is the question.

Should Conventional Financial Institutions Collaborate with Fintech Firms?

We have already seen the novel ways in which the financial technologies have altered the financial institutions. These changes have had specific impacts on the equations of market dominance within the sector. The trend shows mostly a move towards the Fintech and away from the conventional institutions. There are several distinctive reasons for that.

Most of the financial services firms directly involved in the financial sector or deriving services from it are all moving towards Fintech. By implication, the whole of the formal economy is adopting these new technologies. This is due to the clear advantages Fintech has over the traditional institutions. Yet there are several reasons why a complete shift to Fintech hasn’t occurred. The biggest of them is the fact that these technologies lack the kind of credibility the already established institutions have gained, through the backing of the government, public accountability and other similar reasons.

The conventional financial institutions though trying to catch-up are far behind in terms of their ability to adapt to the rate at which independent Fintech is growing. Experts believe core banking solutions and mobile-based banking options are not going to keep them afloat for much longer. However, it is significant to note that the traditional financial institutions are still widely used. And it is their final chance to capitalize on their vast and loyal customer base.

By collaborating with the Fintech firms, they can redesign products which are more democratized and accessible yet do not lack credibility in the eyes of their customers. Such a collaboration would be of a symbiotic nature, and the resulting benefits will be laden with both technological advancements (brought in by Fintech) and years and years of goodwill of traditional financial services institutions. They can put their political clout as well as capital behind Fintech so that the whole industry can change for good. The consequences would be- higher efficiency, stability, security, better customer experience to name a few. Banks would be able to use technologies, like the blockchains, smart contracts, distributed ledgers etc.

Further, to explain the changing dynamics we will be using a few examples of Fintech products and their traditional counterparts to delineate how through collaboration they both might change form.

Micro-lending

In Microlending sector, various new technologies have been made available, which allows for peer-to-peer, direct lending. In this way, it has created significant disruptions in this sphere. As a result of this, many unbanked and underbanked have been brought into the realm of micro-credits. As the conventional finance sector is losing out what it should try instead is to get their expertise and market idea. Most micro-lending companies have dedicated a team of experts, headed by extremely qualified and competent financial experts. Conventional institutions could use these to develop the sector while using the financial technologies.

Blockchain

Cryptocurrencies and blockchains are threatening to change banking back-end operations completely. Blockchain has evolved to be a much more secure and reliable than conventional technologies.

Payments

Fintech is most prominent in the field of payments and transfer gateways, both nationally and internationally. Fintech driven payment platforms make payments frictionless. In fact, they can enable any kind of payment independent of any other financial institution. Here accessibility is increased, both in terms of scale as well as in spatial terms. Businesses and users of any scale can receive digital payments, and these can be used in the remotest of areas where the internet service is available. These are some technologies which traditional companies can adapt to increase the accessibility of their services.

Artificial Intelligence

New technologies, like artificial intelligence and machine learning, are now being widely used in the field of financial consultancy. This has been made possible only because of the fantastic insight of Fintech companies that realized the potential of AI-based services and brought them under the fold of banking. Now, you don’t need to sweat it out in long queues at the bank to get your documents verified for loan approval because banks can now use artificial intelligence to do that. Thanks to AI, you save your time and effort.

Machine Learning

Machine learning is something that is closely associated with AI, but they are different in nature. Machine learning allows companies to improve their process workflows over time. It helps them predict trends using data and watch out for patterns to serve people better. It is, in a way, a type of artificial intelligence that allows Fintech businesses to be more accurate. Almost all the large tech companies in the world are using this to become better at what they do. This technology enables the software to learn from the past and use it to predict the future.

These automated technologies can make much more efficient use of large-scale data. They can update their systems any moment in accordance with the changes in the financial market and are thus, able to gain immense and more accurate knowledge about market behavior. Apart from greater chances of accuracy, these services come at a much lower cost. Therefore, these consultancy platforms are gaining fast acceptance among the investors. However, in the hands of experts, these can be immensely productive leading to excellent results.

Parting Thoughts

The two competing fields in the financial sector which are currently eating into each other’s customer base can collaborate to reap mutual benefits. In this process, the greatest beneficiaries ultimately will be the customers. This is because they will be able to have the ‘best of both worlds’. Different financial institutions perceive the situation differently; some, for example, is out buying innovative Fintech startups while some are looking for collaborations.

Nevertheless, in the complex field of finance such a situation is unprecedented, yet as it seems to us the natural evolution consists of collaborations because both the kind of institutions are durable enough to live through this, so then they might as well live in peace.

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