In his 1997 book, The Innovator’s Dilemma, Harvard professor Clayton M. Christensen coined the term ‘disruptive technology’ to signify new ground-breaking technologies and related concepts that refer to the use of these technologies. As the World stands on the brink of a technological revolution that is fundamentally altering the way everyone lives and works, it’s obvious to observe a complete disruption of various industries and their business models. Financial institutions are no exception. Fintech- an amalgamation of two worlds- finance and technology- involves an evolution of the use of technology in financial services. It locks financial services and technology in a firm embrace. And with this fusion comes both disruption and synergies. 

Not so long ago, life was marked with instances of submission to the gloomy corners of bank offices and standing in bank queues for long hours. Well, not anymore. FinTech disruptors have found a way in. Gone are the days when new market entrants found it difficult to break into the financial services industry.  These disruptors are fast-moving companies, often start-ups, focusing on innovative technologies that can be applied to everything from mobile payments to insurance. 

Fintech disruption started during the 2008 financial crisis. Due to the crisis, the trust in traditional banks got damaged and everyone was eager to save and manage their money. This was a blessing in disguise for the digital industry. Finance sector employees who lost their jobs during the crisis weren’t ready to give up on finance. They teamed up with IT professionals and began Fintech start-ups that were solving people’s problems and therefore, new user-centred financial services started booming. The disruption caused by Fintech in the financial sector shook up the working of financial institutions in big ways. Fintech took to the centre stage as it became indispensable to financial processes. This disruption brought better finance management tools, mobile payments along with fast loans, peer-to-peer lending, and even Insurtech (Insurance technology) solutions. Thanks to Fintech, every digital transaction, be it money transfer, online shopping, foreign currency exchange, stock investment was now possible at our fingertips. Fintech disruption provided ways to deal with inefficiencies and higher costs. For institutions, fintech solutions digitized regulatory risk management processes, saving time, money, and resources along with greater accuracy than traditional processes. 

In the past few years, the world has seen a revolutionary shift in the habits of banking users. Never has there been a time of more excitement in banking. According to a study, 91% of users prefer mobile banking over going to a branch. But this also poses potentially greater challenges. As more and more customers are choosing Fintech products, banks are losing customers. The shift of financial services from being a branch-specific activity to one that permeates all digital channels has led to a decline in the importance of having several brick-and-mortar bank offices. In fact, studies show that the arrival of fintech has pushed various banks to reduce the size and number of their branch offices. By the end of 2016, around 9100 bank branches were shut down in EU owing to higher adoption of electronic payments and online banking.

Fintech has disrupted some of the most common and profitable elements of the financial services chain. Because of the digital competition, financial institutions are compelled to divest from non-core operations and leverage intelligent automation. Also, organizations are under constant pressure to reinvent back office processes and replace aging infrastructure. These transformations also require partnerships and collaborations with external organizations along with modernization of outdated technologies and the rethinking of processes and organization structures. Though the timing of these transformations might differ for different organizations, the need for new thinking is non-negotiable. 

Today, fintech encompasses everything from service chatbots and machine learning algorithms to biometrics-enabled authentication for digital transactions. Though this helps traditional banks to upgrade their operations and deliver seamless services for higher customer retention, this also makes it imperative to make strategic investments in innovative technologies. Fintech disruption is changing the game for the financial services industry. The use of these chatbots not only improves customer satisfaction and reduces costs but also frees agents who mainly focus on value addition. This means that in future, only high skilled agents would be needed and the work that is repetitive in nature would be outsourced to fintech. 

Therefore, it is becoming obvious that the accelerating pace of fintech disruption is the most creative force but the most destructive one as well. New financial technology ensures customers the freedom to switch banks more quickly than ever. Though it widens consumers choices, it also makes banks vulnerable. For many years, traditional financial institutions have outlined their model as: “this is what we offer,” rather than “what do customers want?” But this model doesn’t work anymore. As the world digitizes, security breaches continue to increase. Technology advances and cross-border data exchanges have given businesses access to exponentially more data about what users do and want. Cyberattacks are quite damaging to customers who may lose sensitive personal data and is also detrimental to the reputation of the bank, losing customer trust. Due to such complexities in digital financial systems, financial institutions are even more hesitant to embrace new technologies. 

However, customers are demanding more because that’s what they have become accustomed to. As a result, they may believe banks and other financial institutions aren’t flexible enough to meet their needs in the same way a Fintech can. Retail banks are upgrading digital experiences to match fintech in their core banking offerings. The fact is: Fintechs are in the race to become banks and banks are in the race to become Fintechs. In this process, both systems are collapsing. It has left people wondering if it means the end of traditional institutions. A strict no-no is the only answer to this question. The financial institutions remain an adjudicator of trust for consumers and will continue to play an important role even in case of fintech disruption. Though Fintechs are gaining the confidence of consumers, it’s not at the expense of banks, which continue to be a trusted, relationship-driven entity for conducting financial transactions. Moreover, these Fintech companies may not survive without the support of traditional institutions. Therefore, it’s highly unlikely that FinTech start-ups will replace traditional institutions. It is expected that the surge in funding and innovation will continue as Fintech moves from a largely retail focused offering to an institutional model. 

The big question remains- Should Fintechs be made to opt out of this? It is yet too soon to understand how things will unfold. Fintech is still emerging and evolving and it becomes really hard to predict how it will disrupt financial institutions in the long run. As we know, new technologies, providing both opportunities and challenges, will transform financial institutions. Fintech’s research, innovation and technology-oriented belief system is ushering a new era of efficiency, inclusivity, and transparency in the arena of financial services. It is reshaping customer expectations and setting higher standards for user experience and satisfaction. Therefore, we should begin to embrace fintech disruption. 

References:

Financial services technology 2020 and beyond: Embracing disruption

How to take on the challenges of FinTech 

Fintech is disrupting the financial services industry dated 05.03.2018

The FinTech effect and the disruption of financial services dated 13.12.2016

The Future of Banking in an Era of Fintech Disruption dated 20.08.2019

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