The growing importance and influence of fintech

Fintech 3.0 has revolutionised the financial world by taking banking and finance to consumers’ phones. But what does the growth of neobanks mean for the banking sector and new-age banks?

Fintech is not a new concept. Fintech 1.0 saw the emergence of the transatlantic cable in 1866 and the introduction of one of the most used plastics in today’s world, the credit card, in the 1950s. It has been an ever-evolving concept since it saw the rise of the world's first digital stock exchange and ecommerce businesses.

By the beginning of the 21st century, most banks' internal processes were fully automated and digitised. Fintech 3.0 witnessed the creation of many online payment apps like Google Pay, and revolutionised the financial world.

The impact of fintech in our everyday lives is unavoidable. To understand the depth of its impact, one simply needs to look at how things worked in the past versus now.

Just a few years ago, you’d have to go to the bank to look at your bank account and get a statement. In order to send money across, a minimum of three days were required, which made payment processes slow. Now, you can get all the information regarding your bank account at the tip of your fingers.

Online banking has changed how things work in the banking sector. Not only that, but instant money transfers are the way to go.

Payments are done within minutes if not seconds. If you were to focus on India, you’d notice more and more shops in cities and suburbs now accepting online payments. Smartphones have become a huge contributor to the advancement of fintech.

Fintech 3.0 was fueled by the global financial crisis of 2008. It exposed some serious problems and weaknesses in financial regulation and services. Fintech stepped in with a solution and is continuing to rapidly revolutionise the banking systems across the world.

Fintech’s growing impact

One of the biggest advantages of fintech is its availability. It provides technology that can be used from anywhere in the world. It also has proven to be a more effective and cost-efficient way of banking. Not only does it cut down the need for physical banks – reducing cost, but it also reduces the possibility of error since the processes are all automated by various algorithms.

Fintech companies focus on providing unique solutions to fill the gaps of financial need at a more cost-efficient budget than traditional financial institutions.

Many fintechs have also focused on providing financial education, which helps people manage their money and finances better – helping them reduce their debts and teaching them the importance of saving and investing.

One of the biggest innovations in the fintech sector has been that of neobanks – a kind of digital bank that does not have any physical branches but is completely online-based. They do not have bank licenses but count on bank partners to provide banking-related services.

In recent years, more Indias have put their trust in online payment methods than ever before. With one of the world’s fastest-growing economies, India has undoubtedly emerged as one of the fastest-growing fintech hubs in the world. Not to mention, the pandemic and the lockdown has not only allowed technology to flourish but has hugely sustained it.

The entry of neobanks

Traditional banks are finding it harder to fill the gap of consumer expectations – this is where neobanks step in.

They are is not only trying to fill this gap but also doing so at a lower cost. One of the most revolutionising ideas that neobanks have adopted is the use of RPA (Robotic Process Automation) systems. It forms the backbone of every operation conducted within the neobanks.

The use of this system effectively cuts down human labour, which makes it more efficient and less prone to mistakes. It also forms a core system of how neobanks use data to provide the most effective and personal solutions to their clients. Data monetisation allows them to collect and analyse customer data to recognise customer behaviour.

Volume, variety and velocity are the three major properties of data. Volume is the amount of data collected; variety refers to the number of types of data, whereas velocity refers to the data processing speed. These three properties are managed by the AI/ML system of the neobank.

The challenge here is analysing the data in the right manner so that the accumulated data can be used for action and not just for information. Neobanks aim to ensure that the data to action is prioritised over data to information

Data monetisation amplifies the effectiveness in avoiding fraud and gaining a pattern of human behaviour for every consumer by continuing to obtain and collect data as consumers use the services of the bank.

It empowers the system to create a hyper-personalised profile of the customers which, in turn, proves effective in providing very personal solutions.

The AI along with the business process re-engineering drives cost efficiency for neobanks. Since neobanks are completely online, there is a huge cut on customer fees and they aim to charge minimum to zero transaction fees.

When everything is digital, it hugely cuts down the need to stand in long lines and fill out extensive paperwork; not to mention that the use of RPA allows a swifter data collection for neobanks. This new digital age and the use of AI intelligence will enhance data propulsion towards action to provide the best service to all customers on a personal level, with reduced cost for both institutions and customers.

Because of being completely online, neobanks make it very easy to start an account. You can open an account in just a few steps from the comfort of your homes. They aim to provide a user-friendly interface, making it easier for anyone to use. Because they use an AI, they are also available 24X7.

Additionally, they provide an immediate report. Money transfers are easy, quick and are reflected in the account immediately.

They allow customers to get a loan at the click of their fingers and they can revolutionise ecommerce businesses. They focus on providing a seamless experience by simplifying and equipping automated service features such as book-keeping, GST compliance taxation, balance sheet statements, insurance, and loans in just a few clicks.

Navigating challenges

However, one of the biggest challenges neobanks face is gaining trust. With the growth of fintech, there is a rising concern about cybersecurity. The massive growth of fintech companies and marketplaces has led to increased exposure of vulnerabilities in the fintech industry, and has made it a target of cyberattacks.

Furthermore, traditional banks provide a physical branch and employees, creating personal contact, and making the customers feel safer. Although neobanks try their best to provide personalised services to all their customers, they fail to provide a personal touch.

Despite these challenges, neobanks are actively trying to face these problems head-on. In 2020, India had a smartphone penetration rate of 54 percent, which is estimated to rise to 96 percent by 2040. With this ever demanding and evolving new rise of technology, people and businesses are demanding a more seamless experience.

This is where the partnership of traditional banks and neobanks has the potential to work together to fulfil these needs and demands, providing a beneficial outcome for the customers and the banking sector.

Fintech is actively trying to provide a safer interface and build trust over time. While revolutionising the banking sector, neobanks are also actively trying to gain this trust by partnering with traditional banks.

The next few years will be some of the most crucial in the banking sector as neobanks continue to change the way banking operates, inevitably changing the way businesses operate; transforming the financial services provided with every new rise in Fintech.

Edited by Kanishk Singh

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)