The technological revolution has completely transformed the banking industry. As a result of advancements in metallurgy, coins were produced. Paper money became then feasible thanks to the printing press. Then ATMs changed how we used to access our money, eventually leading to the current Internet banking options.
The financial services sector has begun to change and be disrupted in recent years by fintech, or new digital financial technologies. Fintech and blockchain have transformed banking by providing solutions that raise client value. Among the major innovations they bring to the financial sector are peer-to-peer lending, cryptocurrencies, blockchain, digital wealth advisory and trading platforms, and mobile payment systems. These changes upended the financial services industry by intensifying competition and blurring the borders separating various businesses.
FinTechs v/s Traditional banks
Traditional banks have not been able to target consumer pain areas for very long, but fintech startups have done so with spectacular success. Consumers now expect digital disruption, from phone applications to cashless companies and beyond. Early FinTechs steadfastly developed unique products to supplement already-existing financial services, but today’s distinction between banks and FinTechs is becoming less clear. Fintechs include
1. A standalone start-up that develops tech-driven products to address certain market issues.
2. A business venture that develops into a real bank.
3. A traditional bank updating its services by acquiring smaller FinTechs to implement cutting-edge technologies.
How is Fintech Changing Financial Services?
Here are some of the main ways FinTechs are altering the financial sector, from discovering methods to deliver banking services more quickly to reducing costs through automated processes:
1. Additional service values:
The majority of banking industry innovations have focused on improving service value. FinTech developments have benefited certain users. Payment Gateways, for instance, have benefited internet retailers. The value chain for open banking services was made simple by digital banking. Wealthy consumers received advising services from robo-advisers.
2. A customer-focused strategy:
By offering superior insights using technologies like Big Data and Artificial Intelligence, FinTechs have permitted an enhanced customer-centered approach. FinTech often focuses on a particular financial procedure and aids in developing client trust. For instance – With its marketing approach, the payment and service provider Klarna upended the financial industry. They established the “Consumer Council” program so that customers could discuss their experiences using their goods and request changes to the items. In a similar vein, another company, Stripe, launched Stripe Sessions to hear about consumers’ interactions with the payment system.
3. Added branding:
FinTech companies are also implementing novel and creative branding strategies. Gamification, for instance, incorporates features of games into non-game contexts. It increases client retention rates and ensures consumers have joy in using a product.
10 Innovative Fintech Business Concepts
With increased access to information, tools, guidance, and individualized financing alternatives, clients are now more equipped than ever to plan their own financial futures. Let’s examine 10 cutting-edge FinTech in banking company concepts that are paving the way for disruption.
1. Differential credit rating:
Due to numerous credit score standards, many self-employed customers with a reliable source of income occasionally do not pass typical bank loan screenings. FinTech firms that provide credit rating services, like Nova Credit, have implemented novel strategies by considering alternative data points including social signals and percentile scores among similar borrowers. Better loan judgements have been made as a result of these new elements in conjunction with clever and self-learning algorithms.
2. Alternative underwriting for insurance:
In the modern world, the cost of life insurance will be the same for two clients who have the same height and weight and are both non-smokers. However, whereas one individual may exercise every day, another person may not be interested in doing so. Averaging out calculations—also known as normalizing in actuarial parlance—form the foundation of the majority of these premium estimates. These premiums don’t take into consideration measurable elements. However, FinTech firms like Carpe Data are developing variable premium computing systems using different data sources including social signals, way of life, and medical history. These InsureTech firms may decide whether to sell insurance and offer various terms and conditions when combined with intelligent and self-learning algorithms.
3. Transaction execution
Data is the primary component of any transaction, and improved data management may provide a wealth of information about client preferences. In order to gather customer data and then cross-pollinate it with the data of the other group members, FinTech start-ups in the transaction delivery space have developed free products like expense management apps. This allows them to determine whether a customer has the potential to pay premiums, make real estate investments, buy mutual funds, etc. These FinTech and blockchain businesses operate on a commission basis. For instance, a commission from reselling financial items from a third party.
4. Peer-to-peer lending:
Peer-to-peer (P2P) lending is the practice of one person borrowing money from another. Peer-to-business (P2B) lending is similar in that it refers to a company borrowing money from a single or group of people. LendBoX and other fintech businesses build platforms to connect borrowers and lenders, and they often deduct a charge from the borrower’s repayment.
5. Loans for modest purchases
Due to the poor margins and significant expenses associated with servicing lower-price loans, traditional banks typically don’t willing to take the risk. Buy now and pay later (BNPL) and one-click buy buttons are being offered by FinTech businesses like Affirm on e-commerce websites to allow users to make rapid purchases without having to fill out an authentication form or submit their credit card information. These loans come with the option to pay in installments and are underwritten at 0% interest. On the other side, the Fintechs make money by giving the retailers access to consumer data. Additionally, the combination of this client data and algorithms enables the creation of highly tailored marketing offers.
6. Payment gateways:
Platforms called payment gateways allow customers to pay for goods and services on a retailer’s website. There are many other payment options available today, including credit cards, prepaid cards, cryptocurrencies, and digital wallets. The following payment methods are typically handled by banks at significant cost, but FinTech businesses are incorporating these payment methods into appropriate apps that internet retailers can easily afford and incorporate on their websites. As illustrations, consider Paytm, Cashpay, Razorpay, etc.
7. Electronic wallets:
A payment gateway and a basic bank account combine to form a digital wallet. Users may pre-load their wallets with a set amount of virtual currency, and then use that currency to conduct online or offline business with companies who accept digital wallets as a form of payment. The ease of making payments for a little cost, known as a merchant discount rate (MDR), is provided to customers using the digital wallet business model. For instance, consider Google Wallet.
8. Asset administration:
Investors may trade for free with fintech businesses like UpstoX in return for their personal data. The information is eventually sent to high-frequency traders, who use it to promote to clients their tailored goods. Investors occasionally may pay a little higher price for their asset, but the difference between what they save on trading costs and the marginal price rise is still beneficial.
9. Online banking
There are several challenger banks, like N26 and Jupiter, which provide straightforward personal and commercial bank accounts via a full digital infrastructure. With the exception of the enormous cost reductions in labor and real estate, the business strategy used here is the same as that of a conventional brick-and-mortar branch. However, buyers stand to gain a lot from lower prices.
10. Digital insurance:
Companies in the insurance sector that use fintech are also bringing traditional services online. When opposed to traditional insurance providers, fintech businesses provide life and health insurance with variable premium rates that vary depending on the consumer. These insurance policies are opening up new revenue opportunities that insurance firms have only just begun to investigate, along with customized marketing. Consider the website PolicyBazaar.com.
FinTechs have significantly changed the Indian banking sector in four ways.
1. Technologies for self-service:
Customers now have access to procedural portals that were previously only physically accessible by branch workers thanks to self-service goods. The offerings include creating an account, applying for loans and insurance, and sending money online. Customers learn how to make smarter financial decisions and receive a clear knowledge of their financial credibility.
2. Features for instant payments:
Up to the past ten years, the Indian people remained heavily reliant on cash payments. Many consumers began switching to digital payments with the introduction of POS terminals in 2016, which was followed by the quick development of internet services and demonetization. Nowadays, utilizing digital applications, sending or receiving money from a mobile phone simply takes a few seconds.
3. Customer care voice bots that are automated:
AI chatbots developed by banks are employed primarily for client relationship management. These devices help and support consumers by using speech recognition technology and natural language processing skills.
4. Neobanking:
These banks only exist online and have no physical locations. They provide a wide range of online-accessible financial services, including loans, MF, FD, savings accounts, etc. During the epidemic, this approach grew in popularity as more individuals adopted practical digital methods.
Future of Fintech and Banking
The FinTech business is still small in relation to the banking sector, despite entering banking operations and seeing exponential development over the past several years. As an illustration, worldwide FinTech activity in 2021 exceeded $210 billion, whereas global financial services totaled $23,319.52 billion in that same year. Similar to this, FinTech had a limited impact on the loan industry. For instance, although banks earned £316 billion in loan activity in the UK in 2021, peer-to-peer lenders generated £4 billion. There were comparable development tendencies in other nations as well.
However, due to consumer desire for unparalleled ease, advancements in automated financing and friction-less payment systems are predicted to steal the show in the retail sector. The disruptive FinTech movement will continue to have a significant impact on the organizational design and operation of well-established financial institutions, introducing new systems and verticals.