Source — Pixabay
Considered one of the oldest businesses of the world, the growth of banking happened across centuries, from the simple need to loan grains to farmers and traders traveling across cities which were later paid back in cash or kind. Over time and across millennia, the scope of such transactions got more complex and layered but what didn’t change was the framework; a system of deposit and lending that played out well for all kinds of stakeholders whether traders or farmers. The last 60 years have seen phenomenal growth in the complexity of the financial ecosystem, with digitization further hastening the process. But the basic tenets remain the same. In a similar but different way, fintech can be compared to a parallel form of progress; the jump from horses and camels to wheels for transportation. While the purpose has remained constant, the means and methods to achieve it have become smoother, streamlined, and more sophisticated.
The finance industry is one that has taken to digitization very slowly. Banking and financial institutions didn’t move their processes online actively but were compelled into space by certain factors; shifts in the global economy, the opening of markets to trade and exchange, increasing significance of foreign exchange, and the ability to give customers more options with regards to maintaining their savings and conducting transactions. When the fintech movement first began to gain ground in 2014, incumbent banks thought of it as a ‘stop-gap’ arrangement to maintain ledgers or databases and nothing more. Smartphones and an ‘anywhere anytime’ accessible consumer has brought about a change in consumption patterns, that have led to transactions becoming nimble and fluid across industries. Most traditional institutions who haven’t taken to this disruption, are left with irrelevancy. The ones able to pivot and catch up with the game are leading the charge of digital disruption, as new business models and better customer experiences become non-negotiable service deliverables.
‘Banking is necessary, but banks are not”, Bills Gates once said. The finance industry runs on the strength of transactions. It may be the deposit made nationally and internationally; the former through bank cheques, deposits and DD’s while the latter through money orders and remittances. Transactions also separately pertain to personal, retail or business. Current and recurrent accounts came about from the need to separate money and its taxation for different purposes. With excess money sitting in accounts, came the need to place them in Fixed Deposits and other savings instruments for a certain time in exchange of interest. Mutual funds and other schemes were also an extension of such savings, to ensure more could be made from what an individual saved. Billings are another mainstay of financial transactions. Everything from electricity to rentals, account maintenance to salary crediting is also a part of the ‘to and fro’ flow that happens in finance. While every action and every transaction earlier was in-person and long-drawn, taking considerable time and resources, requiring the establishment of trust with paper exchanges and referrals, the process is much simplified today and this is primarily because of digitization.
Digitization has opened up many diverse avenues, but its major impact has been in finance. An industry that was tightly closeted and built on legacy systems has become nimble and innovative. Below are just a few ways the financial ecosystem is changing and how digitization is compelling the change.
OPEN BANKING SYSTEMS — While banks and technology kept themselves apart earlier, in the last few years there is a growing realization of the benefits of complementing strengths rather than approaching each other as adversaries. Several parts of the world, including UK, Australia and India are opening up to ‘Open Banking’ systems, encouraged by the government and enabling the sharing of customer data and new tools with authorized third parties through APIs. Banks are hesitatingly opening up to this as a way to ensure a centralized manner in which customer data can be verified and processed.
FLEXIBLE FINANCIAL PARTNERSHIPS — In today’s climate, fintech is crucial for a thriving and future-ready financial services marketplace. The fintech-banking partnership is therefore a crucial one that marries the old and the new, which is being adapted in different forms. One kind of partnership involves banks creating a fintech subsidiary for its digital operations like Marcus, a dynamic consumer finance platform by Goldman Sachs and Wells Fargo’s Greenhouse, a mobile banking system. This is easier for established banks with several years of operational experience globally. Another form of flexibility is fintech companies with niche offerings themselves evolving into full-fledged digital banks, case in point for this being India’s PayTM and Atom Bank of the UK. The third kind of partnership is an easier collaboration between an incumbent bank and a fintech provider putting their minds together to provide innovative, flexible products and services to the market. Small business lender OnDeck lends its underwriting technology to JP Morgan Chase for quick loan approval and disbursement while Canada’s TD Bank makes use of Moven’s Money Management App to give their customers unique insights into spending habits.
POWERING VERSATILE INDUSTRIES — While banking and money management are practiced by everyone, digitization has made many lay consumers more aware and allowed access to financial instruments that were previously thought of as archaic and incomprehensible. Increased access to food and hospitality partners online, virtual shopping portals like Amazon and Alibaba, aggregation of vendors across industries like manufacturing and real estate, has mandated faster, secure and flexible digital transactions that forgo the need of in-person access. With consumers accessing salaries directly into accounts, paying for home decor and clothing online, investing in bonds and share markets, managing insurance and properties digitally, finance technology is hastening the conceptualising of new products with even better benefits.
With the vastness of growth before it powered by smartphones, the days of transactional banking or lending and borrowing of money are truly over. What remains to be seen, are the ways in which each part of the financial ecosystem transforms, and the role consumers will play in ensuring banks enable their lifestyle at every stage of life.
These articles are my personal insights and experiences running companies across education, finance and technology. Do reach out to me to share specific insights you may have and don’t forget to share this with your community.
Co-authoring this piece with Charmaine Kenita, on my learnings in FinTech, Real Estate, future challenges, and mapping the way forward