RiskTech Forum

CustomerXPs: Digital Disruption: How Fintech is Pushing Banks to Change

Posted: 23 May 2018  |  Author: Naresh Kurup  |  Source: Clari5

Fintech has brought unprecedented disruption in the financial services ecosystem. While traditionally, fintech was used for back office functions by leveraging software to help banks manage customer databases, execute transactions and handle accounts, today it has DIY modes where customers rely less on a brick and mortar bank for their banking needs, and instead have a multitude of digital channels at their disposal. With 24/7 device-agnostic access, virtually every transaction is now digitally possible.

Digitization has fundamentally transformed banking as we know it today. Mobile payment revenue worldwide in 2015 was $ 450 billion and is expected to cross $1 trillion in 2019. Smartphones with intuitive apps have given customers the advantage of real-time transactions. Close to 40% of the world’s population will own a smartphone by 2021, up from a third of the global population in 2017.

Payment apps integrated with bank accounts allow seamless mobile to mobile payments, online payments, investments and transfers. Reports indicate that 39% of shoppers today prefer electronic payments. Meanwhile, growth in Real-time Retail Payment Systems has been encouraging, with 18 countries now having a ‘live’ RT-RPS systems in place.

The Power Of Digital: Some Key Fintech Trends

The Fintech Explosion: How Banks Are Responding

E.g. – the Minimum Viable Product concept (MVP is the most trimmed down version of a product that can still be released) allows fintechs to quickly test-market-test prototypes. Risks can be mitigated at the design phase by the partnering bank that provides a wealth of consumer insights. But fintech firms need to be wary of product functionality, flexibility, scalability and compliance keeping in mind the partnering financial institution’s threshold for errors. This is a tricky balance, but good partnerships are able to manage it well.

Digital Disruption: What next?

Legacy financial institutions looking to become digital-enabled face two main challenges. First, the business models and personal skills that have served the industry well for decades has been disrupted by digital innovation and no longer works in the new banking ecosystem.

Second, attempts to create new, viable models for the digital age will flounder unless people and organizations are willing to disrupt themselves. This paradox has been termed ‘the innovator’s dilemma’ and was first outlined almost 20 years ago by Clayton Christensen.

Because of the existence of current profitable business sectors and personal successes from the past, there is a normal lack of incentive to identify radically new ways to conduct business. This leads to insufficient decisiveness to commit human or financial resources to experiment with new models.

Also, digital disruption has not been without a flip side. Cyber-attacks (malware, ransomware, phishing, etc.) have been growing steadily along with digitization, so conventional authentication mechanisms are no longer enough to thwart fraudulent attempts. Smarter security protocols and extreme real-time, cross-channel fraud management systems are now available to protect institutions and customers.

Success will depend on how banks quickly respond to opportunities for innovation. The strategy should be to stay focused on growth with digital innovation at the core. Even as the digital disruptions continue, the ecosystem will see deeper collaboration between financial institutions and fintech firms.