Hi Reader,

In this era, 24/7 access to banking services on any device, anywhere is the norm. It is so commonplace that we take digital banking products for granted.

But there is a constant war going on between the Banks - the traditional provider of financial products - and the tech companies who champion customer outreach and customer experience.

In fact, the tech companies are challenging traditional banking on several fronts:

1. Digital banking services with no physical branches, offering convenience and accessibility.
2. Improved, intuitive user experience, real-time insights, and personalized dashboards
3. Targeting underserved populations by leveraging technology
4. Alternative data for credit and risk assessment
5. Personalized finance, recommendations
6. Innovative payment solutions
7. Tailored financial products.

These alternative options lower costs and fees compared to traditional banks, providing better value for customers.

These also foster collaboration and partnership through open banking initiatives, APIs, and white-label solutions.

In many ways, these transfer the power from traditional banks to tech (or Fintech) companies.

Let’s look at four spaces in Banking & Financial services industry where these changes are happening.

Payment Processing

Payments is the epicenter of innovation in the Financial Services industry - the payment tech companies are reshaping the industry with a number of disruptive customer-centric strategies. They do 5 distinct things-

• They offer secure and convenient mobile wallet apps, allowing users to make contactless payments using their smartphones, eliminating the need for physical cards.
• Some Fintech platforms facilitate seamless P2P transfers, enabling individuals to send and receive money instantly, simplifying splitting bills and repaying friends.
• A number of payment tech companies are streamlining cross-border transactions, reducing fees and processing times, and providing users with transparent foreign exchange rates, making international payments more accessible.
• Gradually a large number of payment players leverage open banking APIs to enable seamless and secure integration with banking ecosystems, enhancing payment experiences, and enabling users to view and manage multiple accounts in one place.
• A number of Payment tech companies have started allowing consumers to buy now pay later mode (BNPL) by making a purchase immediately and then splitting the payments into interest-free installments or deferring them for later.

Paypal was the earliest poster boy of technology in modern payment processing. Then came Stripe. The other major tech players in this space are - Square, Adyen, the digital wallet providers (e.g. - Google, Amazon, Apple). The BNPL players in this family are Klarna, Afterpay, and Affirm.

Lending Industry

Fintech innovations are disrupting the lending industry by improving accessibility, efficiency, and credit assessment methods, transforming the way individuals and businesses access financing.

Fintechs are reshaping the lending industry with these 5 disruptive strategies:

• Provide seamless online lending platforms that connect borrowers directly with lenders, revolutionizing the borrowing experience and speeding up loan approvals.
• Leverage advanced algorithms and data analytics & use alternative data sources to assess creditworthiness, expanding access to loans for individuals and businesses with limited traditional credit histories.
• Facilitate P2P lending, enabling individuals to lend money directly to borrowers, bypassing traditional financial intermediaries and offering potentially better rates for both parties.
• Simplify and digitize the loan application process, eliminating paperwork and reducing approval cycle time, making it more convenient and efficient for borrowers.
• Make use of technology to provide small loans to underserved populations, enabling financial inclusion and empowering entrepreneurs in emerging markets to access capital for their businesses.

If you would like to delve deeper, you should look into the following companies:

• LendingClub enables P2P lending for personal loans, business loans, and auto refinancing.
• Prosper has a peer-to-peer lending platform that allows borrowers to obtain personal loans for various purposes.
• SoFi (Social Finance) - provides competitive rates and streamlined processes for borrowers in a range of financial products, including student loan refinancing, personal loans, mortgages, and investment services.
• Avant is an online lending platform specializing in personal loans that utilizes advanced analytics and machine learning algorithms to assess creditworthiness and offer loans to individuals with a wide range of credit profiles.
• OnDeck leverages technology to streamline the application and underwriting process, offering quick access to capital for small businesses.

Investment Banking

Fintechs offer user-friendly platforms for trading stocks, cryptocurrencies, and other assets, empowering individuals with direct access to investment opportunities.

Automated investment advice (robo-advisory) based on algorithms and data analysis is replacing traditional financial advisors, making personalized portfolio management more accessible and cost-effective.

Fintechs enable smaller investors to participate in IPOs, crowdfunding, and alternative investments, breaking down barriers and promoting inclusivity in capital markets.

Through blockchain and smart contracts, Fintechs streamline transactions, reduce intermediaries, and provide real-time data, boosting operational efficiency and transparency.

Data-Driven Insights: Advanced analytics and AI-powered tools allow Fintechs to extract valuable insights from vast amounts of data, facilitating better investment decisions and risk management.

If you want to have an in-depth study, you should look at the following companies in this space:

• Nutmeg (digital wealth management with personalized goals and risk profiles)
• Betterment (robo-advisor with automated rebalancing and tax-loss harvesting)
• Wealthfront (robo-advisor using advanced algorithms)
• Robinhood (easy access to stock, cryptocurrency, and options trading)
• Alpaca (API platform for brokerage services)

Personal Finance

In this space, Fintechs are transforming the way we manage our finances with some disruptive strategies:

• Tech companies offer intuitive mobile apps that track expenses, categorize transactions, and provide real-time insights, empowering users to budget effectively on the go.
• Some Fintech platforms use automation to help users save effortlessly. They round up transactions, set aside spare change, or automate regular savings transfers, making saving a seamless part of daily life.
• The personal finance platforms leveraging data analytics, fintechs provide personalized financial insights and recommendations, helping users understand spending patterns, identify areas for improvement, and make informed financial decisions.

Finance products like Digital Wallets and accessible Investment and Wealth Management (as in the above sections) are other categories of personal finance apps.

Conclusion

The traditional banks are fighting the challenge from fintech players:

Embracing digital transformation, offering online and mobile banking services, and launching transformation initiatives for retail banking, and commercial banking. Every bank is expanding digital payment options and developing its own mobile wallet solution.

Most of the banks are upgrading their current platforms (data, integration, even core banking solutions) and adopting technology to streamline operations, and increase efficiency.

The Banks are acquiring fintech companies to leverage their capabilities, they are investing in fintech partnerships and enriching customer data with behavioral information of customers to protect their share in the financial servicing of customers.

If you are working with any traditional Bank or a Financial Service provider, you should look at the above four areas and inspiration from the initiatives under the above areas (sub-industries).

The large banks in US and Europe are either building adjacent capabilities or partnering with Fintechs or mimicking the capabilities of some of the Fintechs above (Stripe’s API capability is the inspiration for every bank implementing Open Banking, PSD2).

Gradually the neo-banks are emerging with a different operating model and more engaged offerings for the consumers/customers.

But that’s for another day!

That’s all for today!

Till next week…