The Role of FinTechs in Banking and Financial Institutions Today

The Role of FinTechs in Banking and Financial Institutions Today

November 9, 2021

There has been an irreversible change in the way customers interact with financial services due to the pandemic. This unexpected speed of change which created a tsunami effect has also accelerated the adoption of innovative digital financial solutions

Thus, now it’s inevitable that fintech plays a significant role not only in financial services, but also in the global economy, the majority of next-generation businesses, and the culture of the digital society in general. Since the playground areas of fintech are quite wide, it holds great potential for improvement. Therefore, the global fintech industry is expected to reach $324 billion by 2026.

The Value Fintech Startups Add to Financial Services

Fintech services can be used by anyone from anywhere. Considering fintech even meets the needs of those who do not have a bank account in some parts of the world, it is obvious that fintech companies also improve financial inclusion with the variety of services they provide. 

Fintech solutions can provide the services offered by traditional financial institutions at much lower prices. The reason for this is quite simple. The services offered by fintech companies are powered by technology and they automate tasks without the need for manpower. Thus, it creates much more optimized and transparent processes with much lower costs.

Fintechs create value by focusing on these parameters:

  • Identifying, specializing, and excelling in niche product & service area
  • Providing customer-centric operations
  • Innovation and cost-effectiveness
  • Reducing delivery turnaround time (TAT).

Thus, it’s definitely not a coincidence that investments in fintech are on the rise. According to The Rise of Fintech Intermediaries 2021, investment in fintech intermediaries by June 2021 was up by 90%  compared to 2020, amassing US$2.66B.

Now let’s take a closer look at the up-front fintech investment areas and trends that are sure to shape the future of the finance sector.

Fintech Trends to Reshape Banking and Financial Institutions

Open Banking Solutions

With open banking, fintech, banks and financial service providers can share users’ financial information to provide personalized services/products, manage risks or make some data-driven decisions. This ensures data availability, which is one of the biggest challenges in risk assessment and customization.

Thus, consumers both overcome the data privacy barrier by having more advanced control over the personal information they share, and also enable providers to make more accurate decisions as they share more data with the providers.

At this point, it seems that the trend of producing transparent processes and solutions for fintech will continue to grow.

Banking as a Service (BaaS) Solutions

Let’s start by defining what BaaS is:

BaaS is a digital banking services offering model that focuses on enabling banks to lease their existing infrastructure to third-party financial service providers via APIs, thereby enabling fast and efficient interaction with customers, providing new revenue streams.

This model provides banks with an effective method for creating new financial products and delivering them quickly to their customers.

On the other hand, increased customer adoption and regulatory changes are always a major hurdle for third-party service providers. Adding the Covid-19 pandemic to these challenging conditions, financial service providers have also adopted BaaS solutions to provide core banking transaction services such as credit management, account creation or payment and remittance.

 

BaaS seems to offer many opportunities to streamline processes by offering user-friendly experiences to Fintech startups in the coming period.

Embedded Finance Solutions

As customers’ purchasing habits change, their payment needs evolve as well. Customers demand to pay from different devices, through different service providers or from different sales points.

Consider online payments. Banking transactions have to be buried in many different points. For subscriptions, renewals, pay-per-use, banking services now have to take flexible approaches and meet customer demands.

Embedded finance promises a great future to Fintechs at this point. In fact, it is expected to deliver more than $7.2 trillion in new digital opportunities by 2030. The field of embedded finance is likely to continue to grow as non-financial merchants collaborate with financial service providers to improve the end-user experience.

Decentralized Finance (DeFi) Solutions

Decentralized finance is simply a financial system that operates without the need for any traditional or centralized intermediaries. In this sense, DeFi creates a system that provides the flow of transactions and services between the parties and that can operate on its own by using technology instead of a bank.

Online transactions via DeFi cryptocurrency is the most well-known DeFi application. In addition, DeFi makes different financial applications such as borrowing and lending, insurance, investing or swapping much more efficient.

According to DeFi Pulse, the DeFi market has reached a locked total value (TVL) of $96.63 billion, almost 5 times its value last year.

Wholesale Banking Solutions

In its simplest form, wholesale banking can be summarized as the financial transaction dimension of borrowing and lending between institutions. Wholesale banking, as a division within the bank, provides corporate clients with integrated credit and capital markets products in the areas of risk management, investment services/products and finance

Being able to get paid quickly and efficiently is extremely important for international businesses. That’s why banks that offer wholesale banking services have recently transformed their operations with technology and have transitioned to an agile structure to a large extent. Partnerships between the bank’s operation teams and businesses were developed through robotic process automation. Thus, a highly integrated workflow has been achieved, making exception factors much more transparent.

At this point, with the value they create using technology, fintech seems to be increasingly helping financial institutions achieve their wholesale banking goals. 

Conclusion

The fierce competition in the fintech environment seems to increase gradually. As stated in the Global Fintech Report, 82% of incumbents expect to increase their fintech partnerships in the next three to five years.

Keeping up with this wind of change is vital for banks and financial institutions. For this reason, it is essential for businesses to be aware of fintech innovations and trends and to switch to an agile structure. 

 

Here at RISQ, we offer innovative solutions that enable financial institutions to transition to digital adaptation and smart finance in the fastest and most effective way with our team of experts and 30+ years of industry experience. Now that you know the values and the key trends that fintech companies can create for banks and financial institutions, the only thing left to do is to act.

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