The fintech trends supporting digital banks

By Kostas Kotsiopoulos | 19 May 2017

Undoubtedly the financial services industry is significantly affected by the fintech evolution. Alternative finance firms, digital and challenger banks, P2P lending platforms, as well as traditional banks, adopt new technologies in order to better serve their clients.

In a number of research materials, published over the past year, the need for collaboration between established financial institutions and fintech companies or providers has become obvious, so as to deploy modern operational practices to support the demand for more agile and faster moving banking transactions.

PwC’s 2016 Global Fintech Survey indicated that: “Collaboration with fintechs is crucial and will be the only way for traditional firms to deliver technological solutions at the speed expected by the market.” In its 2017 research PwC expects that fintech will continue to expand in many areas. In the IDC research, as analysed by Business Insider, it is clear that banks are starting to experience or anticipate the threat, should they not adjust their operations to the new era. For example, it states that six out of ten banks (worldwide) would partner with a fintech. Within Europe, banks in the UK, Ireland, and Italy are most willing to collaborate with fintechs. 

In the UK, the collaboration of fintechs with the banking industry, as well as the opportunities created the past years for a more flexible banking environment, accelerated the rise of challenger and start-up banks in the country. These ‘fintech’ type of banks focus on delivering digital communication, transparency, fast response and specialised services, so as to differentiate. Partnership with alternative finance firms such as P2P lending is considered really positive and the next step. According to Burnmark report, challenger banks are becoming a significant part of the fintech environmentGiven the latest developments they seem to be getting active support from the regulators. The FCA is setting the rules for better management which this also applies to all alternative finance institutions. Fintech accelerators, regulatory sandboxes, as well as fast track authorisation, are working together to further support the evolution of FinTech and the rising need of a more flexible, customer-focused banking.

Challenger and digital banks have the benefit of creating opportunities for an agile digital environment for both the organisation and their clients with more cost-effective and personal approach. 

Conventional banks are also ‘challenged’ to collaborate with their peers and other businesses and provide digital banking services, as market requirements evolve, so as to differentiate.

The point these studies are making is that the financial services sector has changed. Competition in banks (and similar type institutions) is affected by the online services available to customers. The essence is to offer a more “personalised and digital” approach at all levels.

Why are technology and online service becoming so important?

a) Customers - whether investors, lenders or consumers - are tech savvy. Regardless their age, they feel confident using e.g. smartphone to perform their banking or investment transactions. They want their request to be processed immediately instead of waiting in a branch’s queue. The younger they are the more impatient they are.

b) Technology in the financial services industry has tremendously evolved, to protect institutions and their clients at many levels (from transparency of data to security) while safeguarding the business operations.

c) Economic and political changes also drive the regulatory environment or consumer behaviour in this industry. Usually this requires revisiting the infrastructure or becoming more competitive in the offering, so as to turn a challenge into an opportunity like in the case of mobile and web access or compliance with a system that delivers fast and accurate reporting thus saving time and resources. This is also driven by the latest regulatory changes such as MiFID II and GDPR.

d) Fintech firms are a recognisable force. There is a significant number of new entrants but as it usually happens with hype, those better prepared distinguish from the competition.

e) Investment in technology and/or collaboration with technology providers drives business plans and can accelerate or slow down targets achievements.

Financial institutions are now called upon to turn these into an opportunity for their business. The only way to do so, apart from restructuring and changing the mentality of their operations, is to deploy flexible yet robust solutions that would enable them to differentiate and will complement existing systems. They would need to be able to analyse their data, calculate risks, and provide strategies to their clients when needed. Furthermore, they would need to be able to grow (without the difficulty in adding new capabilities or functions in their platforms or even worse having to replace their existing platform). They would need to be able to deliver the service that would build their brand and meet with their business objectives.

In this context, the back-to-front office operations should support the same level of flexibility and user experience. Offering omni-channel access to consumers it needs to be coupled with a robust data analysis platform that would ensure constant and secure access as well as metrics to analyse risk and performance in each online request or transaction.

Payment systems would need to support multiple networks (users, payment channels and interbank networks), and workflows. The risk management capabilities of the system used would need to initially safeguard the business as well as provide compliance with regulatory requirements.

Deriving from Profile’s experience in the industry there is a plethora of ideas and tools available, however the challenge becomes for the institutions to actively appreciate the benefits of technology to elevate their business. To achieve this, it is always advisable to find a proven and agile technology partner that can listen carefully and understand their requirements and most importantly have the vision to successfully contribute to the realisation of their business plans.