FinTech, or “Finance Technology”, is the next generation of digitally enabled financial services. It encompasses banking, card processing, insurance, and other services that are easily accessible on the Internet. Financial businesses can process all of their business transaction transactions electronically. This is called “closing the loop”. When an institution processes credit card orders in a timely manner and maintains a high degree of customer service, they are demonstrating that they understand the customer service norms of the 21st century.
Fintech innovation can also be understood within the broader context of financial regulators’ increasing calls for increased regulatory oversight. There is increasing recognition that fintechs are exerting an increasing amount of market power and reducing traditional banking profits. If banks continue to embrace new technologies at the pace of the modern economy, they will find themselves increasingly squeezed by a cash-flow crisis that erodes their profit margins.
In response to these pressures, traditional financial institutions have been conducting routine risk management reviews that reveal the degree to which they are vulnerable to declines in the domestic credit card market. Regulators and banking supervisors have been calling for greater examination of bank risk, including the degree to which non-bank entities such as retailers and e-commerce stores are relying on wholesale and closeout vendors for their credit card processing needs. In response to the retail industry’s heightened reliance on wholesale and closeout providers, a number of U.S. banking regulators have threatened to impose more aggressive, fines levied on wholesalers that process credit card transactions for retail merchants.
Regulators and banking supervisors have been conducting a number of industry-driven examinations of what is emerging as the latest and greatest new fintech innovation. The “fast money” phenomenon – rapid acquisition and implementation of digital technology – has been the subject of numerous industry-driven investigations. Regulators have also examined how companies with extensive experience in providing online banking and other financial services value chains are being impacted by changes to accounting procedures and internal control measures. In response to increased pressure from regulatory agencies, more banking companies are beginning to consider outsourcing as an attractive solution to the increasing complexity of their business model.
A rapidly growing trend in the financial technology sector is what is known as “fintech innovation.” This refers to innovations that arise from efforts to build better fintech systems that are capable of delivering innovative products and services to customers. As some fintech innovation attempts to move into the mainstream of the financial services value chain, traditional banks will have to either respond or face the threat of being left behind. Some observers have predicted that the “blockchain revolution” could completely alter the landscape of the global economy. Others are less concerned with what could be called the “utility block” effect and more worried about how the “blockchain” concept may impact current efforts to build the traditional financial technology model. The debate over whether a fintech innovation is really a new breed of technology or simply re-imagining one of the utility block methodologies is likely to continue well into the future.
A number of factors are likely to impact how quickly and deeply this new breed of technology and innovation will impact the banking industry. One of the biggest concerns for the banking industry is how it will impact on its core business functions. The most immediate impact will come from fintech innovation efforts that introduce faster, cheaper, and more efficient online transaction processing capabilities for retail customers. Incoming technology that provides real time bank-to-bank money transfers will allow customers to make secure purchases anywhere, at any time. For institutions that provide mobile banking services, faster transfer speeds will also mean an increase in customer service.
In addition to the impact on core commercial banking functions, fintech innovation may have an indirect impact on other aspects of the financial industry. For example, efforts to improve mobile banking services could have a positive impact on the wider range of services provided by financial institutions. Faster and more efficient online transactions may also lead to greater customer satisfaction. This could result in increased loyalty among current customers as well as a boost to revenue coming from fees and charges.
Although the potential impact on core business activities is notable, fintech startups may also have broader effects on financial institutions outside of the banking industry. While fintech innovations are generally good news for consumers, they could have a profound effect on the performance of other non-bank entities such as energy companies, airlines, and telecommunication firms. Such companies could realize lower profits as a result of improved efficiency and cost controls brought about by fintech initiatives. In fact, lower costs could lead to a reduction in the size of company assets, which could lead to higher efficiency and better financial returns to other non-fintech entities.
