Historically, the financial services industry has been known to be willing to adopt new technologies to streamline operations and increase profits but has always been held back by a multiplicity of factors such as;
- The complexity of financial markets
- Legacy systems that are usually expensive to maintain
- Tight regulations
Nevertheless, the sector greatly benefits from extensive distribution of networks; a large and loyal customer base unwilling to switch financial service providers; unique product specific expertise and protective regulations. Established finance institutions have always generated handsome profits despite many of them being behind in technology and innovation. McKinsey & Company note that in the eight year period between Netscape’s IPO and the acquisition of PayPal by eBay, there were more than 450 tech startups that attempted to disrupt the financial services sector but almost all of them either failed or were acquired by legacy institutions.
With the increase in internet and mobile technology globally, fintech is continually playing a more important role in the financial services industry including:
- The payments and remittance sector
- Online lending
- Wealth management
Traditional finance institutions are either partnering with fintech startups or investing in fintech either through an acquisition of fintech startups or on their own. The reaction by these legacy institutions is informed by the desire to benefit from the efficiencies offered by fintech on the one hand and the necessity of avoiding losing market share to new technology based entrants.
One of the key advantages of fintech sector is that it is almost free from the tight regulations that affect traditional finance institutions. Additionally, the sector boasts of user-friendly digital channels and the ability to address the most essential customer needs.
The significance of fintech in the financial services sector can be summarized into:
Improving the Modes of Customer Acquisition
Fintech startups use technology more than the traditional physical shops. As a result, they can serve customers from a wide geographical area. The mode of acquiring these customers may be difficult at the start but once the company has made a name, customers from all over the world will come running. An example is PayPal which serves customers from across the world without a physical presence in many of the countries.
Lowering the cost of services
The fact the fintech startups do not need a physical presence in every location that they operate in helps them to reduce costs. As a result, they offer cost-effective services to customers. Time taken in transactions such as loan applications is also substantially reduced which further reduces cost.
Advanced analytics and big data bring significant advantages to the financial services sector. They enable institutions to redesign their products to meet customer needs and preferences.
Segment Specific Offering
Fintech startups have focused on specific segments of the market mainly millennials, the unbanked and small businesses. As a result, fintech has helped meet the needs of clients that have been otherwise overlooked by the traditional finance institutions.