After displaying their inability to effectively regulate themselves over the last two decades, financial institutions are now dealing with cumbersome regulations designed to promote transparency and better protections for both consumers and businesses alike.
The strenuous restrictions put in place via regulatory efforts like Dodd-Frank and PSD2 forced these institutions to dramatically change both how they conduct business and how they report those practices. Just like in any mature business or industry, resistance to change and a sluggish acceptance of new technology is the norm. However, the demand for quicker and more transparent banking is growing, and novel fintech solutions have emerged in the absence of more established financial institutions.
The financial technology sector has witnessed a massive boom in the years since the 2008 financial crisis, helped in part by their smaller scale and nimble nature to present innovative solutions that upend traditional financial practices. By promoting the greater integration of technology to improve oversight, reduce transaction times and increase transparency, fintech innovations are rapidly forcing the banking sector to reconsider how it operates.
Bringing Archaic Systems into the 21st Century
One of the more blatant areas where banks have fallen behind fintech is lending. After facing the music from their negligent activities in the lead-up to the 2008 financial crisis, the big bank’s lending processes have been largely outmoded by alternative financing options. LaaS, also known as Lending as a Service, is one example of a fintech industry that effectively plays matchmaker to small or medium-sized businesses and appropriate loan offers for their institutional partners. Such streamlined technology decimates overhead and imparts these savings on both borrowers and lenders.
With many banks still reliant on dated underwriting models, LaaS can determine an individual’s creditworthiness and repayment potential within a matter of minutes, delivering fast solutions for eager borrowers. Furthermore, it cuts down significantly on the time it takes for borrowers to access funds, shortening the timeframe to days instead of weeks. Developments like peer-to-peer lending models help prospective borrowers obtain favorable rates, while empowering investors to take advantage of better returns relative to the record low interest rates they would find in savings accounts.
The restrictive bank-lending environment that emerged from the last financial crisis meant that most institutions failed to adjust to changing consumer needs and demands. While certain banks like Goldman Sachs Group Inc GS are making a splash into the alternative lending arena with their Marcus platform, which brought lending online for the storied institution, most of its peers are still well behind the innovation curve as they grapple with adjusting highly integrated vertical models. One of the reasons fintech has been so successful is that it is more focused on solving singular consumer and business pain points instead of working to handle the entire scope of their needs.
Advancing the Flow of Funds
Apart from the changing lending landscape, another area where fintech has stepped up is in the evolution of payments and processing. Innovations like e-wallets, borderless payment systems and blockchain are taking advantage of the new market that post-crisis laws cracked open. Although PayPal may have been the first company to break down the barriers to facilitating cross-border transactions, many companies have improved upon this early model to revolutionize the payment infrastructure.
For years, the SWIFT system has been the dominant force in international payments, governing how banking institutions transfer funds by standardizing protocols and reporting measures. However, heightened concerns about potential money laundering and other nefarious activities means transferring funds via this dated system can sometimes take days, or even weeks. By comparison, promising fintech innovations have reduced transaction times to minutes instead of days while meeting proper compliance standards.
For example, direct payment company Trustly provides merchants and consumers an innovative way to safely and easily conduct transfers online. Within minutes, clients can move funds directly from their bank accounts to any website they shop from or peer wallet holder they need to pay. E-wallet solutions such as this exist because compliance standards for payment transparency almost require specialization. Trustly operates across 29 countries in the EU with a single license, limiting their regulatory costs while still ensuring that it is functioning well within the law. Most importantly, their technology brings down transfer times and costs, benefiting all stakeholders involved in transfers.
Falling Behind in the Innovation Race
Although the banking sector is placing a greater emphasis on the implementation of new technologies and architectures to increase automation and reduce overhead costs, the reality is that their efforts are no match for the fintech’s sector breakneck pace of innovation. And, thanks to new technological developments, fintech’s legitimacy and pervasiveness is only going to increase.
Finally, perhaps the biggest tailwind that these fintech companies have going for them is that, Instead of undertaking massive lobbying efforts to try to reduce restrictive regulatory measures, the industry faces these challenges head on, creating beneficial solutions that are gradually eroding the financial sector’s stranglehold on banking. Unless they take active measures to deploy their assets toward more streamlined activities that benefit their users, be they businesses or consumers, the threat banks face from fintech companies will only grow with time.
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