The banking industry has undergone significant changes recently. The initial pacing and spread of COVID-19 led to increased digital engagement and innovation. As a result, the financial services sector is experiencing rapid advancement. Today’s consumers are served by new competitors and technologies which transform the convenience, speed, and efficiency with which people manage their finances. In this article, we examine the two extremes of the recent evolution in banking, which are digital banks and the innovations brought by fintech.
New Players in the Market – Digital Banks
Fully online stores, also known as neobanks or digital banks, do not contain any physical branches. Unlike traditional banks that have locations, digital banks are fully app or web based and enable customers to manage their finances from any location. Every single aspect of banking has shifted to digital in this modern era, and the demand for convenient, fast and efficient services is driving this trend even further.
The major advantages of digital banks include lower fees, enhanced customer experience, and the ability to offer personalized financial products. Digital banks’ overhead costs are greatly reduced due to their absence of physical branches enabling them to offer their customers more competitive interest rates and lower transaction fees.
Some well-known examples of digital banks are Chime, Monzo, and Revolut. Each of these platforms offer varying degrees of service, from basic checking and savings accounts to more sophisticated offerings such as loans, budgeting, and even investment accounts. The value of these banks is especially appealing to younger customers who are more inclined to use technology and appreciate managing their money through an app.
Transforming the Industry with Fintech Innovations
The term financial technology or fintech is used to describe the use of technology in a company’s financial service offerings to enhance efficiency and service delivery. Fintech has the capability to dramatically change the entire banking experience, whether it be through payment systems, lending, wealth management, or insurance.
1. AI (Artificial Intelligence) and Machine Learning
AI and machine learning are becoming more important in banking as technology grows. Today, banks are using these technologies to improve their customer service, increase fraud detection, and enhance operational efficiency. Customer support through chatbots is very popular in the current market. AI enabled chatbots offer immediate answers to customer questions and inquiries, providing 24/7 availability. Moreover, machine learning algorithms analyze clients’ spending habits. This enables banks to provide personalized financial advice, tailored product recommendations, and other items that advance and refine automated sales.
AI is critical in preventing fraud. Banks are beginning to employ AI systems that track transactions in real-time in order to detect and prevent fraudulent activities. This approach reduces fraudulent financial loss while increasing the security of banking systems.
2. Blockchain and Cryptocurrencies
Blockchain technology, which is the basis of cryptocurrency such as Bitcoin and Ethereum, is being accepted in the banking sector because of its secure, transparent, and decentralized transaction capabilities. Even though cryptocurrencies are controversial, the blockchain technology that supports them has impressive possibilities for both traditional banks and fintech companies.
Blockchains allow for faster cross-border payments. Sending money internationally through traditional mediums is costly, time-consuming, and heavily reliant on a number of middlemen. With blockchain, transactions are peer-to-peer, removing the need for high fees and long wait times. There are several banks working on developing blockchain-based payment systems to automate and economize the process.
In addition, banks will benefit from increased blockchain security and transparency, making it increasingly difficult for fraudulent actors to manipulate transactions. This also creates new opportunities for managing digital identity, sharing data securely, and creating smart contracts that auto-execute based on preset agreements between two or more parties.
3. Open Banking with API Integration
Open banking is the set of policies that permits third parties, such as an Independent Software Vendor (ISV), to access a bank customer’s information through APIs, granted the customer gives authorization. This development is fostering much greater competition in banking and collaboration between banks and service providers because customers are now able to share their financial information with many apps and services, thanks to open banking.
Consumers benefit from open banking because they can employ applications that aggregate their financial data, assist in planning budgets, and propose new tailored financial products. Digital banks and fintech startups have this unique quality where they personalize products and services to the customer’s needs and preferences which makes them stand out in the sector.
Open banking can enable greater financial inclusion by underserved populations. Most people around the globe are considered unbanked or underbanked and this is even more so in developing nations. Open banking could allow foreigners to access financial products from different countries, such as mobile wallets or peer-to-peer lending services.
4. Contactless Technology and Digital Payments
Perhaps one of the most noticeable changes in the finance world would be accepting payments digitally. Customers can now pay for items using their phones with mobile wallets like Apple Pay, Google Pay, and Samsung Pay, making it more convenient for consumers. The ability to tap a card or smartphone on a point-of-sale terminal and make contactless payments has also gained popularity.
The COVID-19 pandemic accelerated this trend as shoppers wanted to limit physical contact. With the introduction of contactless payments, it is now more common to encounter digital payments. Many Fintech companies are working to ensure they have the infrastructure to accommodate these payments, making them quicker, safer, and more convenient.
The Future Outlook: A Collaborative Ecosystem
Collaboration, as opposed to competition, is likely to be the future of banking between traditional banks and fintech startups. Established financial institutions have an understanding of the importance of new technology and what it brings to changing consumer demands. Many of these institutions are partnering or acquiring smaller start-up fintech companies in their efforts to remain competitive.
The integration of technology with banking services is becoming ubiquitous and law policies need to be updated accordingly. There is a need for active policies balacing protection towards citizens againsttheir investment expenditure while maintaining market control. This becomes significantly more important for law policies dealing with cyber privacy and security issues.
Furthermore, the democratization of financial servicing as a result of technological advancement offers a great opportunity to improve accessibility for individuals and businesses who were previously eluded from targeted financing products available through mainstream services.
Conclusion
There is no doubt that we are digitally transforming banking services. Merely with an application, there is no need to visit the bank, and hence, there is a rise in the number of digital banks aiming to replace traditional ones. Today, banking is not only spoiled with AI and blockchain integrations, but with caring towards users and their experience. As time goes by, it is expected that FinTech driven innovation offered will blend with already existing bank one expanding their offer efficiency and inclusiveness. Destruction of old models will be built on innovation, but in turn will result in improved reliabiility, security, and transparency for consumers.