Fintech advancement in the banking industry has truly been a mind-blowing revolution. With banks going digital, there is a lot of potential for banks to regain their status as the focus point of all the industries. At the same time, there is a lot of vacuum present within the innovation labs at banks which need to be filled. There are a lot of missing pieces to the puzzle which need to be fitted in. Varun Mittal, an associate partner at EY and a ASEAN fintech leader discusses with Ashish Cherian, a BFS Research Analyst on what banks and Fintechs can do to partner to not just survive, but thrive.
Below is a transcript of the episode.
Ashish Cherian: Fintech has taken the world by storm and it is being used in every sector. It’s alarming, the rate of advancement of fintech technologies and each of them are forming their own innovation labs to implement and adopt! Implement and Adopt – That is the key to success today. The main reason for the mass adoption frenzy is due to the fact that customer loyalty is on a decline. Customers want engaging experiences, they want digital experiences, they want a customer centric approach and if they don’t get it, they have lined back-ups to get what they want. When you look at the banking industry, the traditional banks and fintech companies – they have a lot to benefit from the innovation that is coming out. There is a lot of potential for technological implementations! Many institutions are actually sitting down and working out a fintech implementation strategy! However there would be roadblocks and bottlenecks, as is the case with every technological implementation.
What do you think could be some of the challenges that banks and Fintech Companies face while implementing and why do you think this partnership could change how we look at the industry?
Varun Mittal: The biggest challenge when it comes to innovation is how they can innovate on top of their traditional banking interfaces. Every traditional bank is aware of the challenges in spite of having voluminous data and customers. It is a major challenge especially when you look at advanced technologies, such as AI and ML and to engage in that technology along with the legacy systems. Secondly, even though Fintechs are bringing about a huge change, there is a lack of customer trust. For example, a particular use case and its applicability will always differ according to the geographic location. Each entity will have to ensure that they are moving across the ecosystem together and the entire output is suited to their liking.
Ashish Cherian: Engagement with fintech companies is important for banks. Collection deposits at banks are not as high as they were predicted to be and investments for fintech companies are increasing. Also it’s vital for banks to choose the right financial technology that will act as a catalyst or will help the bank thrive under such a lot of conversation and competition.
Under such circumstances, what do you think would be the right business model or fintech model which banks should follow as they engage with fintech firms?
Varun Mittal: There are two or three business models which primarily stand out. One of them is collaboration. Banks and Fintechs shouldn’t be seen as competition to each other but Fintechs should be seen as an extended arm for banks. Secondly, let us look into the entire ecosystem for a B2B or B2C environment. Today, when a fintech is trying to reach out to a customer, the customer has trust issues on whether that particular fintech would be able to deliver. The trust factor between the customer and the bank is higher than that with a fintech. Other business models would include based on how well banks collaborate with Fintechs. It would be challenging for a bank if the fintech that they want to collaborate with doesn’t have the necessary fintech funding. No CXO of the bank would want to take the risk of working with that particular type of fintech. So these are basically the major business models which banks should use while engaging with Fintechs
Ashish Cherian: What is the biggest fintech innovation that could acclaim all the applause in 2019?
Varun Mittal: A fintech innovation is one which makes the customers’ life easier. For example, consider payments for taxis, where one does not directly make payments with the taxi, but have their cards linked with the taxi application service. That would be, something that commands complete inclusion and customer convenience and probably the biggest innovation till date. For 2019, it’s too early to state.
Ashish Cherian: The first half of 2018 saw a total of 58 Billion Dollars being invested in fintech companies and start-ups, 20 Billion more than the whole of 2017 and also more than the aggregate from 2010 to 2016. That equates to huge innovations.
However financial intermediation costs have remained unchanged over the years. Do you think this trend will change in 2019?
Varun Mittal: Yes, but it’s again its subjective based on the growth and the investment. Suppose the investments did increase in 2018, which is because the investors and customers have released that there are some changes that have been brought in because of the innovations that the banks and Fintechs are bringing in. In terms of financial intermediation, I feel that it will change in 2019.
It’s extremely vital that banks and Fintechs take the opportunity and potential that is available and partner together to improve customer services and the core banking system within banks. With the amount of Fintech funding and technology that is available in the market, banks need to improvise to make sure that they are not substituted for challenging outsiders for payment options. With the help of Fintechs, it is possible that 2019 can be a revolutionary year for banks and fintech companies.
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