Fintech – A Disadvantage of Traditional Banking Institutions?

Financial technology is the innovative and technological innovation which aims to replace conventional financial instruments in the delivery of economic services. This technology can be defined as financial tools or software applications that are used to make financial services more efficient, transparent and effective. Financial technology involves new financial instruments, modification of existing financial instruments and application of information and analytics on financial data. Financial technology helps in reducing cost and improving efficiency of financial service delivery. Financial technology is an emerging field that makes use of new technologies to enhance financial activities in finance.

The main sources of innovation in financial technology are software application and technologies such as Big Data. Big Data is described as “a set of data, knowledge and systems that are too large to be assimilated by any one person or even department” and it is expected to “accelerate the pace of decision-making”. The main advantage of using big data is that it provides relevant information for decision-making. Apart from financial institutions, companies are now making use of this technology for decision-making in product and service design, supply chain management, industrial planning, customer relationship management, supply chain execution, and human resource management. Fintech companies use the opportunities provided by big data for better investment returns, improved business performance, improved customer service, and enhanced asset utilization.

Another important feature of fintech is cashless transactions. Traditional banks require the physical presence of customer at a branch or at the front desk. In case of online payments, the customer needs to wait for long hours at the bank to open an account. Moreover, the customer needs to transact online because many online financial institutions do not have physical locations. Therefore, customers can transfer money through online transaction but financial institutions incur expenses for these services which result in under usage of cashless transaction technologies.

Many governments and other regulatory bodies have recognized the importance of fintech in financial services. Several rules and regulations have been developed to protect the interests of financial institutions involved in any financial transactions. According to these rules and regulations, financial institutions are required to develop software applications that facilitate safe and reliable financial transactions. In addition, financial institutions are not allowed to directly deal with end users.

As a part of this implementation, several organizations like software development companies, internet banking platforms, and financial services retailers have entered the fray. These companies focus on developing online applications for end-users. Another important aspect is that these platforms cannot be used by any organization other than the ones who are partnered with banks. These platforms are developed by these organizations for end-users and therefore, cannot be used by fintech companies for their own profit. Most importantly, the application of these technologies requires considerable investment.

Another disadvantage of fintech is that most of the businesses adopting these technologies are small or start-up. Therefore, their capacity to profit from the use of these technologies is limited. Moreover, as these applications are developed for end-users, organizations can use their own personnel in developing these applications. Thus, the scope of financial services offered by traditional banks is being limited by the emergence of these technologies.