Fintechs & Digibanks: is it as beneficial as everyone says?

As the world progresses forward, technology seems to be taking over. Wherever you look, online networking can be seen. Whether it’s electronic billboards or those apple devices that everyone seems to own, the internet surrounds us consuming our everyday lives. 

Fintech is one of the newer discoveries, only properly emerging around 2014. Fintech - financial technology - refers to the ‘integration of technology into offerings by financial service companies’ (Investopedia, 2022), and is used as a means of improving the quality and efficiency of businesses, while automating certain processes for the comfort of the consumers.

 

Fintech and digital banking have emerged regarding 3 aspects primarily: technology, customers, and regulation. 

Firstly, as fixed start-up costs of businesses can often be quite expensive, the required assets - such as land space, etc - acted as barriers to entry. Due to the invention of technology, start-up costs were reduced allowing more banks to initiate new businesses and operate them online. This encouraged many entrepreneurs to open new fintechs online, supporting a rise in the use of digital banking. 

Secondly, customers appreciated fintechs much more than the incumbent banking industry as technology ‘empowers consumers to scrutinize their providers more heavily’ (Graham, 2017). Due to the increase in substitutes, and quick responsiveness of producers online, it convinced more consumers to switch to fintechs. Furthermore, due to the cleaner and more effective customer service, many appreciated this new form of banking.

Finally, along with concrete banks having to comply with regulations, the added restrictions on lending have majorly increased borrowing costs for consumers, further diminishing physical banks’ ability to offer these services. This has allowed fintech startups to step in, offering alternatives that are more attractive to consumers, thereby making them a success.

 

Impacts on Consumers

 

One major fintech, M-PESA, provides more than 51 million customers across seven countries in Africa with a safe, secure and affordable way to send and receive money (Vodafone Foundation).

Digital banking can be a highly beneficial process. Not only can it help raise money by decreasing business costs and consumer costs due to lower commissions, but it can also help to democratize the economy. This is due to more people having the ability to become economically active as now they are not restricted by the state or region in which they live. This results in financial inclusion as Fintechs often lend to smaller businesses - such as hawker center stalls - whom banks tend to avoid. According to World Bank Blogs (2021), over the last decade, 1.2 billion previously unbanked adults gained access to financial services, and the unbanked population fell by 35%. This is more attractive to consumers as they are able to open businesses with greater ease, having access to all the financial products and services that they require.

 

Additionally, it promotes efficiency due to time optimization as response times are much quicker online. Consumers are also able to conveniently access their accounts worldwide and 24/7, which can be quite advantageous especially whilst traveling. Transactions, too, can be monitored anytime anywhere, all from within a single app. This has also been proven useful during recent COVID-19 lockdowns when many, although stuck at home, have had access to remote banking. Lastly, fintechs offer many solutions, providing a variety of value-added services including but not limited to: utility bill payments, mobile phone recharges, insurance policy purchases, taxes, and pension accounts.

 

On the other hand, there are many disadvantages as well, the most prominent being discrimination. There is a huge global imbalance as a large part of the world’s communities do not have access to broadband and technologies. This mainly occurs in developing countries or elderly populations, due to the inaccessibility of devices. These technological advancements exclude this proportion of the population as they must be well-versed with evolving technologies, or at least own an internet-enabled smartphone due to the strong reliance on the internet. Additionally, another section of society is disadvantaged as due to the increase of digital banking, requirements for human labor in the financial industry falls, leading to a rise in unemployment. Even though this rise in unemployment may be temporary, it will likely cause negative impacts on the economy as aggregate demand falls, decreasing economic growth.

 

Furthermore, the lack of regulation may easily lead to potential fraud, as the internet is often unsafe. As many personal details such as bank passwords and account details must be entered into such apps, there is a risk of exposing these to unethical practices, which may breach privacy. This is especially the case for those who are not as well-versed in understanding and keeping up with the constantly evolving technology, leading to internet phishing. Finally - due to the lack of physical branches - when there is a problem in the service it can only be dealt with online, which is unlikely to be an effective solution.

 

Impact on Incumbent Banking Industry

 

As fintech emerges, it is undoubtedly reshaping business for the incumbent banking giants themselves - but is it for the better or worse? The traditional banks may benefit from this improved fintech technology, increasing the efficiency and convenience of their own firm, and allowing increased support for their consumers. Banks may achieve this through acquiring or amalgamating with newly established fintechs, increasing their rate of growth. According to PwC Global (2016), over 90% of banks expect growth in the usage of mobile applications, much higher than any other financial sector. As banks grow further, they can benefit from economies of scale, cutting average costs whilst increasing output. This may further generate innovation, increasing the quality of the service. Finally, the incumbent banking industry may not be impacted by the rise in fintechs as much as expected. Although fintechs may be more efficient, they have not had time to build up a recognisable brand name that consumers can hear and trust. This trust often takes years to build, and in this aspect, the existing banks are in the lead as consumers may choose not to work with banks they haven’t heard of.

 

Another way these banks may benefit from the new technology is through starting their own fintechs. One widely used example of neobanks is Digibank by DBS. Apps such as these generally allow their users to view account balances, transfer money, pay bills, apply for accounts and register for credit cards online. “A bank squeezed into a smartphone”. This would allow the banks to reduce their dependence on land space, and possibly shift loss-making sectors to applications online. Banks could also create new sectors such as customer service chatbots. This would improve a bank’s immersification into the digital banking industry, possibly enhancing consumer responsiveness through a rise in productivity. By existing banks adjusting to the boost in fintechs, consumer attractiveness may increase, leading to a more profitable business for the whole industry.

 

However, though those able to adapt and grow with the use of fintechs will get stronger, the smaller, weaker, banks are likely to get wiped out. As fintechs began their operations with the new state-of-the-art technology, they already have a headstart on banks that

may take longer to adapt to these new technologies as they are already struggling with legacy archaic systems.  This can cause a huge hit to the bank’s revenue and profit, as consumers slowly diverge their attention toward the digital banking industry, resulting in a loss of business. ‘By developing narrowly defined, but highly effective solutions they have managed to step into and take over segments neglected by traditional banks in terms of offerings’ (PricewaterhouseCoopers, 2016).   If fintechs are able to empower and finance micro-businesses that banks ignore, those businesses would then create jobs, leading to a possible overall rise in unemployment in the long term. Over time, the fintechs are likely to increase in productivity and quickly debug malfunctions, slowly overtaking more aspects of the banks as they provide more benefactions for the customers, possibly resulting in bankruptcy.

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As of now we have seen a steep incline in the number of fintechs, however these have yet to be tested in a time of serious economic crisis. Already many fintechs have been undergoing a rough time, and if ever faced with extreme levels of hardship, the weak ones will likely, too, get wiped out, bought by other fintechs, or overtaken by banks, leaving only a few successful in the long run.

 

In conclusion, the increased competition between the existing banks and neobanks should cause an increase in productivity, and allow for collaboration across the banking ecosystem, resulting in both parties profiting. However, this is unlikely to be the case. Though a partnership would spring up new opportunities for both industries, ‘several major impediments inhibit business relations between banks and FinTechs’ (PwC, 2016), establishing a more rivalrous affiliation, instead.

 

But there will definitely be one winner — the consumer.