Prospects and challenges with Fintech’s on Financial system

Abstract
Financial services, including banking services, are at the cusp of a revolutionary change driven
by technological and digital innovations. A rapidly growing number of financial entities and
technology firms are experimenting with related technological and financial solutions as well as
new products in the financial services field which either modifies the way financial
intermediation takes place or leads to disintermediation.

FinTech is broadly an omnibus term used to describe emerging technological innovations in the
financial services sector, with ever increasing reliance on information technology. Commencing
as a term referring to the back end technology used by large financial institutions, it has
expanded to include technological innovation in the financial sector, including innovations in
financial literacy and education, retail banking, investments, etc

Technological innovation is considered to be one of the most influential developments affecting

the global financial sector in the near future. Innovations related to payments, lending, asset
management and insurance pose a challenge to business models and strategies of financial
institutions; yet, these also bring opportunities for both the incumbent market participants and
newcomers. At the same time, innovation can create new risks for individual financial
institutions, consumers of financial services, as well as the financial system as a whole.

This paper on “Prospects and challenges with Fintech’s on Financial system” can provide
insights to academicians and policy makers to consolidate the rules as they are needed for proper
control for these organisations and safe guard measures for existing financial system which had
been the back bone of developing Indian economy.
Key words: Financial stability Board (FSB), Committee on Payments and Market Infrastructure (
CPMI), Fin Tech, Cloud computing,
Introduction
Fintech is not a company with a headquarters and principle inventor behind it. FinTech is an
umbrella term coined in the recent past to denote technological innovation having a bearing on
financial services. FinTech is a broad term that requires definition and currently regulators are
working on bringing out a common definition. Its evaluation can be traced from late 1950 when
technology started to develop around the globe. Credit cards, ATM, Electronic stock trading, use
of mainframes in banks to record and maintain the transactions, internet and e-commerce all the
part of Fintech.
Fintech is an abbreviation of financial technology. It is about using technology to design and
deliver financial services and products. Banks, insurers and other traditional financial institution
are major users. There are also several start –ups (like Paytm) using it to smooth payments
processes, tackle fraud and more.
According to Financial Stability Board (FSB), of the BIS, “FinTech is technologically enabled
financial innovation that could result in new business models, applications, processes, or
products with an associated material effect on financial markets and institutions and the
provision of financial services”. This definition aims at encompassing the wide variety of
innovations in financial services enabled by technologies, regardless the type, size and regulatory
status of the innovative firm. The broadness of the FSB definition is useful when assessing and
anticipating the rapid development of the financial system and financial institutions, and the
associated risks and opportunities.
FinTech innovations have the potential to deliver a range of benefits, in particular efficiency
improvements and cost reductions. Technological developments are also fundamentally changing
the way people access financial services and increasing financial inclusion.
There is large investment in FinTech sector by venture capital Funds. During 2014 around USD
12 billion was invested in FinTech companies, and in 2015 the same is estimated around USD 20
billion.
Source : https://rbi.org.in/scripts/PublicationReportDetails.aspx?ID=892#2

A start up can be in two ways:

(1) B2B : It covers online payments between suppliers, manufacturers, dealers and agents. Web
based resources are enough to create a start – ups of this kind. Roll of banks remains intact as the
balances as received and paid between the closed group have to be updated via their own
business current accounts. However in the area of international finance, there is a common
tendency that every business partner is expected to have a PayPal account of their own, where
receipts and payments are stored in dollar terms by PayPal itself. There is however an option to
withdraw dollar earnings in to their home currency, then need for a local bank arises.
(2) B2C : These payment portals can be directly operated through the internet banking payment
gateways or through a Fintech start up. In the latter case, a customer transfers or recharges the
Paytm ( example) such that each time he spends money for products or services he can pay
through the Paytm Wallet system. When Fintech startups becomes widely acceptable, such that
everyone withdraws only that part of money that they need in physical shall be transferring that
small proportion to their own bank account and use ATM cards to with draw that hard money.
Advantages
 Increasing competition: For any system to be effective, should have a healthy
competition without significant transactions costs. Current banking systems collecting
very high amount as transaction costs due to lake of full-fledged competition among the
 banks. Even the introduction of private and foreign banks in India hadn’t been upto mark
to strengthen the competition in the banking industry. Fin Tech starups shall create such
competitive environment. They can be easily started with low capital incentive but high
profit potential as most of the transactions are automated. Low employee intervention and
high automation increases creditability of digital transfers.
 Lowers customer costs : This is the ultimate aim that infact motivating the startups.
Completion of economic transactions in real time, elimination of middle man
commissions and transportation needs of the customers etc had considerable impact on
reducing the customer costs. With increase in operations such costs are expected be much
lowered.
 Provides service to people who don’t use traditional banking.

Renowned Fintech companies are

 Transferwise : An international money transfer provider
 Lenddo : A credit – scoring service that uses social media
 Ripple : A financial settlement service that allows banks around the world to make direct
transactions with each other
Application of Fin Tech
A simple categorization of some of the most prominent FinTech innovations into groups
according to the areas of financial market activities where they are most likely to be applied is as
under:
Categorization of major FinTech Innovations
Data
Payments, Clearing & Deposits, Lending & Market Investment Analytics &
Settlement capital raising provisioning management Risk
Management
Mobile and web-based Crowd-funding Robo advice Big data
Smart contracts
payments Peer to peer lending Smart Artificial
Cloud computing
Digital currencies Digital currencies contracts Intelligence &
e-Aggregators
Distributed ledger Distributed Ledger e-Trading Robotics
The broad FinTech products/services offered in Indian financial markets are as under
Peer-to-Peer (P2P) Lending Services
These companies use alternative credit models and data sources to provide consumers and
businesses with faster and easier access to capital, providing online services to directly match
lenders with borrowers who may be individuals or businesses. Examples are Lendbox, Faircent,
i2iFunding, Chillr, Shiksha Financial, Gyan Dhan, and Market Finance.
Personal Finance or Retail Investment Services
Fintech companies are also growing around the need to provide customized financial information
and services to individuals, that is, how to save, manage, and invest one’s personal finances
based on one’s specific needs. Examples are FundsIndia.com, Scripbox, Policy Bazaar, and Bank
Bazaar.
Miscellaneous Software Services
Companies are offering a range of cloud computing and technology solutions, which improve
access to financial products and in turn increase efficiency in day to day business operations. The
scope of FinTech is rapidly diversifying at both macro and micro levels, from providing online
accounting software to creating specialized digital platforms connecting buyers and sellers in
specific industries. Examples include Catalyst Labs in the agriculture sector, AirtimeUp which
provides village retailers the ability to perform mobile top ups, ftcash that enables SMEs to offer
payments and promotions to customers through a mobile based platform, Profitbooks (online
accounting software designed for non-accountants), StoreKey, and HummingBill.
Equity Funding Services
This includes crowdfunding platforms that are gaining popularity as access to venture capital is
often difficult to secure. These services are particularly targeted at early stage business
operations. Examples include Ketto, Wishberry, and Start51.
Crypto currency
India being a more conservative market where cash transactions still dominate, usage of digital
financial currency such as ‘bitcoin’ has not seen much traction when compared to international
markets. There are, however, a few bitcoin exchange startups present in India – Unocoin,
Coinsecure, and Zebpay.
Friend of Banking system
These five decades of developments have created a financial technology infrastructure which
most people never think about, but use almost everyday. It’s also important to note that
throughout that 50 year period, fintech developments were also creating more sophisticated risk
management, trade processing, treasury management and data analysis tools at the institutional
level for banks and financial services firms. Bloomberg , Thomson Reuters, SunGard and Misys
are just a few of the players that make up the existing set of large fintech companies that have
built this institutional infrastructure.
What is striking about the last 65 years of development in these technologies is that while they
became mainstream and widely used by banks and their customers, the banking sector was not
threatened. On the contrary, banks grew. In looking at the U.S.’s FDIC data, from 1950 to 2014,
the number of bank branches in the country grew from approximately 18,000 to over 82,000. In
India there are 104000 branches for various banks.

Challenge to Banking system

The role played and expected to be played by Fintech is to be divided into two sub categories : -
 Institutional focused – Fintech ( Currently being played)
 Customer focused – Fintech
So far, Fintech helped banks by providing the infrastructure needed for faster processing of
customer data, lowering employee cost and improving the BPE ( Business per employee) base
tremendously. Over the years banks competed in using the Fintech platform for improving the
service base to the customers.
When Fintech gradually improving to provide retail financial services – with customer focus, it’s
the starting point for threating very existence of banks. Customer focus and Institutional focus
can be mutually exclusive. Their parallel existence as claimed by startup companies is only a
means of creating competition and better service with lowered cost to customers. But reality on
the other-hand is not free from doubts. The main reason for suspecting the threat is that majority
of people who are encouraging this platform are experts restricted by regulatory agencies after
2008 financial crisis.
New Idea : When Fintech was Institutional focused, most of the back office work is done by
technology itself, such that managers expertise themselves in the area of front office – support to
customers, alternative sources of better investments, stepping into investment management and
other cross banking activities. But after 2008 crisis, regulatory agencies had become so strict
that sub – prime lending or investing had almost limited. Managers had to devote lot of time in
compliance procedures in the back – office rather than spending happy time with customers –
explaining mutual benefits with new schemes, risk and return profiles of their banking products.
Thus financial analysts have some serious doubts on encouraging customer – focused Fintech
and the impact on banking sector and economy are being researched by them.
Future of Banking Industry
A better understanding of this concept can be easy if we recollect our knowledge about how
amazon had almost replacing book industry. A true book lover who used to spent hours of time
in a books store is doing it on amazon sites. Issues of this kind are also common with impact of
online marketing on physical retail stores that provide self-employment to millions around the
globe.
But experts claim that banking is little bit different due to the presence of government
regulations to protect their existence. Infact banking system is core to the financial integrity of
the nation itself. As such many people easily overrules the possibility of vanishing of physical
banks on earth due to the introduction of Fintech at any level.
To understand the likely impact, of Fintech one need to understand the maximum level of utility
the so called Fintech can create to the customer. Technology by itself is never a great one, unless
it is capable of creating value to the customers. As long as enhanced facilities with ease of access
to facilities is being delivered by a technology, its value creation multiplies on its own and its
reach to customer and their acceptance is just a matter of time. Does the Fintech had these
capabilities as of now and what more can it added to it in their journey by directly connecting
with customers ?. Looking at the developments coming in cloud computing, server technologies
and robotic innovations leading to AI ( Artificial Intelligence ), one has to say Yes!
If banks does not learn to diversify themselves by adapting to technological challenges, customer
retention becomes a difficult game. Processing of customer requests need to be done in real time
as they do happen with technology. Well adaption of technology surely adds to the capital cost at
the inception, there is a lot of scope to reduce the processing cost, maintenance cost and
employee costs for the banks. So flexibility should be increased in their entire system, such that a
change can be easily initiated as when thought necessary.
Thus to combat on Fintech, banks have to adopt similar technology by partnering with
companies investing in Fintech. Activities in such partnership may range from mere investing in
Fintech startup to Funding the Research and development programs in the area of Fintech.
Annual global Fintech deals and Financing
Year In billions of Dollars Trend ratio
2013 38 100
2014 80 211
2015 143 376
2016 138 363
2017 1108 2916

Startup companies around the globe are increasing tremendously over the past 5 years, where
venture capital financing is doubling every year as seen from the above table. The growth rate
that took place in 2017 is what current banking system should look at to start thinking
strategically for their survival in near future. The speed at which deals are happening indicates
confidence of investors which cannot be ruled out by current banking system.
What banks are currently doing in this Fintech scenario ? Are they transforming
themselves to face the more likely threats?
As a part of the treat reduction strategies, banks invested in these startups to gain by a share
provided by these startups if they turn successful in future. Infact massive investments done in
2017 are mainly due to banks participation in VC – backed financing of Fintech companies.
These measures are just indirect means of insuring banks minimum profitability. But a
permanent solution needs to go beyond these indirect investments. They are expected to
transform themselves though adoption of new technology on their own and communicate to the
customers, about the easy of banking they can perform using these new technologies. Customer
retention in Fintech domination is unidirectional – satisfying your customer through technology
and nothing else.
Process of transformation : The story of a bank in US called Signet Bank, whose position in
1980’s is just 350th largest bank in US is relevant in this context. In a very short period of time,
this bank had transformed into world’s largest bank. The process they used in this transformation
journey is also very simple. It’s nothing more than data analysis using a spread sheet with rows
and columns. They applied tailor made technology to add many features ( rows and columns )
and many relationships ( direct and indirect or dependent and independent ) to solve the
equations to assess applicants eligibility for loan, credit cards and even identifying the
prospective customers who had not even approached this bank. The drilling down capabilities of
internet are used exactly to suit to the requirements their analysis. While other banks are
rejecting due to their incapabilities to find those additional feature needed to assess the quality of
lending, Signet Bank found it as an opportunity, added technology to find real quality and
capitalized on this strength provided by technology.
Above story is just an example of how well banks can convert the potential threat into
opportunity. Thus vision is the best solution to deal with volatility.

Conclusion
FinTech and its impact on global financial services
Innovation and technology have brought about a radical change in traditional financial services.
The world has seen the emergence of more than 12,000 start-ups and massive global investment
of USD 19 billion in 2015 in the FinTech space. The global FinTech software and services sector
is expected to boom as a USD 45 billion opportunity by 2020, growing at a compounded annual
growth rate of 7.1% as per NASSCOM.
Technological innovations compel banks to modify their way of doing business and earnings
models. Banks currently perform activities in several market segments, viz., payments services,
raising deposits, lending, and investments, etc. These are segments where technological
innovations will result in more high-grade products at lower prices. If banks do not adopt them
quick enough, innovation by rivals may put their business models under pressure. Loss of
consumer contact and fragmentation of the value chain could then diminish banks’ ability to
profit from the cross-selling market.
Global Technology players, viz., Apple, Google and Facebook that adopt innovations effectively
and carry technological innovation and new services across the financial value chains. These
companies displace existing financial institutions by exploiting their scale and innovative
capacity.
Technological innovation brings opportunities and risks. FinTech can increase efficiency and
diversity by boosting competition within the financial sector. This effect will reduce market
concentration and may lead to better services for consumers, in particular as new technological
processes often result in greater user-friendliness. This is in particular relevant for the Indian
banking sector. Moreover, innovative new entrants provide an incentive for established financial
institutions to become more competitive and focus more on their customers.
A more diverse financial sector also reduces systemic risk by increasing the heterogeneity
between the risk profiles of market participants. In addition to creating new opportunities,
FinTech also carries potential risks for the financial sector. These include risks to the
profitability of incumbent market players as well as risks related to cyber-attacks.
As the rise of FinTech leads to more and more IT interdependencies between market players
(banks, FinTech, and others) and market infrastructures, IT risk events could escalate into a full-
blown systemic crisis.
The entrance of new FinTech players has not only increased the complexity of the system but has
also introduced heightened IT risks for these players who typically have limited expertise and
experience in managing IT risks.
FinTech and its impact on Indian Financial Services
FinTech innovations, products and technology
India’s FinTech sector may be young but is growing rapidly, fueled by a large market base, an
innovation-driven startup landscape and friendly government policies and regulations. Several
startups populate this emerging and dynamic sector, while both traditional banking institutions
and non-banking financial companies (NBFCs) are catching up. This new disruption in the
banking and financial services sector has had a wide-ranging impact.
In India, FinTech has the potential to provide workable solutions to the problems faced by the
traditional financial institutions such as low penetration, scarce credit history and cash driven
transaction economy. If a collaborative participation from all the stakeholders, viz., regulators,
market players and investors can be harnessed, Indian banking and financial services sector
could be changed dramatically. FinTech service firms are currently redefining the way
companies and consumers conduct transactions on a daily basis.
The Indian FinTech industry grew 282% between 2013 and 2014, and reached USD 450 million
in 2015. At present around 400 FinTech companies are operating in India and their investments
are expected to grow by 170% by 2020. The Indian FinTech software market is forecasted to
touch USD 2.4 billion by 2020 from a current USD 1.2 billion, as per NASSCOM. The
transaction value for the Indian FinTech sector is estimated to be approximately USD 33 billion
in 2016 and is forecasted to reach USD 73 billion in 2020.