For the past 2-3 years, especially during and after the Covid-19 pandemic, businesses have struggled with operations. While most medium and large organizations were forced to change their policy, strategy, and management structure, the finance sector was among the most impacted.
The sector went through a major overhaul with the rise of a profound transformation called fintech.
Fintech is the name for new digital technologies that are potent enough to transform the finance industry for incumbents and big techs. The “disruption”, as we call it, is mostly caused by the developed business models, accessibility, and better financial products.
While we haven’t dedicated separate sections for the benefits and drawbacks of fintech, we—through the impacts—have tried to discuss them in brief.
Impact of FinTech on Financial Services
Every firm and business survives on the minimization of costs. In the financial sector, the absence of trust between parties, for example, lenders and borrowers, often makes it expensive to operate in paper-based processes.
With fintech, these processes can be facilitated faster—reducing transactional costs.
Impact on Key Economic Forces
Fintech has impacted most economic forces, such as:
Economies of scale
On the product side, huge fixed costs are associated with the establishment of back-office systems.
The creation and maintenance of the employee base, regulatory compliances, and minimum capital force them to widen their customer base and reduce these costs per individual.
Fintech, especially SaaS and BaaS products, has allowed these institutions to minimize their fixed costs without the need for rapid scaling.
By offering services like data analytics, online verification, and customer screening, fintech has allowed smaller competitors to offer similar services.
Economies of scope
Cross-selling loan products, insurances, and liabilities create synergies and reduce fixed and transactional costs.
In essence, if a bundle of products can be delivered through the same established channel, the costs are reduced and the products can be offered at a more competitive price.
Fintech services often partner with several investment, loaning, and insurance firms to bundle their packages with their service.
They usually keep their intermediary costs low to garner customers and deliver third-party products through the same channel. The development of a symbiotic relationship is the key here.
On the customer side, services such as payment methods (Paypal or Venmo), are valued more when the number of connected users increases.
Banks, catering to both customers and suppliers, can leverage a broader network to offer their financial services through these fintech applications.
Impact on Connectivity, Data Processing, and Storage
Even with the mass adaptation of decentralization of securities or digital systems by financial sectors, connectivity, data processing, and storage remained major barriers for even the large players.
As a small firm, you’re expected to be licensed and become a part of the transactional network to offer the services.
Moreover, the lack of resources may also limit your efficiency in data analysis and ultimately jeopardize risk prediction and personalization.
Fintech and increased connectivity through the internet and mobile technology rapidly improved the connectivity issue. These mobile operations are carefully tapped by fintech to remove intermediaries and offer personalized services.
The cost of data per GB has fallen from $0.11 in 2009 to $0.02 in 2020. Which made a significant impact on the storage issue.
Computing efficiency also improved with modern hardware. iPhones now being more powerful than the “supercomputers” of the 80s, the cost of data processing has improved by a lot—allowing the fintech providers more wiggle room for pricing.
Additionally, the development of AI and ML models for mathematical reasoning and logic implementation has paved the way for much faster decision-making.
Impact on Business Models
As mentioned, data storage has always been an issue for financial institutions. Zettabytes of personal data, being non-discardable, forces these institutions to continuously invest in hardware and maintenance.
For this very reason, the cost threshold to offer financial services has mostly been unreachable to smaller players.
However, cloud storage and on-demand scalability are now empowering new firms to dip their legs in different markets. Fintech is particularly a beneficiary.
The use of cloud storage in financial institutions has risen sharply over 2014-2018, allowing more and more fintech startups to act as “matchmakers” and deliver a range of products to their customers.
Furthermore, information asymmetries are also addressed with the effective use of fintech.
For example, with more efficient customer data analysis and access to better information, risk assessment is improved without the reliance on physical indicators such as collateral.
The Bottom Line
We’ve discussed the implication of fintech and digital transformation on the financial sectors. The major implications include faster processing, reduced entry threshold, and more competitive pricing. Reduced importance on collateral, bridging information gap, and personalization are additional benefits derived by fintech.