Navigating the Fintech Industry: Elevating or Demoting the Banking & Finance Industry?

Navigating the Fintech Industry:

Elevating or Demoting the Banking & Finance Industry?

With approximately 30,000 startups focusing on fintech and the industry being recognised as one of the most fast-paced and innovative fields, what exactly is Fintech and what impact does it have on our current Banking and Finance industry?

This article will briefly elaborate on the Fintech Industry and how it is linked to the Banking and Finance industry. The discussion on its beneficial and detrimental impact on the Banking & Finance industry and its relation to the current prevalent issue of ‘Sustainable Accounting’ will also be a part of this article.

What is Fintech and How is it Related to the Banking & Finance Industry?

Financial Technology, better known as ‘Fintech’, is a term used to describe new technology that seeks to improve and automate the delivery and use of financial services. The Fintech industry started with lots of vague and unreliable angles that raised the hesitation of financial institutions in applying them. However, with the continuous innovation of products and services that the Fintech industry offers, almost all financial organizations and even SMEs have started to use them in their transaction and asset management.

The Financial Technology industry comprises companies and startups whose focus is heavily on the innovation of technology for the improvement of the delivery of financial services. In one of its most common forms, we can even encounter a product of a Fintech company in our daily lives. Basic financial services such as digital payments or cashless transactions, online banking services, ATMs, etc. are being facilitated by Fintech. In recent times, groundbreaking innovations have significantly streamlined and enhanced the investment process, offering investors unprecedented opportunities for efficiency and optimization. Notably, advancements like Robo-advisors and sophisticated Portfolio Management tools have emerged as game-changers, reshaping the landscape of investment strategies and opportunities.

There is a complex and dynamic relationship between Fintech and the Banking and Finance industry. Quoted from a report by Tapestry Network, financial institutions initially viewed fintech as a competitive threat due to the possibility of a disruption to traditional banking and other uncertainties. Over time, they gradually changed perceptions and started to see fintechs as potential partners to aid them in launching more innovative banking products and services, as recent studies and findings have proven that the opportunities offered by Fintech have elevated both Banking and Finance aspects by providing technological innovations that helped the industry gain optimum efficiency and remain competitive. However, with the shift to digitalization brought by Fintech, there has been said to be a disruption in the Banking sector. According to a recent report written by PWC, with the growing innovations of Fintech, it is estimated that almost 90% of financial institutions will expect growth in their usage of mobile applications. Thus, there will be more reliance on Fintech soon.

Opportunities Offered by Fintech to the Banking & Finance Industry

1.    “A Better Future of Banking”

Fintech enables banks to revamp their traditional business model of brick-and-mortar to technologically revolutionized ones. With all the innovation provided by Fintech, banks are now offered the opportunity to expand access to financial services and enhance their overall services to customers, along with improving their financial stability.

Fintech’s advancements such as E-wallets, AI, and Smart Chip Technology have been said to be one of the ways to open a better path for banks in strengthening their internal processes to deliver optimal service to their users. E-wallets and Mobile Banking Apps increased the transparency of the banking sector by allowing customers to monitor their accounts, track transaction history, and gain more control over their financial data). The implementation of AI has also become an integral part of banking’s brighter future. By offering advanced data collection and analysis, banks are now equipped with better historical information that can help them predict fraud, make credit decisions, and create predictive analyses. Moreover, Smart Chip Technology or EMV is a chip-based innovation that enhances payment systems, improving the security of online transactions and increasing customer confidentiality in electronic payments.

From Figure 1.1, we can see that the value of net interest income generated from digital banks is continuously increasing from the year 2017 until now. The values are even predicted to keep escalating until 2028, showing a verifiable positive impact of Fintech on the banking industry. The continuous growth of Net Interest Income will aid banks in reaching their optimum profitability as it is one of the fundamental aspects of a bank’s revenue and earnings.

1.    Simplified Investing with the Help of Fintech

Products of Fintech have been said to bring new opportunities and advancements for a more simplified process of investing. Advancements such as Stock Trading Apps, Financial Planning Apps, and Robo-advisor have helped investors evaluate investment opportunities, optimize portfolios, and mitigate risk which increases the investor’s return and efficiency.

When it comes to investing, one common barrier young and new investors face is their lack of capital. With the help of Fintech products such as Trading Platforms, have helped out investors by opening up the chance to invest to practically everybody. A certain Fintech platform/app eliminated account minimums, and trade fees, and offered maintenance fees starting as low as $1 a month, giving cost-efficiency benefits to investors.

Apart from being cost-efficient, a Fintech innovation known as “Robo-advisor” is also popular among investors whose aim is to simplify and maximize their return from an investment. Robo-advisor, also known as Robo, is a type of brokerage account that automates the process of investing. This innovation acts as a cheaper option for Financial Advisors while also offering a variety of beneficial services to investors. Robo-advisors can manage personalized portfolios, perform algorithm-based financial planning, and offer advanced investment services that have helped investors gain optimum returns while also minimizing risk through diversification. By also offering to simultaneously manage sub-portfolios with different asset allocations to match the investor’s financial goals, there is no doubt that Robo-advisors have given a major help to investors in simplifying their investment process. With the data provided in Figure 1.2, it has been reported and predicted that the popularity of Robo-advisors will continue to ascend until 2027, which validates the usefulness of Robo-advisors for asset management among investors.

2.    Innovative Automation Benefits from Fintech APIs, Regtech, etc.

Incomplete Data Analytics and Regulatory compliance concerns are considered to be a fraction of issues in the Banking and Finance Industry nowadays. Fortunately, Fintech companies came up with innovations such as Finance-specialized APIs, and Regtech to aid companies with these issues.

Fintech APIs, by definition, are finance-specialized Application Programming Interface that allows businesses to integrate banking and financial services components into applications. The development of Fintech APIs benefits both consumers and the banking and finance industry as it offers efficiency for both sides. Incorporating APIs into various applications allows consumers to simplify their daily processes that involve transactions, thus increasing their overall consumer satisfaction. APIs grant access to an effortless banking system for consumers and at the same time, allow the corresponding financial institution to gain the benefit of data aggregation. By allowing data aggregation, financial institutions are taking advantage of these APIs to perform a quick-paced collection and analysis of data which will help the organization obtain more comprehensive data of their customers.

Before the 2008 crisis, a bank would have to handle about ten regulatory changes a day, while in 2017, this figure rose to 185. Regulatory Technology, or RegTech, is defined as the use of information technology to aid companies in ensuring and managing regulatory compliance amid unpredictable regulatory changes. With the help of RegTech, companies, especially financial institutions can gain the benefit of a flexible and robust IT System to manage their regulatory compliance in a more efficient and less costly way.

Threats Posted by Fintech to the Banking and Finance Industry

1.    Cybersecurity and Data Privacy Violation

Fintech organizations, driven by technological innovations, inadvertently transform into alluring targets for cybercriminals. The intrinsic dependence on digital platforms and interconnected systems exposes these entities to the risk of malicious activities. With the increasing sophistication of cyber threats, the jeopardy of vital financial data becomes a critical concern. Security breaches in the Fintech sector may result in compromised data integrity, breaches of privacy, and the revelation of sensitive financial information. This elevated susceptibility amplifies the potential for financial fraud, identity theft, and other harmful activities, posing significant consequences for both individuals and institutions. Consequently, the Fintech industry must prioritize robust cybersecurity measures, stringent regulations, and continuous advancements in protective frameworks to mitigate the risks and fortify the resilience of financial systems in the face of evolving cyber threats.

2.    Disruption to Traditional Banking

which includes digital wallets, mobile payment apps, cryptocurrencies, and peer-to-peer payment platforms, presents a potential drawback concerning the stability of the banking system. While these innovative payment solutions offer convenience, efficiency, and accessibility, their widespread adoption could pose challenges to the traditional banking infrastructure. The decentralized nature of cryptocurrencies and peer-to-peer transactions, in particular, has the potential to disrupt the established banking model, challenging the central role of financial institutions. As more users gravitate towards decentralized and digital forms of currency, the traditional banking system may face a decline in transaction volumes and could encounter difficulties in adapting to the evolving landscape. Striking a balance between embracing innovation and preserving the stability of the banking sector becomes crucial to ensure a harmonious coexistence between traditional financial institutions and the rapidly evolving world of Fintech.

How Does Fintech Affect Sustainability Accounting?

Fintech has a transformative impact on sustainable accounting by enhancing transparency and data accuracy. Through innovative digital tools and blockchain technology, Fintech solutions enable real-time tracking and verification of financial transactions, making it easier to assess business activities' environmental and social impact. This results in more reliable Environmental, Social, and Governance (ESG) reporting. Furthermore, Fintech fosters the development of sustainable finance products and investment platforms, directing capital toward environmentally responsible projects. By streamlining financial processes and providing access to real-time data, Fintech empowers organizations to incorporate sustainability into their accounting practices, ultimately promoting more accurate and transparent reporting of sustainability-related metrics.

In the contemporary business realm, the intersection of financial technology (Fintech) and sustainability accounting signifies a profound transformation in how organizations approach environmental and social responsibility. Fintech acts as a catalyst for transparency and precision in sustainability reporting, leveraging advanced digital tools and innovative blockchain technology. Fintech's influence lies in its ability to facilitate real-time monitoring and validation of financial transactions. By seamlessly integrating these technologies, businesses can comprehensively evaluate their impact on the environment and society. This transcends traditional metrics, offering a nuanced and accurate portrayal of their Environmental, Social, and Governance (ESG) practices.

Furthermore, Fintech is a driving force behind the evolution of sustainable finance. It contributes to the creation of investment platforms and financial products that actively channel funds toward eco-friendly and socially responsible projects. This transformative approach aligns capital with environmentally conscious initiatives, showcasing the potential of finance as a driver for positive change. As Fintech streamlines financial operations and provides instantaneous access to critical data, organizations are empowered to seamlessly embed sustainability into their accounting practices. This not only enhances the accuracy of reporting but also fosters a culture of transparency, reinforcing the commitment to sustainable and responsible business practices. The symbiotic relationship between Fintech and sustainability accounting is poised to redefine corporate responsibility in the digital age.

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