Fintech integration at its core: What firms need to know

Fintech integration at its core: What firms need to know

Fintech integration at its core: What firms need to know

Nowadays, technology is an essential ingredient of the financial services industry’s success. Financial technology (fintech) seeks to improve and automate the delivery and use of financial services. Through the use of specialized software and algorithms on computers and smartphones, fintech helps companies, business owners, and consumers manage their financial operations, processes and lives better, according to Investopedia.

What are the different types of fintech?
Fintech is transforming many categories of the financial services market. Here are some of the major fintech categories, according to ianmartin.com:

  • Lending: Fintech lenders assess borrowers’ creditworthiness quickly and automate the underwriting process. These new models enable fintech lenders such as Kabbage and Borrowell to offer loans to more borrowers.

  • Payments: Fintech companies allow consumers to send money quickly and cost-effectively. Technologies like blockchain make it possible for these companies to process payments more cost-effectively than traditional companies.

  • International money transfers: Fintech companies offer faster, less expensive international money transfers than traditional companies. Ripple, for example, can transfer money internationally in eight seconds.

  • Personal finance: Plenty of apps on the market can offer advice and help with budgeting. Companies in this category include Mint, which helps consumers create budgets, and Level Money, which helps consumers save.

  • Equity financing: Companies in this category make it easy for businesses to raise money. Some companies work to connect accredited investors with vetted start-ups, while others use a crowdfunding model and let anyone invest in new businesses.

  • Consumer banking: These companies have the opportunity to reach underbanked consumers. Those who can’t get approved for a credit card – or do not want one – can get prepaid cards from fintech companies. Green Dot and Moven are some of the companies in this category.

  • Insurance: Many companies in this category are focusing on distribution and using new technologies to reach customers who are underserved by insurance. However, since the insurance market is highly regulated, these companies tend to partner with traditional insurance companies.

Why is fintech important?
Due to its growing success, fintech has become one of the most important characteristics of today’s economy and finance. The following attributes make fintech a vital integration, according to Axios Holding:

Universality
Financial services have never been more accessible, thanks to the internet’s power. No matter where a company is located, all it needs is Wi-Fi to enter the fintech world. EY Global interviewed more than 27,000 consumers in 27 markets across six continents (where 10 out of 27 are emerging markets). Among the SMEs interviewed, 56% use a banking-and-payments fintech service and 46% use a financing fintech service.

Fintech has not only made financial services available everywhere but also for anyone. This digitalization has created an extraordinary evolution of the financial services sector.

Economic growth
The adoption of fintech services increased from 16% in 2015 to 33% in 2017 to 64% in 2019, according to EY’s Global FinTech Adoption Index 2019. In China alone, the adoption rate is 95% due to money transfers and payment apps.

Business empowerment
Fintech offers solutions wherein all businesses can have enormous benefits.

SMEs need economic growth more than well-established companies and frequently face difficulty in securing the financing that they need to flourish. Fintech products are efficient, effective, and give SMEs access to a variety of rich funding options. These options are tailored to the needs of small businesses and include marketplace (peer-to-peer) lending, merchant and e-commerce, invoice, online supply chain, and online trade finance.

As for well-established businesses, electronic invoicing, open APIs, HP solutions, and other fintech enable them to expand their services further, operate at higher efficiency and at scale.

Ability to turn big data into meaningful data
Businesses have the ability to collect big data based on their customers, sales, web traffic and many other data points. However, they need to know how to use that data in their favour. Fintech helps companies of all sizes understand and manage the data that they gather by creating tools and processes that convert it into meaningful data. In this way, businesses can analyze patterns, trends or links. Fintech can also create reports that will help them track new insights and useful information to create effective strategies in their industry.

Improvement of traditional financial services
Through the competition between fintech and traditional financial services, there is a driven improvement that promotes the replacement of legacy systems with innovative new solutions, which can offer benefits to consumers and other sectors of the economy. Financial institutions have been familiarizing themselves with their new dynamic audiences: millennials and Gen Z. Doing so has made them improve their digital services by putting more effort into user experience and the current technology that these audiences use.

How can firms integrate fintech?
There is no one right way to proceed with fintech integration. Rather, financial institutions should explore all options with an eye to their business objectives and future. Here are some ways to approach fintech, according to KPMG:

Build

The build approach enables organizations to define the scope of their innovation initiatives, design tailor-made products and create buy-in among users over the course of an initiative. However, very few financial institutions have the time, resources, capacity, and agility needed to focus on fintech innovation efficiently and effectively.

Procure

Many fintech companies are looking to sell or license their technologies to financial institutions. The benefits of this approach include reduced innovation cost and access to established solutions, talent, and innovation capacity. However, to make the most of this option, institutions need to evolve their procurement processes to accommodate taking on the capability from small, start-up fintech companies that can help them solve problems in specific areas.

White label

For financial institutions looking for custom solutions, there are a growing number of fintech and other tech companies capable of white-labelling a product or service for them, which they can brand and sell. The benefits of this option include prescribed costs, a diversified approach to innovation, and the ability to test value and fill product/service gaps. On the other hand, its key challenges are less control than developing internally and the need to integrate the innovation structure within the business and share revenue.

Invest/Acquire

While buying or investing in fintech companies can be an effective way to leap over the development process by acquiring access to fintech capabilities, financial institutions should still work to find the best ways to evaluate a purchase or investment.

Partner/Collaborate

In recent years, a distinct trend toward partnership and collaboration has emerged in terms of how financial institutions approach fintech opportunities and challenges. Compared to other approaches, this approach brings with it a more rapid speed to market for fintech solutions while being less costly and resource-intensive.