The growth in FinTech has created a rising trend called embedded finance, where banking and FinTech firms co-operate to bring diversified employee benefits. Experts suggest that embedded finance will transform the way traditional banks operate in the coming years.
The FinTech space has also shown promising growth in the last few years. A recent report by The Boston Consulting Group states that India is strongly poised to witness a fintech sector valuation of $150-160 billion by 2025. The FinTech market in India was valued at $1,920 billion in 2019 and is expected to reach $6,207 billion by 2025, expanding at a compound annual growth rate (CAGR) of 22.7 percent during the 2020-2025 period.
This rise in tech driven financial firms has a huge impact on the way banks operate. Embedded finance eliminates the role of finance as a stand alone function. Instead, finance will embed into various platforms, whether it is making credit available at the point of sale or buying travel insurance along with a flight ticket.
What Has Led To This Rise In FinTech?
There have been several changes in the last few years that have led to the success of FinTech companies. Let’s take a look at the major changes that have occurred and changed people’s banking behavior:
Increase In The Use Of Mobile Devices
Smartphones have penetrated every corner of India and completely changed the way people operate in their daily lives. The number of smartphone users in India should to reach over 760 million in 2021.
With access to the internet on smartphones, transacting online has become a part and parcel of every consumer’s life. Be it getting a cup of coffee or making a big investment, online seems to be the preferred option.
Increase In Online Services
According to a report by EY, 57% of respondents think that the days of going into a physical bank are over. With increased availability of online services, customers have embraced online banking. Be it for transferring money between accounts, deposit checks, tracking transactions or buying ancillary financial products from banks, online banking has become ubiquitous to everyday life of consumers.
Increasing Trust In Technology
More and more customers are getting on the digital board, with putting their buck on technology. According to EY, 40% of customers expressed decreased dependence on their bank as their primary financial services provider. Instead, they used non-bank providers for financial services in the previous 12 months.
In India, the reason for this preference for technology is the ease of use and seamless experience.
The Global Pandemic
The 2020 pandemic forced people to stay within the four walls of their homes and transact for everything digitally. This further accelerated the shift to digital commerce and payments.
Despite most industries suffering during 2020, FinTech businesses continued to work and function in various stages of lockdown. They addressed the evolving financial needs of customers. These factors significantly increased the dependence of customers on non-bank financial institutions.
The Benefits of Banks Collaborating With FinTech
Do these impressive growth numbers in FinTech imply that banks will no longer exist?
The answer is no. In fact, it presents an opportunity for forging a rewarding partnership between the two entities.
FinTech needs banks and vice versa. They are two sides of the same coin that have to merge to leverage each other’s strengths.
Why Do FinTech Firms Need Banks?
FinTech firms need banks because:
- Banks provide the source of capital for FinTech. This capital through deposits, loan interest, shareholder equity and debt is what FinTech relies on to connect customers directly to financial products and services.
- Banks offer the regulatory foundation and guidance that FinTech needs to operate in the financial industry. By leveraging AML policies, licenses and banks relationships with regulators, Fintech can scale a lot more quickly.
- Banks have the knowledge, industry expertise and a solid customer base. FinTech firms can leverage it to lower their capital investment and risks.
- Even though FinTech firms are better with technology, they lack the customer experience that banks have created over generations. Partnering with banks that have a good reputation can help FinTech’s create a name for themselves.
Similarly, banks also need FinTech to keep thriving in today’s competitive age. Traditional banks no longer look at fintech companies as intruders in the field. In fact, they have started considering them valuable when it comes to reaching new goals with their clients.
Why Do Banks Need FinTech Firms?
Banks need FinTech companies because:
- FinTech companies offer ease of use which is the highest priority when we talk about customer retention.
- Banks can use FinTech’s innovation and technological expertise to offer seamless experiences to customers.
- Banks can harness data to offer personalized financial products to the customers, adding to their satisfaction levels.
- Even since the 2008 financial crisis, customers have lost their trust from traditional financial institutions. In contrast, the amount of trust people have for tech companies is much higher. Banks can leverage such higher levels of trust of customers.
- Banks collaborating with Fintech firms can become more agile and offer features that they will not be able to provide otherwise. For instance, 13% of FS companies say easy UX is the best way to retain customers. Banks can build easy UX for their customers and do away with clunky processes with the help of FinTech.
The Road Ahead For Embedded Finance
While both might have different approaches, FinTech companies and banks are synonymous. With the changing behaviors of customers and upcoming technologies, collaboration between banks and FinTech companies is critical to keep offering the best services and solutions to customers.
Banks and FinTech companies share a common goal – to keep offering delightful customer experiences to the masses. This is only possible if the two leverage each other’s strengths and collaborate rather than compete. The very nature of embedded finance will require them to work together to create customizable financial products and make it accessible to consumers.