FinTechs are simultaneously considered by the financial sector as both a great opportunity and a threat. In fact, there is no doubt that they have made their mark on the business world – investment in FinTechs since 2010 has amounted to a whopping 10 billion US dollars. The financial world and economy in general can reap many benefits from FinTech innovations.
The payment initiation services (PIS) of Payment Service Providers (PSP) simplify payments on the internet and, in addition to added convenience for the customer, make a significant contribution to sales in the e-commerce sector. According to financial experts, electronic payment alternatives are instrumental in driving economic growth.
FinTechs can do many things: simple lending, quick product comparisons, seamless processes, innovation – and all this while maintaining a customer-centric approach. FinTechs always take the needs of the user into account when developing their products, which leads to elegant front-ends that provide customers with good and intuitive usability. This way, they also help banks and other companies operate sustainably and remain up to date. FinTech products can also be integrated into existing platforms via open APIs. The mobile bank N26 serves as a great example of how to extend your services with applications from other FinTechs. The N26 customer uses TransferWise for overseas bank transfers, WeltSparen for savings accounts, Clark for insurance offers and AUxmoney for loans – all with the look and feel of N26!
Financial technology thus holds considerable potential for companies, banks, lending institutions and their respective customers. In this blog article, we will take a look at the four trends that will have the greatest impact on the FinTech scene in the future.
1. Innovative Business Models for FinTechs and Banks
Just about every kind of financial business is currently being reinvented by FinTech start-ups. Do you remember waiting in a queue at the bank counter? We rarely have to be present nowadays – there are no queues in banks and you don’t even need a credit card to pay for a concert ticket online. This is partly thanks to the bank’s online banking system, but it is also facilitated by non-bank services. As a partner or independently, FinTechs have launched completely new services on the financial market in recent years, which has also led to banks expanding their range of services. As a result, new sources of income in the financial sector have been generated and customers benefit from a wider choice of financial products for their banking, investments and purchases.
A large part of the additional revenue flows mainly into new financial start-ups, so it is not surprising that financial institutions are suspicious when it comes to FinTechs. However, it is an undisputed fact that FinTechs are a driving force in the financial services market. In fact, the FinTech scene in Germany is more active than ever before. One possibility for established banks and financial institutions is to promote digital change exclusively in-house. Nonetheless, according to a new PwC study, 88% of banks are opting to cooperate with FinTechs.
Some examples from Germany:
Deutsche Bank wants to increase its turnover by investing in partnerships e.g. with the Insurtech Friendsurance and the FinTech Deposit Solutions. Commerzbank currently ranks first with shares in 27 FinTechs. The direct bank ING Diba has a stake in the platform for asset management Scalable Capital as well as in the loan comparison company Fincompare and loan broker Lendico. Helaba is going one step further with Helaba Digital GmbH & Co. KG, a separate investment company for FinTechs.
2. Artificial Intelligence
Artificial intelligence (AI) is a huge topic for FinTechs. In fact, the number of companies using AI has increased again this year. Customers are increasingly willing to use digital assistants while the banking sector is also investing in the technology needed for this.
Let’s take voice recognition as an example: Sparkasse recently announced that it would soon be offering the first voice banking service in Germany – it is AI that makes this possible! Or the Italian Buddybank, a UniCredit company that aims to make banking on the move not only easy, but also entertaining. The ‘Buddy’ has a lot of tricks up his sleeve: he can remind you of appointments, plan trips and even order food. This is highly personal banking in a friendly conversational tone. However, there are many good reasons to adopt this new technology in day-to-day business: AI applications are currently making a name for themselves in customer communication and process automation. Artificial intelligence also affords new possibilities for data analysis, improved customer experience and automated business processes that previously only worked with manual intervention.
Automation has become a matter of course for most people in many areas of life. Whether paying bills, making an investment, applying for a loan and making a bank transfer – all of these can be easily automated with AI. The services that can be created with AI are diverse, and range from easier payment methods to better protection against plunging into your overdraft. Artificial intelligence has not yet become mainstream in the banking sector, but the providers of banking platforms are working hard on it. Forrester recommends that the financial community take technology seriously and think about it sooner rather than later.
3. Collaboration Is the New Innovation
As recently as 2017, 88% of established banks expressed fears of new FinTechs and the impact they would have on their own services in areas such as investment, lending and financial management. However, they were surprisingly creative in their approach to solving the problem. Instead of in-house developments, 82% of the same organisations said they wanted to cooperate with FinTechs in the future.
It is not only banks that are in favour of cooperating with financial technology start-ups; financial services companies are also keen to establish long-lasting partnerships. As a matter of fact, decades of experience and the loyal customer base of banks complement the dynamics, technology and innovation of FinTechs extremely well.
4. Banking No Longer Takes Place Exclusively at the Bank
FinTechs now also cooperate and work on their own ecosystems. For example, there is a technology company in Germany called solarisBank that provides “modular financial services”. In the context of white label banking, it makes its banking license available to third parties for the development of its own banking applications. Banking without a bank has already been a success for Berlin-based FinTech N26 thanks to the shared use of the Wirecard license. In the meantime, their customer base has more than tripled and they now have their own banking license. The Payment Services Directive PSD2 has ramped up the pressure on financial service providers to remain up to date and innovative. The new API banking brings with it many changes from which the financial sector can only benefit if it comes together and engages in strategic cooperation.
With the enforcement of PSD2, the European Commission has created an official guideline for the licensing of FinTech lending institutions. It regulates application procedures, minimum requirements and approval standards under security-relevant criteria such as risk management and equity. The reason behind this was to introduce uniform supervisory rules for FinTechs and established banks.
Anyone wishing to offer banking services or products in Germany must obtain the relevant authorisation from BaFin. The alternative to applying for your own license is to use the services subject to a license of another institution according to the “Licensing as a Service” (LaaS) principle. In Germany, a few FinTechs with their own authorisation such as solarisBank (mentioned above) actually offer to share their license. FinTecSystems will soon also adopt the “Licensing as a Service” model and offer such services in the areas of payment initiation and account information services. In fact, regulation and the associated licensing requirement for certain services will enhance the quality of Open Banking and will thereby boost customer confidence in new providers of financial systems.