Banking Model of The Future

In previous articles, we have discussed what the fintech revolution is and how it has disrupted traditional banking. This article is going to pick up that discussion and take it a bit further.

One of the biggest mistakes made by both the fintech startups and the banking industry in the last decade was of seeing each other as competitors.

Fintech started around with the main idea of making traditional banking obsolete. An idea that in itself was not too bad because fintech is making traditional banking obsolete. The problem however is that banks are too important to be made obsolete that easily.

If you have noticed, whenever there is a financial meltdown, the governments rush to save the big corporations and the biggest corporations that get saved first are the banks.

Credit has become the fabric of this society and banks can be considered as weavers in this scenario. This is why the last decade did not see fintech advance as rapidly as it should have because it was up against the institutions that keep the society up and running.

Banks too were initially not open to fintech because historically banks have been the most technologically advanced institutions.

Banks were quick to transform their manual books to computers when computers were first introduced. Similarly, banks were the first to use the internet to speed up transaction processing and communication systems.

However, the rise of fintech has been an exception in the traditional openness to technology that banks have shown. This exception occurred because fintech firstly identified itself as a competitor and secondly because fintech aimed to go for a decentralized banking system, which is at odds with the current centralized banking system.

This is one reason why when cryptocurrencies were launched over a decade ago, many regulatory authorities moved against them. Even in 2021 when bitcoin is trading higher than ever before, it is not being used as a medium of exchange, which was the original intended purpose. Instead bitcoin today is mainly used as a store for value and has become a trading asset.

Banking Model of The Future

The pandemic has caused a lot to change. One of the main changes has been the willingness of fintech startups and banks to work with each other. Thus, now that both have started to view each other as beneficial for each other, the advancement of the fintech sector, in particular, is going to be more rapid than it was previously.

So how is this all going to change the banking model of the future? Well, let us take a look at the current situation first. If your banking needs are as simple as depositing your savings and withdrawing your funds, you may not have come across many obstacles but if your banking needs are even a little bit more than basic saving and withdrawals, then you will understand that as far as banks are concerned they are still in the dark ages.

Let us start off with the process of account opening first. For most banks, the process of account opening requires you to submit your identity details, proof of work, utility bills and if you are a foreigner trying to open an account in a country you are visiting, then you will need to produce reference letters from your bank in your home country. All of this makes it extremely slow and cumbersome for the clients.

Compare this with opening an account on Apple Pay or any other digital wallet application. It is almost seamless to work with these fintech applications, which is why people prefer these applications over traditional banks. The banks used to have a monopoly over saving, investment and lending functions but the rise of fintech has slowly ended that monopoly.

There are financial investment applications where individuals who had never invested in anything before, are now investing with as low as $1000 in savings. They are now integrating budgeting and investment applications, which not only teach personal financial management basics to the customers but plan out their investment strategy too.

There are applications that replicate the portfolio of smart investors and then allow users to build up their portfolios through algorithms, to replicate the return being generated by smart investors. Furthermore, robo advisor applications (like Moneyfarm) have taken over the risk management space and are now advising clients in a more transparent and cheaper manner.

Formerly these services used to be the sole domain of banks, fintech startups are taking over these services slowly. People are responding positively to such services being offered by fintechs because people trust fintechs more than banks.

Why? Because fintechs offer greater transparency, low cost and diversity in options. Banks on the other hand charge higher fees that are not as transparent as they project themselves and do not offer diversity in options.

But does this not make fintech and banks competitors then? Earlier we discussed that banks and fintech are now trying to collaborate with each other? Well yes. While this made them competitors, banks have come to the realization that in order to stay relevant they need to go through the transformation. They have in other words accepted the inevitable.

So what we will see in the future is that banks will have fintech startups as their front end. At some level, we will see integration between fintechs and banks with fintech taking care of the front end whereas the back end tasks such as dispute resolutions, payment processing and regulatory approval etc will become the sole responsibility of the banks.

In other words, in future, you may not have to go to a bank to open your bank account. You may even not have to download the app of a digital bank to open a bank account. You can possibly open your own bank account through Facebook or Whatsapp. This is not a far fetched idea. WeChat Pay and Whatsapp Pay are already present as payment solutions. With a few more integrations platforms such as these can also facilitate bank account opening and thus change the banking model as we know it. In future, all of your banking needs may be fulfilled through Facebook or Whatsapp, without ever seeing the inside of a bank.