Fintech is embracing the digital banking revolution
The launch of new banking regulations will expand the industry, say experts
Fintech companies are finding greater opportunities to enter the digital banking sector, after leading financial centres announced they will introduce “new regulatory frameworks” for neobanks. The Far East is heading the charge, with Hong Kong, South Korea, Malaysia, Taiwan and Singapore awarding new licences for digital banks.
The new regulatory frameworks enable partnerships and joint ventures to team up and apply for digital banking licences. A report by points to banking consortiums, which account for approximately 80% of the applicants.
This is, they conclude, because regulators need to see that applicants are expert in several industry areas, including “furthering financial inclusion, technological innovation, customer analytics, and a solid understanding of banking risk management and compliance.”
The report also states that to become profitable and grow, digital banks must be built on five elements. For example: a large customer base with financial inclusion that provides services to an underbanked demographic, as well as a wide network of distribution channels with numerous customer touch points, are both essential in creating profitability.
Equally, several financial services must be included, such as e-commerce, e-wallets, travel services and remittance services, to create a well-rounded package for customers.
Finally, financial products that target specific customers will also be key. In the Far Eastern sector, an estimated 60% of adult banking customers do not have access to credit facilities. The inability of traditional banks to carry out risk assessment means digital banks will offer more advantageous products to a market portion that is currently poorly catered to.
The race to launch means that several banks will enter the market simultaneously, without the need for a physical presence. The latest fintech solutions will be in demand to service the new financial products available in the expanding digital banking sector. Technology will also enable the industry to scale, as new customers and analytics provide guidance on new, tailored services.
Fintech will also benefit, says the report, from the increased need for compliance, risk assessment and cyber security. It states: “Many consortiums will have fintech as participating members, but they are typically unfamiliar with the level of regulatory scrutiny to which banks are subject.
So, risk management and compliance will be important criteria in the assessment of applications […] Expertise will be particularly relevant in cyber and information security, anti-money laundering, and compliance aimed at preventing financial crimes.”
Zafin: Banking is now in the era of the tech ecosystem
The development of tech ecosystems is placing the future of post-COVID banking in jeopardy. At a time when Big Tech can replicate the functions of traditional financial institutions, what can banks do to retain a grip on the market?
John Smith, EVP Ecosystem at Zafin, has a few ideas. A SaaS cloud-native product and pricing platform for financial institutions, Zafin is preparing the next generation of banks to cope with this precise challenge.
Smith is responsible for the strategic and tactical management of the company’s ecosystem, including the creation of new business models to support growth and differentiation. We asked him four questions:
Q. Have the events of the pandemic caused an irreversible shift in the digitalisation of banks? If so, is COVID the sole cause or are there other factors?
It’s a great question and one that I am asked a lot. Without a doubt, the COVID-19 pandemic has driven a significant shift in the acceleration of digital. In fact, I’ve seen some estimates show there to have been as much as four to six years of digital adoption growth since the initial lockdown started.
While the pandemic may be the primary reason for this growth, two other drivers include fintech disruption and the high costs of operating a traditional retail bank. Both of these factors have caught the attention of banking executives as they set their minds on accelerating digital transformation with a focus on high return, low risk.
Q. Some commentators believe banks must learn from Big Tech in order to survive. Do you agree? Please expand.
I agree completely; we’re living in the era of the ‘ecosystem’. All the seismic shifts we’re seeing in technology, be it aggregation, embedded finance, DeFi or hyper-personalisation are all enabled by the foundation of an ecosystem.
When financial institutions work with a strategic partner like Zafin, which has made the strategic investments in a best-in-class ecosystem, they’re able to capitalise on opportunities more quickly and safely, and will be better positioned for growth now and at the other side of the pandemic.
Q. What are currently the obstacles to adopting Open Banking? Is it more likely to 'take off' in some regions rather than others?
I would argue that Open Banking has been in the US for some time and will only continue to grow there. By definition, Open Banking is about the secure sharing of financial information that customers are aware of and have authorised. Under that definition, we’re seeing aspects of this well underway even though its full potential remains to be seen.
Third-Party Providers are a natural outcome of Open Banking, whereby they can create propositions beyond what a bank normally does to enable banking functions such as payments, borrowing, saving and so on. Once again, some of these are already present through industry-led initiatives, whereas regions such as the EU have taken the pathway of regulation such as PSD2.
The industry-led initiatives we’ve seen in the US have also had the added advantage of guard-rails that regulatory bodies like FFIEC and CFPB provide. There are also other technology-led initiatives such as API definitions that are set out through the FS-ISAC.
I would argue the future of Open Banking in North America will be through the natural evolution of the guidelines and API definitions that have been published, as well as the natural progression of industry initiatives.
Q. Are there any other bank tech trends you'd like to discuss?
Coreless banking. Zafin has been pioneering some of the work around externalising functions out of the legacy core to drive a more ‘fintech nimble’ bank, while not having to deliver a ‘heart and lungs’ core bank replacement.
Real life examples of this include moving some of the core functions of a banking system, such as product and pricing to a platform like Zafin. Origination, onboarding, KYC, risk, and compliance are all other examples of externalising banking functions for added agility.