The Impact of Fintech on the Banking Industry: Building Synergy Between Banks and Open Finance
In the last couple of years, it's no secret that the growth of financial technology (fintech) companies have revolutionized how the financial sector operates. This rings especially true for the banking industry, regardless of the mixed reception it used to have in its early stages. Some parties used to (or still do) argue that the fintech revolution disrupted traditional banking, but many stand firm on the notion that it has positively impacted the strength of existing banking services.
At the end of the day, what kind of impact does the development of fintech actually have on the banking industry? Let's discuss more below.
The importance of banks and financial institutions
Banks were, and still are, considered to be one of the major traditional players within the financial services industry that help the stability and circulation of funds in the economy. They are still the go-to traditional financial services provider for most people in need of funds, with popular services including provision of bank accounts, credit cards, mortgages, investments and more. According to the World Bank's Global Findex Database 2021, the global account ownership increased from 51% in 2011 to 76% of adults. In the Asia-Pacific (APAC) region alone, 71% of the population owns a bank account in 2021, which was a considerable increase from 65% in 2017.
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How does fintech affect the banking industry
Before the global fintech industry started solidifying their spots in the financial services sector, the most trusted and well-known methods of getting funding was via commercial banks (esp. big banks). However, the rise of the fintech market proved to be a formidable competition for them. Financial technology companies are more flexible, less regulated, and provide more competitive financial solutions like blockchain, peer-to-peer lending, micro funding, etc.
The global COVID-19 pandemic is also one of the reasons behind the rise of fintech ventures worldwide. As lockdowns severely restrict mobility and human interaction, online transactions became the norm. Fintech startups successfully provide various financial solutions to meet these growing needs, especially with the increasingly popular mobile banking platforms or digital wallets like GoPay (Indonesia) and AliPay (China). According to Statista, the global value of fintech transactions is expected to reach $10.52 trillion by 2025, whilst this number was only $5.47 trillion in 2020 and $3.04 trillion in 2017.
Instead of competing with fintech service providers head-on, many banks decide to adopt and use fintech solutions instead. This strategy has worked especially well in emerging markets like Indonesia, China and India, where a large proportion of the population is still unbanked or underbanked. While traditional banks still have difficulties in fully covering this target market, the flexible nature of fintech start-ups can help attract customers at the grassroot level.
With new technologies and immersive adoption of fintech, a lot of its operations have evolved across the entire banking system. Examples include the utilization of biometric sensors and iris scanners in ATMs, providing more branchless banking, and using artificial intelligence with machine learning to detect fraudulent transactions.
Ultimately, this synergy between fintech and banking is made possible through two prevalent concepts within the fintech ecosystem: open banking and open finance.
Open finance: the future of banking
To understand what open finance is, we first must understand the definition of open banking. According to Jakob Rost (CEO, Ayoconnect), open banking refers to the "sharing of software and services for basic banking functions such as billing with third-party partners like banks, retailers, and e-wallets". On the other hand, open finance is commonly known as the extension of open banking. It provides even more shared fintech services such as loans, mortgages, and pensions.
In simple terms: both open banking and open finance allows non-banks to offer competitive financial services to customers, all without the hassle of hiring expensive in-house development engineers or buying another company's technology. It will not only allow banks to create innovations in the financial realm, but also facilitate the integration of financial services for non-banking firms (retail, insurance, etc.).
One of the examples to illustrate the impact of fintech on banks via open finance is the emergence of direct debit. By implementing direct debit APIs, your business can accept payments from their customers using debit or credit card. For instance, if you utilize Ayoconnect's direct debit API, your business will be instantly integrated with seven of our partner banks at once. This includes Bank Mandiri, BNI, BRI, CIMB Niaga and more.
Ayoconnect builds synergy with banks
If you're looking to leverage the convenience of open finance for your business, then look no further!
As Southeast Asia's largest open finance platform, Ayoconnect is building an ecosystem that enables seamless integration between digital banks, traditional financial institutions, fintech companies and government entities. We have a great selection of open banking and open finance APIs tailored for your needs, including direct debit, recurring payment management (RPM) and embedded digital products (PPOB).
Ready to #MoveForward with us? Contact us for a demo here!