The rise of fintech has been a wake up call for legacy financial institutions. Consumers have wanted cheaper and more convenient banking solutions for years, yet traditional banks have historically lagged behind in technological development. Regulatory restrictions in the finance industry meant established banks rarely had to worry about new competition. Because of this, for over a century the cost of financial services remained consistently expensive.
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Banks can no longer downplay the importance of fintech or rely on their reputation alone to retain customers. However, traditional financial institutions needn’t fear the increasing popularity of fintech either. By working hand-in-hand with fintech companies, traditional banks can harness their technological expertise to design customized solutions for their clients. Application programming interfaces (APIs) can now be coded to seamlessly integrate with a bank’s existing technology.
The power of legacy banking combined with the agility of tech companies can help old-fashioned banking and innovative technology work in unison. Fintech-as-a-service (FaaS) will usher legacy financial institutions into the 21st century and change the face of finance in the future.
Fintech Is Here To Stay
Let’s take a moment to fully appreciate how fintech has changed the game in terms of money management.
In the past several years, we’ve seen the introduction of financial mobile apps such as Venmo and Cashapp, which allow smartphone users from all around the world to easily transfer money from their bank accounts with the tap of a screen. Before this development, it wasn’t uncommon for people to have to wait in line at a Western Union or wait 2-5 days for a wire transfer if they were sending money abroad.
Stock brokerages - once the gatekeepers of market information - have been forced to pare down fees as much as possible to compete with the likes of Robinhood and Acorns. These are just a few examples of the democratizing effects of fintech. Once the realm of wealthy insiders and trust fund recipients, investing and trading on the stock market has finally spread to the masses.
As the pandemic taught us, we are living in an increasingly globalized society. Businesses and their funds need to be able to move cash across borders quickly to keep up. FaaS companies offer fully integrated financial services that can easily embed this function in any application.
Fintech applications can give financial institutions the ability to transfer money, withdraw funds, and convert currency online, lending cutting-edge technology to some of the biggest names in banking. Furthermore, FaaS companies take responsibility for the regulatory aspect of their work, one of the largest hurdles to creating apps that handle sensitive information.
Covid-19 had a profound effect on fintech and digitalization in general. As whole populations headed towards lockdown and were forced to work remotely, the ability to complete tasks online became the central focus. Tech stocks soared as even the most technologically illiterate found themselves forced to learn how to do things online. As such, the unique situation of Covid-19 has accelerated fintech adoption across all age demographics.
Why Banks Need Fintech
Consumers still want the sense of security provided by established financial institutions. Although you might know a lot of people who use PayPal, few would trust an application in lieu of a bank to hold all their money. In fact, according to recent surveys, 71% of customers report a credit or debit card is their preferred way to complete transactions.
In spite of this loyalty, credit card companies are changing to fit their customer’s changing needs. Visa, one of the most well-known credit card companies in the world, recently announced that they will be the first major credit card to offer Bitcoin rewards. And fintech companies are increasingly moving into the debit and credit card space, integrating their platform with the consumer’s own bank account whether the bank likes it or not.
The strength of fintech lay in its ability to take basic financial transactions and transform them by making them easier, more convenient, and less expensive. By harnessing the innovative solutions offered by fintech, traditional banks can offer better services and expand their customer base.
Generally, FaaS companies offer cutting-edge technology, sleek designs, and a better user experience than the applications designed by financial institutions themselves. This makes sense, as the main area of expertise for banks is in finance, not technology.
What’s more, banks who develop apps on their own must spend a lot of time hiring the right developers, cyber security experts, and regulatory advisors before they can even begin planning the pipeline of a new online service. By using a FaaS company, the technology is ready to go almost immediately.
Many FaaS companies offer customization, giving banks the ability to utilize their own colors, logos and images within their APIs. In many cases, customers won’t even know that they are using third party technology when they are completing transactions. Banks that use FaaS integrations also don’t have to worry about software maintenance, which can be time-consuming and expensive. FaaS vendors take full responsibility for prioritizing cybersecurity and keeping their platforms up-to-date.
Furthermore, many of the applications designed by banks make it easy for their own customers to send or receive money, but may not work in tandem with those offered by other banks. Unburdened by the fear of introducing customers to competitors, fintech can bridge the gap between different financial institutions.
Why Fintech Needs Legacy Financial Institutions
New technology can be glamorous, but few want to be anything but conservative when it comes to their hard-earned money. While alternatives to banks have gotten a lot of buzz in recent years, it doesn’t seem that there will be a huge shift away from traditional banks in favor of fintech.
People want to trust their money in time-honored institutions with name recognition. They feel reassured knowing that they can walk into their local branch and speak to someone if they have a problem, even if they rarely (if ever) do so.
Most fintech apps remain anonymous to customers, and the technology industry in general doesn’t have a great reputation for customer service. By working with banks, fintech companies can gain access to customer data that will help them shape their products and marketing to reach wider audiences.
Fintech and alternative investment solutions, such as cryptocurrencies and non-fungible tokens, need banks to lend them reputability and legitimacy in the austere world of finance.
Legacy financial institutions realize the importance of technology to make processes less time consuming and expensive for their clients. Fintech, once an adversary of traditional banks, have now become valued partners. By leveraging the expertise offered by FaaS companies, banks can provide their customers with both excellent customer service and convenient online solutions. Together, financial technology can become more secure and accessible for all.