The financial sector has undergone a transformation since the start of the 21st century. Brick-and-mortar financial institutions previously feared that advances in digital technology could undermine their competitive edge. They've recently started embracing new technology that can aid them in the future. Of course, new technology also comes with risks, but these will be mitigated over time.
Here are four reasons that FinTech will impact the financial industry:
1. Breaking up the banking oligopoly
For nearly a century, the banking industry has been extremely consolidated. A small number of multinational banks have captured the vast majority of the market.
FinTech has enabled smaller competitors to break up the stronghold. New technology has limited the barriers to entry for smaller banks.
Improved competition has benefited customers in many ways. They can now turn to a deeper pool of financial institutions to find the best rates, which is likely to start pushing interest rates down.
2. Automated credit scoring
The International Monetary Fund published a study last year on the exciting opportunities provided by FinTech. Among the factors it emphasized was the advantages of automation technology. The AI algorithms behind this technology has enabled financial institutions to develop automated credit scoring solutions. This eliminates the waiting time and reduces the cost of underwriting loans. It will be much more convenient for customers and lenders.
Of course, there are also risks associated with automated credit scoring. The algorithms need to be carefully constructed to ensure lenders don’t draw inaccurate conclusions about the actuarial risks customers present. This could lead to unfairly set interest rates, poor risk management and unnecessary customer dissatisfaction. Most financial institutions are aware of this risk and are striving to address it with their automated credit scoring models.
3. Simplifying the lending and borrowing process
Customers and loan officers feel that the lending process is unnecessarily complex. FinTech has introduced a number of solutions that help process loans quicker than ever before.
Financial institutions are exploring ways to use FinTech to expedite the approval time to minimize staffing costs and improve customer satisfaction. P2P loans are a great example of technology breaking down the barriers of traditional lending. This can be particularly beneficial for small businesses in sectors that require immediate cash to stave off financial concerns during recessionary cycles. They can complete the process online in minutes, rather than waiting days for a decision from a traditional lender.
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4. New financial security benefits and risks
Digital technology has created a number of security benefits. By restricting the need for customers to use brick-and-mortar banking solutions, they have mitigated some of the risks of fraud, embezzlement and theft. All transactions have to be carefully monitored and there's a ledger documenting them. This makes it more difficult for criminals to skim funds.
On the other hand, FinTech has attracted a new classification of criminals and created financial risks. Cybercriminals tend to be more sophisticated and often feel emboldened by the lack of a physical presence. They may also attempt to conduct their crimes from anywhere in the world.
Dealing with these security threats must be a priority for all financial institutions in 2020 and beyond. They've started leveraging blockchain and other radical solutions to minimize the risks of cybersecurity breaches.