Commentaries and insightful analyses on the world of finance, technology and IT.

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January 2, 2017

Lap 1: Fintechs in race with banks

The history of the existing modern banking dates back to the foundation of Taula de la Ciutat, Barcelona in 1401. Modern day banking has since then evolved so much that we now term it as traditional banking. The latest definition of modern day banking has changed its scope to mobility, analytics, open APIs, blockchains, IOTs, artificial intelligence, and many such technological advancements, which materialized only in the last two decades.
The banking industry has faced numerous disruptions and events, both macro and micro, in the industry environment and has matured to mitigate similar instances time and again. Presently, the industry is hit by another wave of technological advancement and customer demand for relevant technology solutions. Having technology at its core, fintechs have already made inroads into the banking industry, unsettled traditional players, and set new boundaries for the game. The impact is such that the recent world fintech report states that at least 60 percent of traditional banks are seeking partnership with fintechs to cater to customer expectations which are elevated by the predominant digital experience in their daily life.

Fintechs constitute a very small fraction of the financial industry, but they are growing at a much faster pace than their traditional peers. Recent surveys and reports indicate that at least 40 percent of global customers are already in business with at least one non-traditional firm, which has left the alarm bells ringing. Due to the lack of competitors, old and big players in the industry were used to playing their large customer base to their advantage. However, with the ever-increasing demand for open banking, the biggest competitor (in terms of customer base) will now have to compete with the smallest.

Over time, banks have been able to build trust with their customers using transparent operational structures and one-to-one interactions, and therefore, customers who are habituated with direct banking will be tough to separate. On the contrary, the Gen Y believes in banking on the go and prefers to evaluate and compare pricing and service offerings with other service providers, and therefore, fall in the target base for fintechs.

Fintechs use technology to their advantage for simplification, gamification, and automation of processes, resulting in an enhanced customer experience. Recent regional activities in the banking industry such as the revised directive on payment services (PSD2) from the European Commission, capital markets authority (CMA) directives on open banking in the UK, demonetization in India, Office of the Comptroller of the Currency's decision to offer a national bank specialty charter to fintech, and the formation of Office of Innovation in the US proves that the trend is not regional but global, and it is disrupting the industry in the most eventful way.

A careful comparison of market reports and surveys from 2015 and now suggest that banks have started taking fintechs much more seriously, and as a result, they have been able to marginalize the gap in areas such as service quality and customer experience, with still a lot to be done. In this race to capture greater market share, both banks and fintechs have their own set of strengths, weaknesses, opportunities and threats (SWOTs). They can either choose to play around their competitor's weaknesses and capture a share of their customer base, or play to their strengths, leverage each other's expertise for providing the best customer experience, mutually benefit and co-exist.

Risk-as-a-service: A solution for managing the risk frauds

- By Kuljit Singh and Durga Prasad Balmuri

In today's globalized economy, business environment is changing rapidly due to technological, political, social, and other factors which is exposing companies to greater risks. Risk not only brings regulations, but also the opportunity to those affected by risks.

This pursuit of servicing has led to a field called risk-as-a-service (RaaS). When it comes to financial services, managing risk is of paramount importance. RaaS in financial services industry is a cloud-based risk management solution catering to banks, hedge funds, pension funds, and other financial companies. Many firms, unable to create and manage complete in-house solutions, are embracing RaaS offerings, be it cloud solutions or Business Process outsourcing. By paying a regular monthly / quarterly / annual fixed subscription fees, these firms are able to enjoy the benefits of using risk management solutions without the need to develop and maintain costly in-house facilities.

RaaS solutions tend to address due diligence obligations, risk management, internal audit, change management, risk reporting, and more through advanced analytics, risk modeling, and customer reporting through dashboards. These solutions try to help companies by identifying inherent risks before they become major problems.

RaaS solutions come with many advantages, such as better staff augmentation by freeing up in-house staff to focus on higher level risk management activities, access to advanced security tools and contextual expertise by subscribing to solutions that are very critical or not easy to maintain in-house.

Consulting firms, seeing vast opportunity in cloud based offerings in risk management, are investing huge amounts to meet the growing demand. FIS, a global leader in banking and payments technology, has invested more than US dollars 200 million over the last three years in its RaaS division, which is focusing on developing risk and information security products and services for the financial industry.

RaaS solutions are being used in various spheres within financial services industry. For instance, they can be very helpful to fund managers in meeting regulatory requirements, making better investment decisions, and avoiding unintended sector-industry concentration. In the case of banks, they can help in creating automated risk models and mapping the client's income with expenditure, thus saving time and effort in gathering proof of an individual's financial situation.

For IT vendors, the main aim should be to help clients compress data architectures, which would help all the departments in a company to have same knowledge about risk as is known by department which manage risks. Opportunities offered by RaaS have been seized by many vendors in the form of cloud solutions and other BPO services. As the world is getting more complicated with explosion in data, more globalized world, increased technological innovations, it would be imperative for companies to look at risk more seriously and RaaS could be the ideal way forward.