By Donald Antoine August 13, 2022
Banks, insurers, and credit unions offer limited products and services in the financial services industry. Operational costs, capital requirements, and regulatory restrictions have limited their market presence. This has led to the emergence of alternative service providers — FinTechs — as a substitute for traditional banks. Using technology to improve efficiency, transparency, and security in banking is known as financial technology.
These technologies have become mainstream in providing digital payment services and managing personal finances on smartphones. As a result, banks and nonbank financial institutions, such as insurance companies or trust companies, now have a more comprehensive range of financial products and services available to them.
With that in mind, we’ll look at the role of FinTechs in the financial industry:
What’s FinTech?
FinTech is a revolutionary concept that is changing the way we do business. The definition of FinTech is a combination of financial and information technology. Some of the biggest names in the world are now accessible to consumers thanks to financial technology. Alternative lending, crowdfunding, and digital wallets are some examples of FinTech. With FinTech, anyone with access to a mobile device can open a bank account and pay for items using just their phone. This type of innovation is promising to change the way we do business.
What is the Role of Fintech in Banking?
Providing effective banking services and a full range of financial products and services requires advanced technologies. FinTechs will have a significant advantage over traditional banks if these technologies are not available from their usual suppliers. As opposed to conventional banks, FinTechs can design, build, and market new products independently. By offering more competitive service pricing, they can undercut traditional banks.
FinTechs have filled the void left by banks in some market areas, but they still face challenges when entering traditional banking markets. These include US banking markets such as mortgages and small business loans and European markets like consumer lending or high-yield debt issuance. Due to competition from FinTechs, these large financial institutions have consolidated due to their global reach and lack of local competition.
Nbfcs and Fis and Their Role in the Financial Industry
Due to increased demand for alternative financial services, financial technology has emerged and challenged traditional business models. Nonbank financial institutions with smaller capital requirements and regulatory restrictions have taken up the niche vacated by conventional banks. Many NBFCs adopt a business model similar to that of banks but without the same level of risk.
They provide deposits, loans, mortgages, insurance products, wealth management services, and other services such as remittances or payment processing at a lower cost than banks.
Advantages of NBFCs
Individuals and companies can obtain financial services through NBFIs in addition to banks. By providing these services, they can compete with banks. Banking companies offer bundled financial services, but NBFIs tailor their services to specific groups by unbundling the services. A specialty sector may also allow NBFIs to gain an advantage in information. NBFIs promote competition within the financial services industry by unbundling, targeting, and specializing.
A multifaceted financial system, which includes nonbank financial institutions, can protect economies from economic shocks and help them recover. When the primary form of intermediation fails, NBFIs act as backup facilities to convert savings into capital investment.
Disadvantages of NBFCs
A lack of adequate regulations may exacerbate the fragility of the financial system in countries with nonbank financial institutions. The shadow banking system is dominated by NBFIs, although not all NBFIs are lightly regulated. An NBFI that operates largely unsupervised by government regulators and anyone else can threaten the stability of the entire financial system if it controls a large share of it. Credit bubbles and asset overpricing can be fueled by weaknesses in NBFI regulation, leading to asset price collapses and loan defaults.
How Does a Bank or an NBFC Work?
Nonbank financial companies (NBFCs) provide financial services similar to those offered by banks but do not hold a banking license or undergo any regulatory oversight. A bank or a nonbank financial company typically provides the following services:
- Deposit-taking
- Securities and money market trading activities
- Lending, insurance, and credit underwriting activities
- Investment banking and advisory services
- Consumer products, such as mortgages and consumer loans
- Payment services
- Marketing of products and services to a wide range of customers, including affluent individuals, corporations, financial institutions, and the general public
- Smartphone applications for consumers – including digital banking, payments, personal finance management tools, and more
Differences Between Banks and NBFCs
Banks, which operate within a regulated environment and are subject to strict capital adequacy limits and reserve requirements, have few alternatives in the market. On the other hand, NBFCs do not have to adhere to such regulations and can be more flexible in meeting customer needs regarding products and services.
Regulatory restrictions: This refers to the fact that banks are subject to rigorous regulation and supervision by central authorities at the macro-level like banking regulators, whereas such regulations do not bind FinTechs.
Product range: Banks generally offer only a limited range of financial services such as deposits, loans, and payment services such as cheques or wire transfers, whereas NBFCs, however, sell a wide range of financial products, including insurance policies, life insurance, pension plans and investments for higher returns.
Capital requirement: Banks must maintain adequate capital levels to ensure their solvency. FinTechs do not need sufficient capital levels as they do not need to meet solvency requirements or inflow from customers’ deposits as banks do.
Operating costs: The operating cost for banks is significantly high due to their regulatory burden. At the same time, NBFCs incur low costs due to their simplified regulatory environment and lack of stringent capital requirements.
The Future of FinTech in the Financial Industry
Over the past decade, FinTech has emerged as a major force in the financial industry. From mobile payments and personal finance apps to investment management and lending platforms, FinTech has revolutionized how we handle our finances.
Financial institutions must adapt to the changing landscape and embrace new technologies to stay competitive. FinTech will only become more prevalent and important as we move into the future. At the same time, consumers will benefit from the convenience and security that FinTech provides.
So what does the future hold for FinTech? Only time will tell, but one thing is for sure: it is here to stay. Stay up-to-date with everything related to FinTech by following our blog.
