Fintech entrepreneur Michael Zetser, states that the financial services industry has been shaken up in big ways with the launch of financial technology. There is no doubt that fintech has some exciting opportunities to offer, but it also brings challenges and banks are amongst the financial institutions that are grappling with them.
Fintech can undoubtedly offer smart solutions to banks that allow them to operate at lower cost and more efficiently, but it is still evolving and growing. Therefore, companies and organizations are unsure of just how much their daily operations will be disrupted due to fintech. While banks have begun to embrace fintech for meeting the demand of their clients, there are some challenges that they have to overcome.
Fintech and compliance with regulatory requirements
Numerous financial regulations have been introduced for banks since 2008 when the financial crisis hit. Compliance with regulatory standards is a must for banks in order to avoid hefty legal penalties and fees. Most of the existing financial regulations are focused on traditional banking, but with digital solutions becoming the norm, banks have to incorporate the same regulatory standards in their digital banking services as well, or they might not remain compliant.
According to Michael Zetser, this is where regulatory technology comes in, which is also a derivative of financial technology. It can save time, resources and money and digitize the risk management processes required under regulatory standards. In fact, it is capable of doing so with greater accuracy than the traditional way.
The financial services industry is incorporating a number of regtech solutions for fraud detection and for addressing Know-Your-Customer (KYC) and Anti-Money Laundering (AML) policies. Integrating technology into risk management can prove to be beneficial for banks.
Future of traditional banks
The financial industry has seen major changes, thanks to fintech startups, which are able to deliver more innovation and better services to customers. In fact, they are proving to be more cost-effective and faster than traditional banking institutions and this has left people wondering if it is the end of traditional banking.
However, there are a number of reasons due to which fintech startups cannot fully replace conventional banking. First and foremost, consumers still trust banks more for holding their money responsibly as compared to startups. These institutions have built trust with their customers over decades and it will take time for fintech startups to come close to achieving the same.
Moreover, fintech startups and companies are also partnering with banks and Michael Zetser points out that it is benefitting both of them. The former are able to use such partnerships to expand their market reach and gain customer trust, while the latter are able to gain insights and technology through mentorship programs, mergers and acquisition of startups.
Staying innovative
One of the biggest challenges facing banks due to fintech is figuring out how to transition from the old legacy systems their operations depend on and have remained in place for decades. As banks have grown, so have their systems and they have become quite complex. It is not very different from trying to remove a single brick from a house’s foundation and leaving the rest of the structure intact.
Fortunately, there are a number of options that banks can explore when deciding how to incorporate fintech in their operations. Fintech investor Michael Zetser says that launching front-end apps for customers is one way to accomplish this. These apps offer a user-friendly and easy interface that banks can use for staying relevant in the market. But, this should be considered a quick fix and banks should continue to make changes at the back-end at a slower pace.
Banks can also explore the option of establishing two teams and dedicating one to their legacy system, while the other works on a new system based on the latest technology. The two teams can work in tandem and gradually overhaul the entire banking operations.
Cybersecurity risks
As information becomes digitized, there has also been an increase in security breaches. Since digital financial systems are quite complex, it means that banks are also vulnerable to these cybersecurity breaches. These can be extremely damaging for customers because their sensitive personal data might be compromised and this can be ruin the reputation of the bank, prompting them to lose the trust of their clients.
The good news is that banks can use a number of tactics for mitigating the risk of cyberattacks. As compared to security questions and traditional passwords, code-generated and one-time passwords and biometrics can offer greater security. Likewise, Michael Zetser suggests that banks stay up to date on the security trends in the industry and also provide proper training to their employees who are handling sensitive data. These steps can help banks in reducing the risk of cyberattacks and provide their customers with peace of mind.