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How Banking Evolution is Addressing the Challenges of Fintech in 2022

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How Banking Evolution is Addressing the Challenges of Fintech

Finance technology or Fintech is no longer jargon for the banking industry. Alternatively, it has become a familiar term in technology trends. Fintech trends focus on startups and organizations securely cracking open-closed systems and unbundling the financial industry’s suite of services.

While growing Fintech trends offer exciting opportunities, banking institutions are grappling with the challenges it brings.

The banking industry, especially retail banks, is experiencing a bumpy ride during its radical transformation. Faced with constantly evolving user demands, changing business models, compliance regulations, and disruptive technologies are pushing traditional banking institutions to rethink their business operations.

Banks and credit unions are embracing this transformation to not only survive but thrive in the competitive landscape.

According to a forecast, the global financial technology market is expected to grow and reach a market value of USD 324 billion by 2026 with a CAGR of 25.18% over the forecast period (2022-2027). In another report by Statista, the market’s largest segment will be digital payments, with a total transaction value of USD 8,563 billion in 2022.

Challenges Faced During Banking Evolution

As banks and credit unions embrace Fintech to meet user demands, they face challenges. Here are a few of the common challenges financial institutions are facing:

1. Implementation in existing legacy systems

One of the biggest challenges in banking evolution is implementing new technology while replacing old legacy systems. Most major banking systems are built using the COBOL programming languages, which have been around for over half a century.

Such systems in the banks need updates to stay in line with today’s connected digital environment. There are several options for banks when they are evolving away from traditional applications.

One solution is to launch a front-end application for your customers. Mobile or web applications provide an easy-to-use interface allowing banks to stay relevant in the market. Make sure to consider it only a temporary solution while substantial back-end changes take place at an appropriate pace.

Another solution is assigning two dedicated teams for respective tasks like one team manages and maintains the legacy systems while another team develops a new system for your institution.

2. Regulatory compliance

Another significant challenge is regulatory compliance with digital banking practices. From Basel III regulation to Dodd-Frank, and from Current Expected Credit Loss (CECL) to Allowance for Loan Leases (ALLL), there are numerous regulations that credit unions and banks must comply with. Non-compliance brings severe consequences like additional costs incurring and high risks.

Regulatory technology, a derivative of finance technology, helps digitize regulatory risk management processes, saving money, time, and resources while providing greater flexibility and accuracy. Compliance with the regulations will address anti-money laundering and Know Your Customers (KYC) laws and can help detect fraud.

3. Security breaches

As more users adopt digital technology, security breaches continue to increase. Banks are left vulnerable to attacks due to the increasing complexity of digital financial systems. With advances in biometric technology, one-time and code-generated passwords are more secure than traditional passwords or security questions.

Blockchain in Fintech is another technology trend lifting the finance industry with new visions. Blockchain empowers financial institutions based on a distributed ledger technology that stores all transactions, independently verified and shared with users to create secured and established records. Blockchain in Fintech also helps safeguard against double-spending, currency reproduction, and fraud.

4. Changing business models

The changing business models involve additional costs as prime challenges for financial institutions beginning to trust the fintech revolution. The increasing cost of capital combined with sustained low-interest rates decreased proprietary trading, and decreased return on equity puts pressure on maintaining the bank’s profitability as the shareholder’s expectations remain unmodified.

However, this challenge can be addressed by bringing new competitive service offerings, rationalizing business lines, and seeking sustainable operational efficiencies. Also, financial institutions must be structured to support agility and pivoting whenever necessary to avoid extensive economic failures.

5. Rising user expectations

The primary reason for banking evolution is the rising user expectations which is also a challenge for traditional banking systems. Changing customer expectations and demographics play a significant role in elevated expectations.

Today’s user is more thoughtful, savvier, and more informed; the prime reason is technology. Millennials and Gen Z users make the most of the high-end banking solutions. In contrast, baby boomers and older members of Gen X value human interaction and prefer to visit physical stores.

To meet user expectations that constitute the majority of the customer base, organizations must revive their strategies and deliver what the users need. With each new generation, there is an increase in the expectations of digitized experiences.

6. Continuous Innovation

For banks and credit unions to achieve sustainable growth and success requires agility, better human relationships, insights, and continuous innovation. Benchmarking effective practices provides valuable insights into helping organizations to survive; however, they need consistent innovation to thrive.

To address the occurring opportunities for innovation, you must gather insights through customer interaction, organizational analysis, and focus on user experience.

For instance, cloud computing and big data analytics can help finance-based organizations innovate rapidly and deliver an ultimate customer experience.

Wrapping Up!

Digital transformation in the banking sector is necessary, and banks must look forward to the opportunities brought by the digital revolution. It can help provide better services and establish a stronger customer relationship.

Fintech trends in collaboration with financial institutions play a crucial role in client experience while improving retention and generating new revenue streams. Being the early adopters of technology trends like cloud applications will place your organization ahead of the competition as they have the power to innovate faster and provide better agility and scalability to digital solutions.