Fintechs are creating the future of financial services
The fintech revolution has become a hub in helping financial institutions drive innovation as both continue to coexist in a competitive landscape. The industry has moved beyond speculative theory about the impact of fintech to the practical application of fintech solutions to modernize and grow. Fintechs have disrupted the value chain from payment innovation to establishing digital currencies and even helping to democratize finance. Designing fintech strategy and integration remains important for financial institutions as they grapple with changing demands from digitally savvy customers and evolving compliance and regulatory laws.
Going forward, fintechs may decide to move the needle from industry competitors to industry collaborators to drive innovation but not introduce systemic risk. This is where established technology partners can help provide significant value as fintechs navigate and operate in this highly regulated space in 2023.
We have seen both fintechs and banks focus their initiatives on solving front-end and customer-facing problems. This comes as no surprise as customers demand faster and more seamless digital banking experiences. For example, Embedded Finance allows organizations to partner with fintechs to offer buy-now, pay-later (BNPL) services so that customers who meet certain financial criteria can better finance large purchases. Embedded Finance requires the use of APIs and enables organizations to open their application data to third-party developers and partners that offer BNPL. As this enables services and products to leverage each other’s data, it is important to maintain trust and privacy for all players involved – financial institutions, fintechs and even the retailer. This is where the value of a shift in focus from front-end solutions to making improvements to middle and back office functions cannot be underestimated – which requires a holistic approach to cloud technology to help deliver both the security and scalability needed by fintechs and their customers.
Fintechs will continue to leverage the flexibility of hybrid cloud to securely manage their business-critical workloads across multiple environments, allowing increased levels of speed and security to accelerate time to market for digital financial services. However, data resilience, privacy and information security will always have to be at the forefront of their decision-making and IT strategy in today’s complex digital world.
Like other industries, fintechs face an evolving regulatory landscape. We see fintech leaders strongly looking for technology partners with deep experience who are not only building for the regulations that are already in place, but for future ones that can impact the business. Regulators in the EU and US seek to provide legal guardrails while allowing information sharing. For example, the EU’s forthcoming Digital Operational Resilience Act (DORA) is aimed at the development of risk and resilience in an increasingly digitized landscape of the EU’s financial services. In the US, a recent Treasury Department report found that fintechs are contributing to competitive pressures in financial services as their business models and new capabilities create additional risks to consumer protection and market integrity. Furthermore, the US Securities and Exchange Commission (SEC) has also proposed changes to the rules for ESG reporting and disclosure. Fintechs are potentially approaching the point where informal ESG strategies may no longer keep pace with regulatory changes in this area.
In 2023, business leaders should continue to focus on ESG, from reducing carbon footprints to improving energy efficiency. Some fintechs have already built into their business model and strategy pathways to help bank clients evaluate and reduce their environmental impact and channel their operations into other sustainable assets. Yayzy, a UK-based fintech, provides API-driven technology for banks to integrate into their mobile apps, to enable carbon footprint tracking for customers based on their spending, along with sustainable alternative proposals for footprint reduction and carbon offsets. Yayzy leverages IBM Cloud to modernize its footprint calculator as high levels of security are required by financial institutions to comply with strict industry regulations.
The breadth of solutions provided by fintechs is already on display in the global financial system as they continue to partner with financial institutions. This currently ranges from helping to modernize core banking infrastructure to accelerating the adoption of embedded banking and other digital financial services. However, fintechs will need to choose the right technology partners to maintain trust and confidence in the digital transformation journey amid increasing regulatory scrutiny.
