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Growth through innovation: Financial Service Transformation


Written by: Angelina Mariana


What is FinTech?

Financial technology, more commonly known as FinTech, is a form of software that aims to increase the efficiency of financial services and operations. FinTech can be used to help companies, business owners, and consumers manage their financial operations more effectively and efficiently.


Some common uses of FinTech include peer-to-peer transaction services such as remittances, lending services, and online payments. Financial organizations can also partner with external FinTech troubleshooters to develop in-house solutions that can increase the efficiency of a service. Regardless of the operational constraints, this decision is very meaningful because it is supported by capital expenditures and operating expenditures.


Capital Expenditures, also known as Capex, are manufacturing equipment, machinery, and building improvements. On the other hand, operating expenditures, also known as Opex, are rent and utilities, wages and salaries, overhead cost.


Figure1: Number of FinTech companies by region

Source: ImmuniWeb


As shown in figure 1, North America has the most number of Fintech companies, at 53 fintech companies (Application Security Series, 2019). Some well-known fintech companies in North America are Stripe and Ripple (Kauflin, 2020). A huge number of international investors invest money into these FinTech companies to promote better research and development of financial technology.


Figure 2: Monopolistic Competition Graph

Source: Economics Help

https://www.economicshelp.org/blog/311/markets/monopolistic-competition/


Moreover, FinTech has been classified into a monopolistic competition which mostly indicates the high number of sellers, and the lowest level of barrier to entry and exit (Mate et al., 2019). As seen from graph in figure 2, monopolistic competition in the long run will lead to P1 > min AC. A large number of sellers indicate who has the potential to enter the market, with the number of participants being quite varied. Low barriers to entry or exit, show similarities to a perfect competition where new players will enter the market if existing players realise there are additional benefits. So, in the case of long-run equilibrium, the firm will only realise a normal profit as the extra profit will drop to zero (Tuovila, 2020). Monopolistic competition has caused financial institutions to differ from their competitors. Some differences can be seen in their payment and banking strategies.


Payment

Payment is a FinTech service that gives access to critical assets that are used for an incumbent position offline that are conducted to compete with the other competitors. For example, before having FinTech, finance institutions traditionally made payment via the institution by filling some registration forms. Now, with FinTech, to make an easy payment, we can use a technology (smartphone) that provides a bank account over the internet. This provides convenience for customers to maintain their transactions and turn their smartphones into a “digital wallet”.


Banking

The competitors of the FinTech industry which have anti-competitive factors, have no impact on this service since FinTech does not have an elevated intensity of use with a lack of clear regulatory standards. The difference is located on the mobile, which focuses on how it can increase the anti-fraud system where it can’t be linked to the personal information of users.


Since FinTech is a monopolistic competition, it gives consumers the benefit of becoming more knowledgeable towards the FinTech service, quality, and development. It also gives consumers a variety of services that they could choose.


Why does FinTech Need a Digital Partnership?

Financial Technology requires a digital partnership because this current technology depends on these 3 factors.


Cost-Effectiveness

The partnership reduces the need of hiring staff and talents to research on the product, thus reducing employment costs. Besides that, having a partnership increases the transparency as shareholders from the two companies are able to have an open communication on the research without the fear of data leak.


Allocating a dedicated technology service provider means that there is no need to retrain staff or hire experts to run it and improve budget control and transparency. In addition, most payments can be done online through e-wallet, mobile banking, and payment apps. There is the view of quality payment that makes FinTech have technology capabilities.


Flexibility

Allocating to experts reduces the chances of poor hiring and spending budgets on new in-house technology. In addition, companies try several options until they get the right fit rather than making costly mistakes that they have to endure. FinTech gives some advantages in terms of its flexibility by using high technology that allows fast and cheap transactions. Furthermore, fintech allows customers to get lower prices provided by the capital venture.


Faster Market Delivery

Giving access to the faster service provider will differentiate it from competition in the global market. FinTech is able to provide users with better experience and performance. With market delivery, FinTech is able to help households reach the income level necessary to improve their lives.


Challenges Fintech in Industry


Figure3: Global Digital Payments (2017 – 2024)

Source: Medium

https://medium.com/an-idea/8-key-challenges-fintech-industry-faces-and-their-solutions-f447b0c857ea


Challenges in financial technology will be worth USD $26.5 trillion by 2022 based on a survey by a Market screener (Bhatt, 2021). Some background of this growth is backed by loans, insurance, and rising interest in investment. Figure 3 illustrates an increase in the digital payment transaction over the years. This shows the financial sector has contributed to the growth of many sectors by its efficient strategies of finance. Hence, the financial service can grow better.


There are many other major challenges that the FinTech industry faces on a daily basis. The following will be discussed to address some challenges that FinTech may face.


1. Data Security

Data security is one of the processes used to protect data from unauthorized data access, generally in digital information like FinTech, mobile banking, payment apps, and others. In traditional banking, security guards and CCTVs are used to safeguard the company to prevent data leak. This data security commonly needs to be protected because it will prevent some privacy data from being misused by third parties for fraud. In the current years, banks in America have lost about USD 1 billion per year due to cyber-crime (Bursztynsky, 2021).


In Indonesia, the financial service authority researched that cybercrime is one of the major challenges faced by financial services such as the banks and financial companies. As the financial sector is essential and important to the FinTech industry, cybercrime can cause major impact. It has been reported that around IDR 246.5 billion was scammed in total (Ramli, 2021).


In order to reduce the occurrence of cybercrime, the Monetary Authority of Indonesia tried to minimise the impact of cybercrime by increasing cyber-resilience among the community. This was done in 2 steps. Firstly, the authority prepares and keeps perfecting the existing regulation. Secondly, the authority educates the community on how they can protect themselves from being a victim of cyber-crime (Sulaeman, 2021).


2. Lack of expertise Fintech

Many countries still lack expertise in financial applications. In the past, banks tried to improve their services through the bank’s website and through calls. However, it has been surveyed that there is a lack of financial service integration and poor customer experience.


Usage of FinTech has a significant influence on the country’s economy. With FinTech being a common topic of innovation, a lot of research has been done on blockchain systems in banking, investment, and commerce.


For example, poor digital experiences may cause harm relating to public government perception of trust. In Kenya, the communities learnt how to use financial applications such as M-Pesa, a mobile phone-based money transfer service, payments and micro-financing service. Although it is common to see money transfer services in developing countries, for low-developing countries like Kenya, this improvement in technology gave the country hope in financial growth (Piper, 2020).


Strategic Fintech Framework

The strategy for this technology is “innovation” to manage the changes in the lifecycle of the century. Having a strategy will make it easy to process the delivery of a digital finance service. The background of this strategy will not only promote an alignment of the organization, it will also help focus on consumer behavior and innovation. However, FinTech has its cons. Companies that use FinTech have to know how to collaborate and provide benefits and incentives to their participants. It is also essential for companies to have proper thought and oversight on its development core assumptions. If not, they would produce black box results.


The strategy of FinTech is a holistic way of rethinking business in terms of innovation outcomes. It requires thinking outside the box in innovative ways with a broad alliance of practitioners and academics. The process is as follows:


  • What kind of aspect of financial services can digitalize?

  • How can this be done over internet security?

  • Regulatory implication regarding a new approach

  • Validation of customer demand


Effects of FinTech on the Financial Services

Some effects could include the technological trends, such as:


  1. Big data and cloud technologies give access to data without any specification for installing the applications on the mobile. Big data gives customers personal targets based on their analysis and the fast-moving digital transformation.

  2. Interface application program is the format of application programming that makes a system interact with clients. The application of this technology provides a system that is used in external software products.

  3. Payment system adjusts with artificial intelligence (future payments). This payment system has an operation that takes an analysis from the customer behavior and suggests the payment method that can help the customer to reduce the fees. Moreover, in this payment system, they provide a special function to give security when the transaction is in progress.

  4. Resolves the customers’ troubles, by using the internet and mobile devices. This gives an advantage in making resolution very fast. It gives a chatbot to save costs and gives a personalised service to customers by digital services which are flexible and easy for customers to adopt. For the last advantage, it can be found the opportunity to change the financial services experiences to gain higher loyalty from the customer relations.


This effect gives financial services an existence in using the site of a website that has already become a modern service.


Conclusion

FinTech is a monopolistic competition which indicates that the level barrier for entry and exit is a low and high number for sellers. By this competition, FinTech has some disparities like the method of payment and the banking strategies in the financial service. Because of this monopolism, FinTech needs some digital partnership that provides a cost-effective, flexible, and faster market delivery.


On the other hand, there are some challenges for FinTech, such as data security and lack of expertise in technology. It will damage financial technology. Furthermore, with the strategy framework by building up innovation, it can help the customers to use the digital finance service. Hence, FinTech can help to improve the financial service to be a modern assistance.



References

Application Security Series. (2019, August 20). State of Application Security at Top 100 Global Fintech Startups. ImmuniWeb. https://www.immuniweb.com/blog/fintech-application-security.html


Bhatt,C. (2021, June). 8 Biggest Challenges Fintech Industry Faces in 2021. Techtic Solutions. https://www.techtic.com/blog/fintech-industry-challenges/amp/


Bursztynsky, J. (2021, June 14). Bank of America spends over $1 billion per year on cybersecurity, CEO Brian Moynihan says. CNBC. https://www.cnbc.com/amp/2021/06/14/bank-of-america-spends-over-1-billion-per-year-on-cybersecurity.html


England, J. (2021, August 10). The future of digital ecosystems in the Fintech Space. FinTech Magazine.

https://fintechmagazine.com/technology-and-ai/future-digital-ecosystems-fintech-space


H., N. (2021, September 29). The impact of fintech on the future of banks and financial services. Geniusee.

https://geniusee.com/single-blog/fintechs-impact-on-the-future-of-banking-and-financial-services


Kagan, J. (2020, August 20). Financial Technology – Fintech. Investopedia. https://www.investopedia.com/terms/f/fintech.asp


Kauflin, J. (2020, February 12). The 10 biggest fintech companies in America 2020. Forbes. https://www.forbes.com/sites/jeffkauflin/2020/02/12/the-10-biggest-fintech-companies-in-america-2020/amp/


Lewis, A. (2021, September 16). The Fintech Revolution: Opportunity and Challenges Beyond 2021. ReadWrite. https://readwrite.com/2021/09/16/the-fintech-revolution-opportunity-challenges-beyond-2021/


Mate, N., Laszlo, C., & Sandor, G. (2019, December 14). Fintech companies and banks – encounter of two different market structures in Hungary. Economics & Working Capital. http://eworkcapital.com/fintech-companies-and-banks-encounter-of-two-different-market-structures-in-hungary/


Piper, K. (2020, September 11). What Kenya can teach its neighbors - and the US - about improving the lives of the "unbanked". Vox. https://www.vox.com/platform/amp/future-perfect/21420357/kenya-mobile-banking-unbanked-cellphone-money


Ramli, R., R. (2021, October 26). Imbas Kejahatan Cyber, Bank-bank Dunia Merugi Rp 1.420 Triliun Per Tahun. KOMPAS.com. https://amp.kompas.com/money/read/2021/10/26/173828526/imbas-kejahatan-cyber-bank-bank-dunia-merugi-rp-1420-triliun-per-tahun


Sulaeman. (2021, September 24). Intip Cara OJK berantas kejahatan cyber di industri keuangan. Merdeka.com. https://m.merdeka.com/uang/intip-cara-ojk-berantas-kejahatan-cyber-di-industri-keuangan.html?page=1


Tuovila, A. (2020, October 31). Normal profit. Investopedia. https://www.investopedia.com/terms/n/normal_profit.asp