Fintech has transformed various financial services, such as payments, lending and wealth management, challenging traditional banking models. Behind this disruption are improved system connectivity, computing power and reduced computing data costs. According to a 2021 report by the Bank for International Settlements (BIS), these technological improvements have removed friction and enabled new business models to emerge. With the entry of new niche fintech players, new types of services have been introduced and financial products have been transformed.
“The areas that have experienced the most profound impact are the consumer-facing ones, such as payment and consumer lending and credit,” highlighted S. Alex Yang, Professor of Management Science and Operations at London Business School. “These areas directly benefitted from the wide adoption of mobile devices and data availability.”
Starbucks is a concrete example. Historically viewed as a coffee shop, the group had close to $1.57 billion of “stored value card and loyalty program” liabilities as of October 2023, according to its 2023 annual report. These liabilities are akin to a bank’s customer deposits, which its customers have loaded into its mobile app. Another example is the rise of big technology companies in the financial space, like Apple, with its Apple Pay solution, blurring industry boundaries between technology hardware and payments.
In the UAE, the rapid adoption of digital banking has positioned Dubai as a significant fintech hub. “Here, the shift towards fintech introduced a new wave of technologies and cultivated a vibrant ecosystem that attracts investment and drives innovation,” explained Sara Hoteit, Backbase Regional Manager, Middle East. She said in places like Saudi Arabia, regulatory changes like open banking are reshaping the landscape, encouraging collaboration between traditional banks and fintechs. This has expanded the availability of financial services to more customers and pushed towards cashless transactions and digital wallets.
Slower than expected growth
While there has been disruption at a global level, the fintech sector itself has grown slower than some expected. Several global consulting firms forecasted around a decade ago that there would be significant revenue shifts from banks to fintech companies. However, the actual revenue impact has been more modest.
Fintech companies have secured a smaller share of the banking sector’s net revenue than global consulting firms expected. In 2022, the fintech sector only accounted for an estimated 5% of the worldwide banking sector’s net revenue, according to McKinsey & Company. The share in the Middle East was less than 1%. This discrepancy between the expected and realised share of the wallet underscores the dynamic nature of the financial services sector. “While fintechs have at times been portrayed as a threat to incumbent banks, the reality is that they do not exist in a vacuum; incumbents have actively adapted to the fintech challenge, thereby mitigating potential revenue losses,” noted Johnny Kollin, Managing Director, Várri Consultancy.
The shifting dynamics are further underscored by the decline in fintech investment in recent years. Over the last two years, there has been a slowdown in capital deployed into the sector. In 2023, capital invested in the fintech sector globally amounted to $51.2 billion, marking a 48% decline from the previous year’s $99 billion, according to Innovate Finance. The investment has not only been reduced but has also remained concentrated in a few markets. US-based fintech companies topped the 2023 list of investments, accounting for $24 billion of capital raised across 1,530 deals. According to the report, UK-based fintech companies raised $5.1 billion of capital across 409 deals.
“Going forward, fintech will continue to reshape traditional financial services as there is still a significant amount that has yet to be achieved using existing technology,” said Kollin. “At the same time, incumbents are also reshaping the fintech industry.”
Fintech startups in the lending space need help scaling their business at times due to a need for more capital and funding through deposits. While some players may have initially attempted to challenge traditional lenders, they now have to rely on those same banks for financing. Eventually, those who manage to master a niche segment within a collaborative partnership model will likely be the ones to scale.
Customer engagement through technology
Technology has allowed for a more personalised customer experience. However, a crucial distinction must be made between the potential of fintech to personalise financial services and the current state of personalisation in financial institutions. “Arguing that financial institutions have enhanced customer engagement through personalisation hinges on how we define it and how we value the depth and relevance of personalisation,” explained Kollin.
Today, financial institutions can offer services tailored to users’ financial behaviour. However, customer experiences remain standardised to allow those institutions to scale effectively. “As a result, they lack the depth of relationship that comes from human interaction and the nuanced understanding of individual circumstances,” Kollin stressed. “Furthermore, today’s rare forms of personalisation are largely data-driven, based on algorithms analysing transaction history and online behaviours.” However, such analysis is unlikely to fully capture a customer’s needs or preferences.
Banks can innovate by implementing machine learning and AI to personalise financial products and transform how users interact with their services. This makes the online banking experience as unique as the customer using it. However, Charbel Khneisser, Vice President of Solutions Engineering – EMEA, Riverbed, believes that AI’s greater and perhaps largely untapped potential is less in customer-facing applications than in back-end systems.
“AIOps can offer substantial value for the region’s banks. With the complexity and volume of data generated in banking operations, AIOps enables real-time monitoring, analysis and response to IT incidents, enhancing system reliability and security,” he said. “By leveraging machine learning algorithms, AIOps can predict potential issues before they occur, preventing downtime and ensuring uninterrupted services critical for banking operations.”
Furthermore, AIOps streamlines IT workflows, automates routine tasks and optimises resource allocation, improving operational efficiency and cost savings. Ultimately, AIOps empowers banks to deliver seamless, secure and high-performance digital experiences to their customers. According to Paterson, Machine learning techniques are especially relevant in retail banking, where propensity modelling and risk pricing of financial instruments have typically been less than near real-time.
Improving operational efficiency with RPA
Financial institutions use robotic process automation (RPA) to automate structured tasks, which can significantly enhance operational efficiency, reduce costs and minimise human error. The challenge with adopting RPA has been that most company data could be more structured. An Oracle white paper published in 2014 found that only 10% to 20% of financial institutions’ data was structured. Similar findings were reported by Hyperscience in 2022.
More advanced forms of RPA, including autonomous and cognitive automation (RPA 3.0 and RPA 4.0), incorporate some aspects of artificial intelligence (AI). As a result, automation capabilities can now be extended to unstructured data processing, enabling more use cases. “This technology evolution will allow financial institutions to automate a broader range of tasks, including those involving unstructured data, as demonstrated in case studies like Deutsche Bank,” explained Kollin.
By integrating RPA with AI technologies, financial institutions can streamline various processes and achieve greater accuracy, compliance and cost efficiency, marking a critical step in their digital transformation journey.
“RPA, coupled with insights into how the processes are modelled from process discovery functions, reduces the analysis involved at the start of these projects and can show a positive ROI, quickly,” stated Gary Paterson, Head of Banking Architecture – MENA, Endava. “For larger organisations that have many people operating processes at scale, RPA deployments can make a real difference to the operating costs of a bank, while enabling it to remain compliant.”
Paterson says the processes and technologies stay inside the bank instead of being entrusted to a business process outsourcing (BPO) partner. While this latter approach was once practical in helping reduce operating costs, it often results in risks that are difficult to assess and manage with a third-party processor. Many efficiencies BPOs deliver can now be achieved by deploying internal RPA systems.
Regulatory technology solutions
Regtech solutions have significant potential to improve compliance and increase productivity in financial and non-financial companies, particularly in markets like the Middle East. “Looking at the UAE as an example, there are more than 40 multidisciplinary free zones, two financial free zones with separate laws and court systems and four different regulators responsible for the authorisation and supervision of financial institutions,” explained Kollin. “Such a regulatory environment offers opportunities but also gives companies, particularly challenger fintech companies in regulated sectors, a complex web to navigate.”
“With that complexity comes the opportunity for regtech companies to disrupt the market for compliance solutions.”
Despite the clear advantages of deploying regtech solutions, many businesses are reluctant to invest in modern, efficient solutions. The 2023 Thomson Reuters Regulatory Intelligence survey highlights that, beyond increased regulatory risks, respondents need help employing these regtech applications. This reluctance is often due to insufficient investment, a need for more internal expertise and inadequate infrastructure. According to the survey, these issues reflect broader obstacles encountered in implementing fintech applications, including the need for more skills, data governance and regulatory strategies.
According to industry experts, over time, the tangible benefits of robust regtech solutions will become more apparent to more market participants as the financial services sector grows increasingly intricate and competition increases with open banking initiatives. By embracing these technologies, firms can navigate the complexities of regulatory compliance more efficiently. Combining it with automation and analytics, they can also gain strategic advantages like faster go-to-market.
“Adopting a unified omni-channel strategy, updating core banking systems to be more flexible, moving to cloud-native solution, and making the most of AI, blockchain and regtech, are key steps for banks aiming to become more agile, focused on their customers and ready to innovate,” explained Hoteit.
In conclusion, while fintech continues to reshape the financial landscape, challenges persist in achieving anticipated revenue shifts and sustaining investment momentum. However, with advancements in technology and regulatory frameworks, coupled with a focus on personalised customer experiences and efficient compliance solutions, the industry remains poised for further transformation and growth.
The road ahead demands strategic adaptation and collaboration to realise the full potential of fintech in delivering value to both businesses and consumers.