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Embedded Finance

The Rise of Digital in Fintech

Software automation and digitization of manual processes is the next frontier for the financial services industry, where many companies and banks still operate relying on huge workforces. 

Over the last five years, I’ve been in touch with a number of financial institutions, some of them serving millions of customers, and gradually came to realize that in many cases the cutting edge financial products provided to consumers are actually powered by a huge workforce of people in the background performing an abundance of manual tasks in order to provide services to the customers they serve.

Efficiently managing a financial institution with the constraints of compliance’s stringent legal and regulatory requirements, often on a state-by-state basis, is not an easy thing to do. Building a partnership network is essential in complying with each of those requirements, however, you can only be as efficient as your least efficient provider is.

The rise of advanced platforms powered by Artificial Intelligence, and Machine Learning data-driven software in financial services is powering the modernization of the industry. As in many industries before, automated and scalable software services will bridge the gap of inefficiency and transform organizations to ultimately provide a better service to demanding consumers and businesses.

Companies wanting to be on the cutting edge of financial services will have to move quickly in adopting services that enable them to be faster and more efficient. New banks and mobile wallets that have highly frictionless onboarding processes through automated identity management, and agile compliance departments solving edge cases in just minutes, have been in the forefront of disruption in the consumer market.

Younger generations no longer consider standing in line at the corner bank and filling out long paper forms to open a bank account. They simply go to the finance app store, register in minutes, open a bank account and a debit card immediately, and then ask their employers to deposit their salaries there. The process is Instant, with no hassles, and very few questions asked.

Downloading another mobile app will get that same person a quick loan, another mobile app and they’re investing in the financial market with as little as $5, and another mobile app can create a credit card with a 5% cashback for any purchase. The process is as easy and fast as that, and they're in the market with all they need to manage their financial lives.

These consumers don’t tend to be very loyal to only one brand. Just as easy as they enabled themselves in minutes with these services, they can install multiple alternatives for similar services and be clients of multiple financial institutions. Whereas 15 years ago a new consumer in the financial market would pick one or two banks to work with, they’re now using multiple financial institutions, often concurring for each individual financial product they use.

However, competition in the space is fierce. The immediacy of modern life has changed consumers' expectations, and also their patience to wait for more than one minute for pretty much anything they access online. Financial companies need to constantly improve their services, providing more perks and discounts to consumers to keep a retention and revenue positive trend. Ease of use, strong branding, and speed of accessing their funds are key to retaining financial consumers. Innovation in the sector is happening faster than it has ever before.

Although traditional banks seem to be the ones hurting the most from this consumer trend, the reality is that these innovative companies rely heavily on the underlying banking system to enable their programs. A number of banks that have already identified this trend have been pioneers on enabling and supporting these companies in the financial market.

As this trend steepens, it is expected that more banks will want to ride the big FinTech wave in order to diversify their business, to generate new revenue streams, and to benefit from highly profitable margins from consumers they didn’t have to acquire directly. As different banking partner alternatives emerge for startups to build new business models, the competition will increase for the selection amongst the growing number of enabling banks.

Competition ultimately benefits customers in the same measure that it makes life harder for providers. Banks, just like any other institution participating in this market will need to, not only modernize their processes and efficiency to speed up enablement, but also to scale their organization to support the business needs of their demanding new customers. Obsolete and batch-driven banking core systems, compliance processes based on emails, or Excel sheets for program monitoring simply won’t work, and adding more staff to the ranks is not going to scale either. Digitizing through new software platforms is the key.

The challenge will be finding a way to modernize fast enough to support new customers, while remaining fully compliant with banking laws and regulations, maintaining responsible risk management, and without losing the fast moving train of innovation.

It’s not enough to set up the programs and lay the regulatory foundations to enable fintechs. Compliance and Risk Officers will have to learn to trust new process automation platforms, to drive a transformation in their organizations to work on the principle of exception-based monitoring on a daily basis, and to shift to optimized data-driven auditing processes to make sure their institutions are protected. This will be at the same time they keep up with the market demands.

Fortunately, financial institutions’ jump to the new era of digitization is now being powered by an emerging software service provider trend. These companies are providing aggregation services to cover almost all the bases in the path to modernization. Much like the Software-as-a-Service revolution removed the need for massive IT departments to support and enhance the vital systems of organizations, so will the aggregators of state-of-the-art financial services remove the need to manage multiple disparate systems that often don’t integrate seamlessly. This also means not having to maintain a huge team to support the business.

Financial institutions can benefit from the ecosystem of partners, compliant processes and controls, and best practices in the industry aggregated in these platforms. This provides a rapid time-to-market of their products and services, without having to maintain relationships with tens of vendors. The era of efficiency, speed, and automated compliance processes is here, and the race for innovative financial services has just begun.

As new companies provide more services to increase efficiencies, the pace of adoption from financial institutions to the new era of digital, will determine their competitiveness in the market.


Originally published on Toolbox.

Written by Pedro Silva