The COVID pandemic pushed most businesses towards a technological overhaul. It heightened the perceived volatility in the market and became the first major test for the global financial system. In many ways, it became a catalyst in moving banking systems towards a more tech- and data-based era.
Amidst the challenges that have emerged such as supply chain disruption and a global economic slowdown, it fell on the financial ecosystem to ensure uninterrupted business. The singular positive feature in transforming the financial services industry has been the accelerated use of technology, as well as innovation across the entire spectrum of banking services.
Neobanks and fintechs driving innovation across financial services
A new ecosystem of customers, traditional banks, fintech, regulators, and developers is taking shape. By leveraging next-gen tech capabilities of AI, ML, big data, mobile technology, blockchain, and cloud-based SaaS applications to deliver innovative products and services, the focus is on simplified banking processes, enhanced customer engagement, and enabling ‘anywhere-banking.’
From facilitating account opening to selling credit cards, fintech companies have begun transforming into full-fledged banking institutions by offering the entire spectrum of banking services – digital identity, credit ratings, stock trading, loans, and payments – all at the click of a button.
But a major challenge to fintech is in the form of market volatility. With the fintech investment market witnessing cyclical ups and downs, early-stage startups find it difficult to find capital to fund their operational costs. For large incumbents, any crisis scenario highlights the importance of effective operational risk management arrangements.
An important outcome of the pandemic has been the rise in neobanks (digital banks functioning online and without physical branches), which focus on product innovation. Fintech firm Razorpay is a standout example; it launched a neo-banking platform called RazorpayX that enables several transactions like commercial payroll, expense management, and other commercial credit products. RazorpayX projects the financial capability of SMEs – deposits, cash flow management, transaction reconciliation, and flexible payouts – which is of great help to business owners.
A major concern is that regulation seems to be hampering growth. While the consensus is that a well-done ‘regulation framework’ will bump up innovation, it isn’t possible to fit ‘new tech’ within ‘old rules.’ Therefore, the huge task ahead is to build a framework that has ‘protection meeting overarching objectives,’ but provides enough latitude for innovation – driving growth across the risk and regulatory space.
While neobanks’ focus is on product innovation, the issue of profitability has been a recurring theme – less than 5 per cent are currently profitable. This is of concern, especially for some of the older neobanks (those in existence for more than five years) as the high growth that they witnessed in their initial years was supposed to be a precursor to profitability in the future. That is not in sight!
Banking in – and on – the age of the Metaverse
We are witnessing the rise of Metaverse as a new business paradigm, built on new-age tech. This is true for financial services as well, with large banks like HSBC and JP Morgan announcing their entry into the Metaverse – to be nearly a $3 trillion economy in a decade. And this has been achieved due to the progress within the industry in moving from traditional to digital banking and beyond – where DeFi (decentralised finance) brings value to metaverse finance (MetaFi).
While the immediate goal can be on customer connect in the current open metaverses of Sandbox and Decentraland, in the short term banks can look to engage with prospective customers and onboard them via crypto wallets, as well as by enabling payments, loan disbursal, and custody services.
With blockchain facilitating the use of non-fungible tokens (NFTs) and cryptocurrencies, what metaverse offers is a wider canvas for banks to tap into. As this evolution demonstrates, MetaFi is not an overnight transformation for banks. MetaFi will need a crypto-native, decentralised infrastructure powered by Web 3.0 technologies to provide seamless, transparent, and permission-less value transfer.
A strong foundational DeFi strategy encompassing digital assets and currencies, combined with open banking approaches to connecting to third-party services in a seamless and secure manner, will be pivotal for banks to explore the full potential of the metaverse.
In the end, it’s all about the customer experience
While the prerequisite across banking will be the use of technology, the quality and ingenuity of technology should match our aspirations of acquiring scale and diversion of business. The focus of use of technology should shift from ‘transactions-based to business-oriented’ and to shift from product-based banking to customer-first banking to cater more effectively to consumers.
As the battle for the supposed super-app dominance continues, fintech companies must build long-term road maps that include a vision for each of these components, allowing them to expand their service offering to become ‘the go-to destination’ for the future of ‘consumers of finance’ and enhance the customer experience. Across this rapidly expanding connected ecosystem, conviction and convenience never share the same zip code!