What are our Future FinTech Champions learning at the moment? And what are their thoughts on the current development of FinTech? Read through this submission from one of our FFCs, Chitradeo Sonkar, currently studying Computer Science @ University of Mauritius [Submission made in August 2024].

The Fintech Revolution: Transforming the Future of the Banking Industry

The banking industry has undergone a significant evolution from its traditional roots to the modern digital era. In the past, banks operated mainly through physical branches where transactions were done manually on paper. Services were limited, making it less convenient for customers, especially those in rural areas. Regulations were simpler and focused locally.

Today, digital technology has revolutionized banking. Customers can manage their accounts and make transactions online or via mobile apps anytime. Moreover, the banking and financial industry is witnessing the decade’s biggest shift due to digital Fintech solutions. FinTech is a mixed blessing for the banks. If the latter clout the power of fintech services in the right way, it’s a win-win situation. With the emergence of FinTech, the financial services industry has seen a different angle in financial transformation. From digital payments to investment and insurance platforms, Fintech is transforming financial services. According to a report from Fortune Business Insights, the fintech market size is projected to grow to USD 882.30 billion by 2030, exhibiting a CAGR of 17% during the forecast period (2023-2030) (GLOBE NEWSWIRE 2024).

(Source: DigiPay)

There are several ways the FinTech industry is bringing transformative changes in the banking industry. Some of them are as follows:

Payments processing

Traditional banks are increasingly adopting FinTech technologies to stay competitive, launching their own digital wallets, mobile banking apps, and contactless payment options. For instance, JPMorgan Chase’s mobile app now supports digital wallet integration and contactless payments, enhancing customer convenience and engagement. According to a report by (Meredith Alda 2024), digital payment transactions are projected to reach US$11.53tn in 2024 and is expected to show an annual growth rate (CAGR 2024-2028) of 9.52% resulting in a projected total amount of US$16.59tn by 2028.

Driven by the proliferation of smartphones and internet connectivity, mobile payments are used by more than 2 billion users globally. In the United States, mobile payment market size reached US$ 612.6 Billion in 2023. IMARC Group expects the market to reach US$ 3,901.8 Billion by 2032, exhibiting a growth rate (CAGR) of 22.2% during 2024-2032 (Imarcgroup). Additionally, contactless payments, which gained substantial traction during the COVID-19 pandemic, is expected to reach USD 164.15 billion by 2030, registering a CAGR of 19.1% during the forecast period (Research and Market 2022). In Mauritius, the Mobile POS Payments market is projected to reach US$571.00m in 2024 and the transaction value is expected to show an annual growth rate (CAGR 2024-2028) of 15.38% resulting in a projected total amount of US$1,012.00m by 2028 (Meredith .A ).

(Source: Research and Market)

Lending and Financing

In the past, getting a loan required heading to a local bank branch, sitting down with a loan officer, and pouring over the details of your financial life which were once deemed tiring and a loss of time by waiting in a queue are being revolutionized through the emergence of FinTech innovative solutions. Nowadays, consumers can access loans in seconds with a few taps on their smartphones. Fintech powers peer-to-peer (P2P) lending solutions, allowing a retiree in Florida to loan money to a single parent in Germany or a small business owner in Paris (Danielle Antosz 2022). 

P2P lending alone has experienced rapid growth with its market size amount to US$ 83.79 billion in 2021 and it is expected to hit over US$ 705.81 billion by 2030 with a registered CAGR of 26.7% (Neslihan .T & Ihsan .E .K, 2023.). This surge is attributed to the convenience and speed these platforms offer compared to traditional banks, as well as their ability to provide loans to underserved markets. In the small business sector, FinTech lenders have captured a significant share, with companies like OnDeck and Kabbage disbursing billions in loans. OnDeck, for example, has provided over $13 billion in loans to customers in 700 different industries across the United States, Canada and Australia(Sec). Additionally, FinTech companies are leveraging advanced algorithms and machine learning to assess creditworthiness, enabling faster decision-making and lower default rates.

Regulatory Framework

The rapid expansion of FinTech has necessitated the development of comprehensive regulatory frameworks to ensure consumer protection, financial stability, and compliance with existing financial laws. According to a 2023 report by regtech, it has found that spending on Regtech by financial institutions and other industries will increase by 124% between 2023 and 2028 globally, from $83 billion in 2023(Daniel Bedford 2023). The European Union has introduced the Revised Payment Services Directive (PSD2), which mandates strong customer authentication and open banking standards to enhance security and competition.

Additionally, the General Data Protection Regulation (GDPR) was implemented in 2018, set stringent data privacy standards that significantly impact how FinTech companies handle user data. Countries like Singapore and Australia have also established regulatory sandboxes, allowing FinTech firms to innovate within a controlled environment while ensuring compliance with regulatory standards (Alyssa Abrams 2023). These measures are critical in balancing innovation with the need for robust consumer protection and financial system integrity.

Collaboration and Partnerships

Faced with the threat of losing customers and revenues to agile fintech challengers, banks arе collaborating with fintеch companiеs rathеr than compеting against thеm dirеctly in cеrtain arеas. For example, some banks are looking to acquire fintech startups in order to maintain a competitive edge. Companies like Citibank and Goldman Sachs have developed accelerator programs to fuel fintech and integrate these technologies into their broader financial infrastructure (Invoice.2go). Also, Citigroup (Citi) has taken a significant step in embracing financial technology by making a strategic investment in Icon Solutions, a leading FinTech firm (Editorial Team 2023). According to a PwC report, majority of global banks, insurers and investment managers intend to increase their partnerships with FinTech companies over the next 3 to 5 years (PwC 2017).

These collaborations enable traditional banks to leverage advanced technologies such as artificial intelligence, blockchain, and big data analytics to enhance their services. For instance, JPMorgan Chase partnered with OnDeck to streamline its small business lending process, significantly reducing loan approval times. Moreover, partnerships between FinTech companies and financial institutions are also crucial for financial inclusion. In emerging markets, collaborations between telecom companies and FinTech firms, like the partnership between Vodafone and Safaricom for M-Pesa, have revolutionized mobile money services, reaching over reached 50 million monthly active customers strengthening its position as Africa’s largest fintech (Safaricom). These strategic alliances are vital for driving growth, fostering innovation, and delivering enhanced financial services to a broader customer base.

Blockchain Technology

The traditional banking system is outdated, and fintech companies are quickly taking over the competition with their decentralized banking platforms. According to a report, Blockchain technology could reduce infrastructure costs for eight of the world’s 10 largest investment banks by an average of 30%, translating to $8bn (€7.5bn, £6.6bn) to $12bn in annual cost savings for those banks (Vivek 2017). Blockchain’s decentralized ledger system eliminates intermediaries, accelerates transaction settlements, and enhances data integrity and privacy through cryptographic security measures.

Leading banks like JPMorgan Chase and HSBC are leveraging blockchain to streamline operations and improve service delivery. JPMorgan Chase uses blockchain for faster payment processing, while HSBC adopts DLT for secure trade finance operations, reducing paperwork and processing times significantly. Beyond operational efficiencies, blockchain enables innovative financial services such as smart contracts, which automate and enforce agreements without intermediaries, thereby reducing costs and enhancing accessibility. Blockchain’s transformative potential in banking is underscored by projections from the World Economic Forum, forecasting that blockchain platforms could secure 10% of global GDP by 2027 (Jeremy 2024). This technology not only enhances banking processes but also fosters a more secure and efficient financial ecosystem, positioning FinTech at the forefront of industry innovation and customer-centric service delivery.

FinTech has become the core to the banking and financial sector, driving the success of modern banks. Its implementation has profoundly impacted banking by enhancing speed, security, efficiency, and cost-effectiveness; qualities that cater directly to customer needs. However, there are challenges between the banking sector and the innovations Fintech brings. By addressing these adversities, both industries can stimulate economic growth and foster financial inclusion throughout the world.