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The Impacts of Fintech in the Financial Industry

The Impacts of Fintech in the financial industry

Financial Technology (fintech) has captured the attention of the global financial industry recently. Proponents of fintech are taking every measure to develop more advanced technologies and innovations to improve fintech and accommodate the financial industry more. On the other hand, those opposing the adoption of fintech in the financial industry argue that it creates more harm than benefits in the industry. Fintech supporters illustrate that it has brought many improvements in the financial industry by boosting efficiency, developing a better customer experience, easier access, and faster financial services. Data security, confidentiality, privacy, and disrupting the traditional financial model are still under discussion. The introduction of fintech in the financial industry has generated several impacts, some that are positive and others that are negative. Several financial institutions have shown the adoption of fintech, such as JP Morgan, which has invested in financial technology to cope with trends in the financial industry. This suggests that the impact of fintech has been felt in many regions, especially in the financial industry. However, the discussion on the effectiveness of adopting fintech in the financial industry has created heat with the debate taking two major divides; fintech promoting financial institutions, and the other is that fintech is choking the traditional financial providers. Supporters of fintech argue that fintech has created innovative financial products that have made it easy and faster to access financial services. On the other hand, those opposing fintech illustrate the threats to privacy and confidentiality caused by the introduction of fintech. Therefore, the impacts of fintech in the financial industry include positive and negative effects that influence the functioning of financial service providers and the industry.

Literature Review

The introduction of fintech was largely contributed by the financial crisis in 2008. It was caused by the transition eminent in financial market participants to low-capital intensive business structures, which were modern and accommodated the modern market structures. This created the financial industry’s need for innovation and creativity, leading to new financial products representing the initial fintech companies. Current fintech is characterized by increased digital transformations attributed to a combination of technological advancements such as artificial intelligence, machine learning, robotization, blockchain, among other technological developments. Fintech has changed how traditional banking services are provided. Thus, in this paper, we shall examine the emergence of fintech, factors affecting its adoption in financial institutions, the pros and cons of fintech, the impacts of fintech, and the challenges facing fintech.

Emergence of fintech

The introduction of fintech has been gradual, with optimum acceptance taking place after the financial crisis in 2008, creating an evolution in the financial sector. According to Schindler (2017), the financial crisis shaped the structure of the financial industry due to increased risks that increased the regulations in the financial industry during the crisis. This created a pathway for the introduction of alternative methods because most banks reduced or stopped lending. Thus, fintech was introduced as new entrants in the financial industry with innovative methods of solving the challenges faced in financial institutions. Technology has also played a major role in the introduction of fintech in the financial industry. According to Mention (2019), the introduction of fintech in the financial industry was attributed to the support it gained from other technological advancements. The technological advancements that contributed to the introduction of fintech include artificial intelligence, machine learning, blockchain technology, smart contracts, to mention a few.

Adoption of fintech in the financial industry

Fintech has become a global phenomenon caused by advancements in education and improvements in innovation. According to Mention (2019), fintech has been accepted in several sectors considering the financial industry. Most financial institutions have adopted fintech. For instance, JP Morgan has invested heavily in fintech to tap the current trends in financial innovations. This suggests that fintech has captured the attention of financial institutions and the financial industry. An empirical study by Hu et al. (2019) explains that the adoption of fintech in the financial industry improves user experience and banking efficiency. Fintech influences the brand image of financial institutions, the attitude of users, and government support; thus, most financial institutions adopt fintech to take advantage of these elements.

Impacts of fintech on the financial industry

The introduction of fintech in the financial industry has created several impacts in the industry. According to Goldstein (2019), fintech has affected the operations in financial institutions by creating new financial products and aspects such as mobile banking, online money transfers, crowdfunding, and cryptocurrency. These financial innovations have changed the way services are provided by most financial service providers. Blockchain is essential in money transfers and distributed computing. Ashta and Biot‐Paquerot (2018) illustrate that fintech and the incorporated technologies are essential in financial institutions because they have introduced efficiencies in operations, such as bypassing the back office, the middle office, and the front office, which was eminent in traditional financial service providers. Fintech has improved user experience and operational efficiencies in financial institutions (Hu et al., 2019). This is among the key reasons why most financial institutions have adopted fintech in their structures. According to Kang (2018), the increased use of mobile devices has increased the demand for mobile payments attributed to fintech. This illustrates that fintech has an increased impact on financial service providers. Examples of mobile payment services accrued to fintech include Apple pay, Samsung Pay, and Android Pay.

Benefits of Fintech in the financial industry

Fintech has created several benefits in the financial industry. According to Goldstein et al. (2019), fintech has enabled complex computing challenges for traditional financial methods. This is enabled due to the introduction of better and innovative technological advancements such as big data technologies. Fintech has also caused expanding access to financial services to traditionally underserved or unserved areas (Mention, 2019). This has been enabled by the introduction of mobile banking and online banking, and money transfers. Other benefits of fintech in the financial sector include bypassing the back office, middle office, and front office in most financial institutions (Ashta & Biot‐Paquerot, 2018). Such practices were associated with traditional financial providers. They are currently washed out through the introduction of fintech in the financial industry. Fintech has also enabled easy communication and interaction between financial institutions and customers. Communication has increased management value in most financial institutions. According to Hu et al. (2019), fintech has enabled improvement in user experiences and efficiency in operations. The adoption of technological developments in the financial industry has promoted efficiency in the operation of financial service providers and improved the user experience making it easier for customers to access financial services. Fintech has also helped to solve the challenges of unemployment (Demir et al., 2020). These are illustrations that fintech has benefits to the financial industry and the community.

Disadvantages of fintech

Fintech has created several challenges in the financial industry. According to Goldstein et al. (2019), the introduction of fintech in the financial industry has disrupted the traditional financial service providers. Mention (2019) supports the argument that fintech has caused disruptions in the incumbent financial services because fintech-related services are cheaper, faster, and easier to use than traditional financial services. This has caused poor performance in most traditional financial providers, with some institutions going bankrupt. Ashta and Biot‐Paquerot (2018) illustrate that, apart from disrupting the traditional financial models, fintech has also introduced challenges such as systematic risks during deposits, data transfers, privacy issues, and confidentiality. Authentication issues, authorization challenges, problems affecting the integrity, privacy violations, and inadequate autonomy are the most common challenges created by mobile-based and online banking services (Kang, 2018). These challenges have created controversy in the effectiveness of fintech in the financial industry.

References

Ashta, A., & Biot‐Paquerot, G. (2018). FinTech evolution: Strategic value management issues in a fast-changing industry. Strategic Change27(4), 301-311.
https://onlinelibrary.wiley.com/doi/abs/10.1002/jsc.2203

Demir, A., Pesqué-Cela, V., Altunbas, Y., & Murinde, V. (2020). Fintech, financial inclusion, and income inequality: a quantile regression approach. The European Journal of Finance, 1-22.
https://www.tandfonline.com/doi/abs/10.1080/1351847X.2020.1772335

Goldstein, I., Jiang, W., & Karolyi, G. A. (2019). To FinTech and beyond. The Review of Financial Studies32(5), 1647-1661.
https://academic.oup.com/rfs/article-abstract/32/5/1647/5427782

Hu, Z., Ding, S., Li, S., Chen, L., & Yang, S. (2019). Adoption intention of fintech services for bank users: An empirical examination with an extended technology acceptance model. Symmetry11(3), 340.
https://www.mdpi.com/423566

Kang, J. (2018). Mobile payment in Fintech environment: trends, security challenges, and services. Human-centric Computing and Information sciences8(1), 1-16.
https://hcis-journal.springeropen.com/articles/10.1186/s13673-018-0155-4

Mention, A. L. (2019). The future of fintech.
https://www.tandfonline.com/doi/abs/10.1080/08956308.2019.1613123

Schindler, J. W. (2017). FinTech and financial innovation: Drivers and depth.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3029731