The growing importance of innovations coupled with the extensive use of technologies has changed the face of banking worldwide. Financial technologies (Fintech) have become an integral part of banking, and nowadays banks have started to compete beyond financial services due to the increasing competition from nonfinancial institutions. The Fintech industry has grown massively over the past couple of years. Fintech companies pose a strategic threat by potentially disrupting the financial sectors and services, particularly in areas such as lending, payments, wealth management, and property and casualty products. Fintech companies have quickly moved on from their initially modest offerings in back-office operations into areas such as trading, investment, retail banking, thus emerging as direct competitors in the industry. Though the fintech revolution has been in full swing for the last few years, there are a number of complex challenges that fintech companies are yet to resolve:
- Regulatory constraints
The fintech industry is quite different from the traditional banking setup. Fintech companies are often unaware of which regulators and governing bodies they have to adhere to. This means that these companies often aren’t even aware of the regulations that they must comply with. This problem can result in delays in getting license on-time. Also, the possibility of getting charged with hefty fines are also high. To add on to this problem, since the financial crisis of 2008, governing bodies have created much more stringent regulations that the financial industry must follow.
- Difficulty in attracting investors
Fintech companies were highly successful in raising funds until 2016. However, from the second quarter of 2016, this trend showed a major dip. One of the main reasons for this was banks and other financial institutions starting their own fintech operations and reducing the dependence on fintech companies. Traditional banks may have been seeing companies in the fintech industry as rivals. However, banks and other financial institutions aren’t aware of the advantages that the fintech companies can provide for them.
- Limited understanding
Since the fintech companies do not follow those crystal-clear guidelines that were previously mentioned, there’s obviously a lot of misunderstanding in the exact procedures which must be followed in the fintech industry. Furthermore, the general public has their skepticism about relying on fintech companies rather than traditional banks. The fintech revolution has the potential to disrupt the financial industry, but until more people become educated about fintech, some of the misconceptions will restrict companies in the fintech industry from realizing their full potential.
- Security challenges
The financial sector deals with sensitive information about various individuals and enterprises. With the emergence of fintech, a plethora of data has become available in digital formats, which makes it easier to analyze and generate insights, but at the same time also makes the data more susceptible to security breaches. This is one of the main factors fueling skeptics to rely on fintech companies.