The current world economy is heading into a possible recession given the uncertainty of the United States-China trade dispute, Brexit, volatile Middle East region and global oil prices fluctuations. While on the other hand, the financial industry is blooming with digitalization and high-tech innovation to create a better consumer experience as a result of the 2008 financial crisis.

The term Fintech stands for financial technology; indicating an upgrade of traditional financial products with new and disruptive technology. Due to this revolution, according to BNM’s annual report, non-banks are also making headway in this segment. Payment space has always been a common starting point for non-banks to embark on financial services, with an aim to evolve into digital banks.

Years after the 2008 crisis, Banks resisted change and maintained traditional approach as they have monopolised the financial services for so long, with little to no competition, thereby allowing them to charge high commissions, and often obscure or hidden fees, such as inflated foreign exchange rate spreads or letter of credit costs to satisfy their profit-oriented objective.

Fintech providers have seen this and offer an alternative, often with cheaper rates and transparent pricing.

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For this reason, banks are now playing catch-up with Fintech in terms of technology, customers and pricing. Fintechs are setting the benchmark high. This is one reason why banks across Europe keep closing high street branches. People are simply not banking in person anymore, especially generations X and Y, and banks have so far been unable to engage customers online whereas Fintechs have, as their strength lies in online interaction.

Based on a study done by KANTOX, the main reasons which led to the development of Fintech are

  • Anger at the established banking system and the main entities that it consists of.
  • Widespread lack of trust with banks post-crisis.
  • After the crisis, banks stopped lending; businesses had to contend with refusals on lines of credits or bank loans and individuals were turned down mortgages and personal loans.

It is only a matter of time before we see Fintech pervasively change finance in the same way the Internet changed the music and newspaper industries. Furthermore, Fintechs have the technological edge over banks, and as technology develops, we will see more pioneering solutions offered uniquely by Fintechs undermining further the functions of traditional banking eg. Alibaba extending loans from its ability to generate cash. It is interesting to note the determination of Bitcoins “to compete with and ultimately dismantle the institutions that had brought about the crisis”.

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The dynamic and fast-paced digital market is difficult to control. It is important for supervisory authorities to come up with solutions to safeguard this borderless business as the risk of fraud, money laundering and tax evasion is high in this industry. Although it was mentioned in the BNM Central Bank Digital Currency: A Monetary Policy Perspective, September 2017, that

“It is quite unlikely that cryptocurrencies would replace cash transactions any time soon. Pioneering work reviewed generally concludes that CBDC, even if introduced in the future, would likely be a complement rather than a substitute to cash and bank deposits.”

Traditional weaknesses and greed in the current banking industry push further the growth of Fintech.  It is suggested that in order to impose restrictions; it is important for authorities to understand the push and pull factors that lead to the growth of Fintech.  Framework and policies should be designed to encourage competition in the financial industry, protect the interest of the consumer or the weaker party and encourage the better distribution of wealth as a socio-economic agenda.

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Weak monitoring and understanding of macroeconomic impacts from Fintech may lead to the next financial crisis as more reliance being placed on AI and statistical-based decisions.   Monitoring authorities need to develop next-generation competencies to monitor and understand the wider macroeconomic impact of Fintech to avoid the next financial disaster.

We know that Fintech is here to stay and is necessary as a natural evolution to financial systems as the world becomes more digital.  As the global population grows and traditional jobs disappear, technological and ideological breakthroughs are required to avoid a global meltdown. We must not forget that economic growth is supported by real consumption by real consumers.

It is important to note that the ability to generate regular and sustainable income for the masses to grow a larger consumption base is the next step in Fintech’s evolution, a real possibility of the future.

Analysts Sharifah Azzahra and Shahril Azlan