Fintech – Will It Replace Traditional Banks?

The introduction of open banking has given fintech companies the opportunity to transform the global financial sector, giving people access to financial services easily accessible via smartphones and computers with user-friendly apps and websites.

One of the most important changes in traditional banking in our lifetime, the open banking directive obliges banks to share data via application programming interfaces (APIs). As a result, banks no longer have exclusive rights over data management and approved fintech companies can plug into people’s accounts and offer them a range of services.

The European Parliament adopted the revised Payment Services Directive (PSD2) in October 2015 to promote open banking. Now established and spread around the world, open banking services have enabled the emergence of embedded finance – but is this a safe way to improve the consumer experience, or does it have hidden risks?

Built-in economy

Built-in finance can stimulate markets and increase sales while making life easier for customers.

“Financial services and fintech are about easy access, convenience, transparency, affordability and being able to please your customers,” said Nameer Khan, Chairman of the MENA Fintech Association (MFTA). This inclusive, non-profit association promotes an open dialogue for the fintech community in the Middle East and North Africa. “It makes finance invisible; it’s built into everything we do.”

Basically, built-in finance is the integration of financial services – such as lending or payment processing – within a non-financial corporation’s offering. Built-in finance can take several forms: built-in credit, payment and even insurance.

The car manufacturer Tesla offers built-in insurance to all customers who buy a Tesla, so that they can drive their new vehicle straight out of the showroom, fully covered, without extra paperwork. The Uber taxi service offers built-in payment, access to users’ bank details (with their consent), so they do not have to enter credit card information every time they book a trip.

Built-in credit – also known as built-in lending – allows consumers to buy now, pay later (BNPL). One of the market leaders in offering this form of embedded credit is the Swedish fintech company Klarna. Available across parts of Europe and the US, Klarna provides short-term sales loans for purchases across the portfolio of registered dealers with its “pay-in-four” plan, so customers can split their balance into four installments paid every fortnight day.

Risks and benefits

Companies like Klarna stimulate sales for their registered retailers, while at the same time making it easier for consumers to afford goods by sharing payments over time. Klarna does not charge interest on its pay-in-four financing model. However, users will incur a late payment fee. Longer repayment periods are available at some of Klarna’s dealers. Interest rates vary by retailer, rising to 25%. Some BNPL service providers charge even more.

Fintech companies in some parts of the world, called “digital loan sharks”, have made headlines for using exorbitant interest rates and using harsh tactics to collect debt, which has led to a demand for stricter regulations.

Although any consumer can potentially get into debt, those who are most vulnerable are often in developing countries and have a dire need with limited access to traditional banking. As with all data sharing applications, BNPL service users are also at risk of identity fraud. But when properly regulated, banks and fintech companies have shown that they can adapt to create a safe and beneficial retail experience for consumers.

Sharif El-Badawi, CEO of venture capital firm Dubai Future District Fund, is optimistic about the future of fintech startups. “Banks that meet halfway through these startups give us – as consumers and businesses – the most value when the partnership is at its peak, so we get the safety and security of a bank and the user experience, and ring and whistle, from the start,” says El-Badawi . “The expandability of the two working together, I think, is the happy moment for us as consumers.”

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