How has Fintech Innovation Impacted the Role and Expectations of Central Banks

Fintech solutions slowly integrated themselves into our lives, and now they’re here to stay. From Apple Pay to the Crowdfunding platform that’s helped to raise billions of dollars over the years, fintech is everywhere. It’s so heavily relied upon that it begs the question, how do fintech solutions impact the role and expectations of central banks? Fintech doesn’t eradicate the need for central banks; it integrates into them. Let’s explore how fintech might be changing the role of central banks.

Fintechs And Traditional Banking Collide

On the surface, it can seem like fintech – and the variety of innovative solutions and digital banking startups that come with it – are trying to steal traditional banking’s thunder – but that’s not the case. The world still heavily relies upon central banking and various banking and payment solutions, particularly businesses, like wire transfers and ACH payments. ACH payments aim to cut costs and support business-to-business payments, whereas wire transfers speed up transaction processing times – click here for an ACH Transfer vs Wire Transfer comparison.

It would be naive to think that traditional processes like ACH payments and wire transfers are useless, and it would also be naive to think central banks are at risk of a fintech takeover – central banks are at the heart of fintech solutions. Mobile banking, for example, is one of the most revolutionary and innovative fintech solutions that central banks offer. And, fintech companies often have to go through central banks for governance and payment processing.

Has Fintech Altered The Role and Expectations Of Central Banks?

There’s no denying that although fintech solutions aren’t here to eradicate the need for central banks, they are changing the role and expectations. Research carried out by the PwC revealed that 73% of financial executives at major companies believe fintech solutions are most likely to disrupt consumer banking. That’s because fintech solutions focus solely on the consumer. In the same review by the PwC, only 53% of respondents from the banking sector believe they are consumer-centric, compared to 80% of fintech respondents.

What fintech companies are doing, however, is putting a healthy pressure on central banking systems to do more to be consumer-centric. Fintech companies are great at finding weaknesses in central banking systems and exploiting them. For example, offering loans to people with poor credit, better personal finance tools, and peer-to-peer marketplaces are just a few areas fintech companies are targeting.

Fintech has altered the role and expectations of central banks by showing consumers that banking can be instant, fast, and supportive of their every financial need. The other consequence of fintech solutions is the transition from the need to have human input to the reliance on technological innovation to support applications. One study found that central banks are exploring using artificial intelligence and augmented reality to implement fintech solutions.

The Limitations of Fintech Solutions

Some limitations prove fintech solutions won’t completely dominate the financial market, like the lack of physical branches. Fintech solutions rely entirely on phone calls, emails, and social media networks to solve issues that can come with their own set of drawbacks. From network issues to software downtime, a lack of clear communication and the inability to have face-to-face conversations about banking solutions can be off-putting to some consumers.

Data security, naturally, is one of the biggest limitations to fintech innovation. Increases in cyberattacks to nearly 2,000 per day present an increasing challenge for fintech companies that battle to keep their completely virtual services secure. Most fintech solutions require consumers to use a two-step authorization, biometric authentication, and behavior analytic software that detects unusual activity. Central banking mobile apps also use these safety features.

Fintech applications also find themselves plagued by customer retention and user experiences. Even though the innovation of fintech applications is changing the face of traditional banking, that trust in traditional banking methods is unparalleled. Couple this with the fact that most central banks now have sophisticated mobile apps that allow customers to do everything from transfer money to take out a new loan, and digital banking fintech companies have a problem.

What Does The Future Of Central Banks Look Like?

The future of central banks won’t find themselves begging for customers, but they will find themselves heavily influenced by the power of fintech solutions. Fintech combines the financial and tech industries to create solutions to issues that have plagued central banks for years – such as the pre-mobile banking app-accessibility issues. Fintech innovators and central banks should work in unison to provide real solutions to problems consumers didn’t even know they had.

Take Google and Apple pay as the perfect example. This fintech solution combines innovative technology with traditional banking to support consumers making instant payments without using their cards. People now have the power to pay in-store at the tap of a phone onto the contactless machine – consumers don’t even have to open their phones anymore. Solutions like that one prove fintech companies and traditional banks can work in harmony to improve consumer access to their banking, save time, and reduce banking costs.

The role and expectations of central banks are evolving to become one that puts the needs of consumers first. Fintech innovations are pushing central banks to find new ways to support consumers while also keeping up with the pressure of emerging digital banks. The role of central banks will always be integral to the financial system.