As the bedrock of all economies, the financial sector is constantly innovating and adopting new solutions. In the 21st Century, digital banking has become ubiquitous, with major banks providing mobile apps and web platforms. Statista reports that approximately 65% of the U.S. population uses digital banking, and this trend is similarly observed in other major economies. Moreover, numerous online-only banks operate globally.
The financial industry is adapting to changes that reach beyond digital banking, with these changes happening in various areas such as mobile trading, payment processing, mortgages, and others. This article examines the drivers behind this evolution and showcases examples of how the industry is embracing new solutions.
5 Reasons the Financial Industry is Adapting to New Solutions
1. Customer Behaviour
Customer behavior tends to change over time in every industry, and digital banking is a good demonstration of this. Boomers, people born between 1946 to 1964, grew up in a period where banking was primarily done with paper and are more likely to stick to their old ways even as banking has become more digital. In contrast, millennials (1981-1996) and Generation Z (1997 to date) overwhelmingly embrace digital banking.
We stated earlier that 65% of the U.S. population uses digital banking, which is true, but that statistic isn’t distributed equally by age range. According to Business-review.eu, 75% of millennials reported using digital banking in 2022, while only 49% of boomers did the same. It’s then no surprise that banks have largely pivoted to digital services to appease their newest customer base, the ones that will stick longer.
Another area where customer behavior is driving changes is online trading. Millennials and Gen Z are more likely to use a smartphone to trade, while the older cohort prefers the classical way of using a desktop. Younger people are more likely to embrace mobile trading platforms with interactive features while the older cohort prefers desktop platforms with dated looks. Thus, online brokers now focus on mobile solutions to appease the younger cohort.
The MetaTrader 5 Web Terminal is an example of a mobile trading platform favored by the younger cohort. You can access it from any web browser; there’s no need to download any app. The Web Terminal lets you trade different assets including stocks, futures, foreign exchange, etc. You can find real-time quotes for different types of assets and dozens of indicators for technical analysis. You can start trading with a demo account to test and switch to a real account when you’re ready. It’s adapted for touch screens and mobile devices, which makes it easy to use.
You’ll hardly find many other industries with strict regulations like the financial industry. This industry is very important to the economic health of every country, so governments have enacted strict and constantly changing regulations to keep up with economic and political trends.
Regulations play a big role in fostering disruption in the financial sector. For example, you can now find messaging apps, e.g., WhatsApp and WeChat, offering banking and payment services because they got a banking license or partnered with an institution that has the license. This has made it easier for people around the globe to send and receive money from each other, thanks to regulations that allow it.
Online trading is another area where regulations cause disruption. You can now find apps that allow you to trade without commissions thanks to a payment for order flow (PFOF), a system where they make money by routing trades to a market maker instead of charging fees to users. Though controversial, the regulatory framework that allows PFOF has saved a lot of fees for traders.
Nations around the globe have become interdependent on each other to drive economic progress, and this is called globalization. For instance, Saudi Arabia is a major oil producer and exporter but has to import a lot of electrical equipment from the likes of China and the USA to meet local demand; India is a major exporter of tech talent to the U.S. and other major economies; China is the world’s biggest electronics exporter, etc.
Globalization is powered by the movement of workers between different countries, either temporarily or permanently, and these workers often send money back to their home countries. Financial institutions have taken note and have deployed a lot of resources into offering better remittance services. Gone are the days when you needed to pay hefty fees to send money from one country to another; you can now do that easily with small commissions. There are also online platforms that specialize in remittance, e.g., Wise and Remitly, with low fees.
4. Cloud Hosting Advancements
You may be familiar with cloud hosting, wherein you can build and deploy apps on rented servers instead of building your own server infrastructure which takes money and time. Anyone can build an app and host it with a cloud provider such as Microsoft Azure or AWS instead of buying and maintaining their own servers.
Cloud providers have made it easy for banks to deploy new solutions as they see fit and scale their infrastructure. They’re a major driving force for banks adapting to disruption and providing innovative products and services to their customers. The good thing is that cloud hosting is becoming more advanced yet cheaper and more accessible every day. Financial institutions or startups can now build tools and host them for a relatively low cost and only pay for the computing resources they consume.
The financial sector is so large that there’s space for many institutions and startups to succeed. It consists of numerous areas, and there’s no winner-takes-all. There’s enough market share to go around and earn different firms considerable revenue, which is why there’s intense competition in the industry. The competition has led financial providers to adapt to disruption or the risk of being left behind.
For instance, traditional banks began building digital platforms en-masse after noticing newer neo-banks eating into their market share. You’ll hardly find a consumer bank today that doesn’t have an online platform. Similarly, traditional brokers began investing more in mobile platforms after noticing newer trading platforms eating into their market share.
There are numerous other examples of competition fostering disruption in the financial sector. Robo-advisors now compete with long-established wealth and asset management firms; peer-to-peer lending now competes with traditional bank lending; payment processors now enable merchants to accept payments online without going through a lengthy review process with banks, etc.
We have listed five major reasons driving disruption in the financial industry. This industry is huge yet still growing rapidly, expected to top $37 trillion in 2027 compared to $28 trillion in 2023. There’s enough space for both established institutions and newer startups to flourish in this sector. The intense competition is bound to drive more innovation as time goes on.