Banking Institution and Financial Market

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Traditional banks have been the key players in the financial market, building customer base; on trust, loyalty, capability and efficiency. Customers see these banks as the best and only option to transact in the financial market- the back-end system that drives the banking institution, which we can only have knowledge by word-of-mouth or general information. The innovations in technology that have been building up for that same period of time has come to surpass the components and functions of a typical day-to-day bank, and has brought to light significant benefits that puts them in competition in the market. It is no doubt that the fintech industry has evolved beyond its initial years and are no longer considered as small businesses seeking to make-up a part of the global business environment. But as professionally run companies that pose a major threat to the traditional entities with innovations in technology being the driving force (EY Index, 2019).

The fintechs propose a disrupted service or an invented service- in disrupted service companies, they offer customers a more compelling offering with the use of technological innovations, such as, convenience, low rates, faster transactions, etc. leading to a more competitive market. On the other hand, the invented service companies bring completely new offerings that have never existed before with the use of artificial intelligence and alternative models, like, mobile payments, cashless withdrawals and payments, easy account opening. This shows the potentials to change or impact the financial subsectors.

Nigeria, a developing economy in the past has had its banking institutions filled with over-the-counter tellers who process cash deposits and withdrawals yet could not overcome the number of customers who needed to complete their transactions. But with the introduction of developed banking models that can replace functions like deposits and withdrawals, adopted artificial intelligence/machine learning service fintechs. Banks like Guaranty Trust Bank Plc., a retail bank who introduced the use of cash deposit ATM’s to reduce the time spent and inconveniences faced by its customers. 

One catastrophic scenario involves fragmentation and disruption. Established entities could lose their depositors to these neo-banks, creating a discrepancy between their assets and liabilities that could lead to a credit crunch (The Economist, 2019).So far, developments in fintech has been focused more at the retail than wholesale financial space, with the World Economic Forum identifying six ‘innovation clusters’: payment; market provisioning; investment management; insurance; deposits, and lending and capital raising (World Economic Forum, 2016).

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Among these big tech challenger banks that offer a range of financial services, Neo-banks are the best positioned. When considering who the real market players are, it is clear that the banks are the key players, the intermediaries between individuals who have the funds to play around the global economy, and corporations that need these funds to foster investments. One of the main benefits these tech groups have in common is low rates/costs. Neo-banks which perform similar services as their incumbents, has a head in satisfying customer needs at little to no costs- which is the overall reason people consider at first before giving loyalty or getting involved with a financial entity.

An example will be, N26 a German challenger bank, classified as a deposit and payment oriented company in this research. N26 formerly called Number 26 is amongst the top challengers that have their operating license from the European Central Bank and locally regulated by the Central Bank of Ireland. N26 boasts of low foreign currency conversion rates, claiming to be 6X cheaper than regular banks. N26 has the prestige of being Europe’s most valuable start-up with a $2.7 billion valuation. 

This challenger is referred to as a neo-bank, which carries out similar functions of a traditional bank but operating exclusively online. The stand out characteristic of N26’s model is simplicity. They further provide benefits like, free business MasterCard with 0.1% cashback, a no minimum deposit to open an account and an automatic expense breakdown in categories. New technologies, nowadays, are fuelling innovations that stand to deliver enormous value to customers. For banks to be able to meet up with its counterpart Challenger banks, they should; adapt to new business model change- these banks should offer omni-channel services such as, self-service branches, phone applications, and online via desktop and mobile devices. 

Become available 24/7 through helpdesks, chat bots, mail, SMS, videoconference, social media and so on to diversify its reach to meet the different customer needs (Nuyens, 2019). To benefit from technology advancement, government should give consumers right to control their data to protect privacy thus preventing external accumulation by fintechs. While this idea revolves around regulation, it poses to disrupt technological innovations in digitization which is a trend that cannot be easily cut out from our day to day life. 

The thoughts of regulators dampening competition for fear of destabilizing the sector is mistaken. Total transformation of banks is essential- where the disruption comes from within than from challengers. In the case of the Development Bank of Singapore in 2014, where the chief executive Mr. Gupta considered spinning off a different unit to lead the tech transformation, or utilizing the services of fintech firms but decided the bank was capable of rebuilding itself.

Since then DBS has adopted new back-office models, in 2016, acquired Digibank- a mobile-only bank app that has lowered costs of acquiring offline customers. The retail bank says the revenue of their digital customers are growing faster, having a cost to income ratio of just 34% — implying $34 of costs for every $100 of income — versus a cost to income ratio of 55% for traditional customers. This proves the cost efficiency benefit fintechs propose. Partnerships – it goes with the saying that team work is the best work. Although not every bank agrees with this, but it has not stopped some from creating alliances with the big tech companies. An example would be that of JP Morgan and Amazon in the US which would give the bank access to 100million of the e-commerce’s customers who utilize of one of their online services known as amazon-prime.

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