10.36172/EKONOMISTI.2021.XVII.03.TEA.KASRADZE 

Expanded Summary

Each banking institution has a customer-oriented strategic plan, although the sudden emergence of competition does not allow them to relax. The explosion of new technologies and the rise in consumer demand have been putting pressure on banks since the 2008 recession. Retail banking customers are constantly expecting new, improved, affordable, convenient continuous service from the bank. In an environment of increasingly competitive, innovative financial services, banks need to be able to maintain not only customers but also brand awareness. The emergence of non-traditional financial service providers in the market such as FinTech, NEO Banks, Challenger Banks, BigTech, which reduces the relationship between banks and their customers, completely changes the banking industry. Today we face a new open ecosystem of consumers, traditional banks, FinTech and BigTech companies, regulators, developers, non-banking firms and other players, with customers at the center. Banks will have to significantly change their commercial and operating models to retain customers and remain active players in the market.

Keywords:  bank industry, financial services, FinTech, consumers, digitalization

The internal (micro) and external (macro) environment of banking institutions, which determines the competitiveness of the banking sector, has changed significantly since the 2008 crisis. Among the major recent micro-changes that have undoubtedly changed the bank operations and vision are: a) the emergence of a new generation of banking customers and increased customer expectations and b) increased competition from new players in the financial industry - non-traditional financial service providers - FinTech, NEO Banks, Challenger Banks, BigTech (SWACHA-LECH, 2017). They are focused on the new generation of consumers and their expectations. These changes are forcing the banking sector to significantly change its commercial and operating models in order to retain customers and remain active players on the market. The trend accelerated even more in the wake of the Covid-19 pandemic.

The presented paper examines the development trends of new players in the financial industry - non-traditional financial service providers such as FinTech, NEO Banks, Challenger Banks, BigTech. Etc and the readiness of the banking industry to respond to these trends. The paper is a desk study of the impact of digitalization of financial services on the banking sector based on the study and analysis of reports of the various international organizations, local policy documents, reports and regulations of the National Bank, the papers of various researchers and their secondary data. Based on the research, suggestions have been made on how Georgian banks should strategically approach non-traditional providers of financial services to avoid losses, withstand competition and remain active market players.

Experts believe that in recent years, Georgia has made great strides in terms of technology, and today we can say that Georgia is one of the most attractive places for Fintech opportunities in the post-Soviet space. Georgia is an attractive place for the world's largest Fintech companies to invest, as they see that many large companies are already operating successfully in the country. There is a great variety of Fintech companies in Georgia. Innovative financial services are successfully offered to customers here by both newly established startups and large companies providing traditional financial services. The banking sector in Georgia quickly realized the need and importance of financial innovation for consumers and it began to provide online banking programs to customers in cooperation with Fintechs, through which customers can easily perform various operations in a short time.

Today there are payment provider companies, as well as lender and cryptocurrency trading platforms in Georgia. Since 2018, the first Georgian neobank, fully digital bank Space Bank has also operated, only as a mobile application, without any traditional physical branches. Through this app, customers can get a full range of retail banking services such as loans, payment cards and saving products. The customer-oriented daily banking system has completely changed the access of the Georgian population to financial services and boost financial inclusion (Kasradze, 2020).

The number of online transactions with payment cards is gradually increasing. E-commerce is also quite popular in the country. In Georgia, consumers often use e-commerce websites such as eBay, Amazon and AliExpress to purchase items through e-wallets and credit card payments. Consumers today can also avail P2P loans.

The main challenges of the innovative financial service industry in Georgia are:

A) The main obstacle to the development of a competitive market in Georgia is the lack of clear regulatory standards. Regulations are somewhat hindering the activities of Fintechs. The permission/license from the National Bank is required for the activity. In case of a payment system provider, the requirements for obtaining a license are relatively light, while Fintechs wishing to lend and obtain a deposit will be required to obtain a digital banking license from 2020.

The introduction of an open banking system, on the one hand, will encourage the expansion of Fintech activities, on the other hand, will significantly change the traditional banking business models and keep the hegemony of the classical banking system in the past (Abuladze, 2018).

Pursuant to the Association Agreement between Georgia and the European Union, the National Bank of Georgia started the introduction of open banking in Georgia in March 2021 within the framework of the implementation of the Second Payment Services Directive (PSD2 - Payment Services Directive 2) It will be fully operational by the end of 2021 and will be available to non-banking institutions as well as individuals, which, on the one hand, will increase competition between Fintechs and banks, and, on the other hand, will give them better cooperation opportunities (National Bank of Georgia, 2020). 

B) Restrictions on access to data. Open Banking allows Fintechs to easily access client data and embed banking services in their digital products. As a result, the consumer will get the most customized and safe product for them. At this point, this service is only available to banks. For Fintech companies, the business environment is not so favorable in this respect. Up to now, the banking sector only exchanges credit information with one another through credit bureaus.

C) Lack of trust in customers is another challenge for non-traditional financial service providers. Although the interest in technological innovations is high, a large part of consumers still prefers the services of large financial institutions, which is due to the relationship and trust established over the years. Newly established Fintech organizations need to gain the trust and goodwill of customers with high quality, fast,cheap and transparent service(Zarnadze & Kasradze, 2020).

D) Qualified staff is also a problematic issue for non-traditional companies providing innovative financial services. To work in the field of Fintech, a person needs some knowledge in both finance and technology (Tea Kasrade, 2021). Due to the high level of education, this problem is less common in Europe and America, but in the developing world, adequate human resources are another challenge for non-traditional financial service providers. Access to an educated and cheap workforce in Georgia is a kind of advantage of Georgian Fintech companies (Tea Kasradze, 2018).

E) And finally, access to capital is a serious challenge not only for Georgian companies but for the whole world (the only exception in this regard is China) (Kasradze, Tea, 2018).

Thus, after the crisis of 2008, there is an explosion of new technologies in the financial sector and an increase in consumer demand, which put pressure on traditional banks. Retail banking customers are constantly expecting new, improved, affordable, convenient continuous service from the bank.

Given the need and popularity of technologies, trends and their current/future impact on the financial sector should be considered. Banks, if they want to stay in the market and be competitive, must perceive financial technologies as the next stage of evolution and be actively involved in simplifying and improving financial services.

The traditional banking system will be able to overcome the growing competition from Bigtecs and Fintechs only through innovative technologies, offering continuous digital banking tailored to the customer; by increasing cyber security measures to prevent theft of all kinds of information or technological fraud; with digital signatures that replace the paper and ensure the authenticity of the user's signature that the signed documents are 100% legal and valid without the need to go to the office; by collecting and processing data to better understand customer requirements and needs, and offer customized products; by gaining reputation and trust through offering any financial product to customers easily, quickly and cheaply; by educated, qualified staff.