Fintech vs traditional banking - is one going to die out soon or are they both going to thrive? Is fintech eating away at the customer bases of traditional banks, or do banks not have much reason to worry?
What is Fintech?
Fintech is a portmanteau of the words “financial” and “technology”. It covers all technology that seeks to automate and improve the delivery and use of financial services and products. It involves making use of algorithms and specialized software to handle financial processes and operations by consumers, entrepreneurs, and businesses.
It started off as technology that was intended to be used by financial institutions and banks in their back-end systems, but the focus in the Fintech game is now heavily on consumer-oriented services and it now deals primarily with mobile payments, alternative finance, online banking, stock trading, insurance, big data, and financial management as a whole.
What are Banks?
A traditional bank is essentially a financial institution that has a license to receive deposits from and issue loans to individuals as well as businesses and other organizations. Banks also offer other kinds of financial services like foreign currency exchange, wealth management, and safe deposit boxes.
There are several types of banks like investment banks, retail banks and corporate banks, and these banks are governed and regulated by the central bank or the national government.
Difference between Fintechs and banks
The focus
The overarching goal of fintech is to streamline the customer experience and increase convinence, functionality, personalization and accessibility of financial services.
Banks, on the other hand, tend to concentrate on security and the management of financial risks.
Structures
The organizational structure of fintech companies tends to have fewer barriers, which means that there is more room for innovation. Banks have rather rigid structures and the restrictions and long approval processes involved do not allow them to innovate easily and roll out changes at a sufficiently high pace.
Fintechs also tend to have flatter organizational structures, which makes it easier for them to innovate, test, revise, and change their systems at a quicker pace.
Reliance on technology
Fintech companies are heavily reliant on digital technology, while traditional banks have a lesser degree of reliance on digital technology. The fintech companies are free of legacy system issues and make use of new technologies like artificial intelligence, machine learning, big data, and cloud computing, and chatbots to create better customer experiences.
Customer profile
Banks focus on serving customers with strong credit ratings and proven credit ratings. Fintech companies do serve these customers, but they also do business with customers who have lower credit ratings and are considered unbankable.
There are around 1.7 billion people around the world who do not even have a bank account. Fintech can help these people by offering them the opportunity to avail of financial services without having a bank account, making Fintech a very powerful force pushing towards financial inclusion.
Collateral demanded
Traditional banks have very strict collateral requirements. Fintech companies tend to have more lenient and flexible collateral requirements.
Regulation
Traditional banks are governed and regulated by the central bank and the national government. Fintech companies aren’t regulated by the central bank to a great extent and are able to self-regulate to some level as well.
Workforce requirements
Traditional banks need a lot of real estate and an extremely large number of employees in order to serve their customers effectively. Fintech startups, on the other hand, don’t need that much real estate, and through the use of modern technology, they can get things done faster and more efficiently than traditional banks can, with a substantially smaller team.
Customer experience
Traditional banks generally offer customer experiences that aren’t what the modern customer is looking for. There are long, stretched out processes, and customers generally have to wait for a substantial amount of time before any issues they faced get resolved.
But Fintech focuses on increasing convenience and creating better customer experiences. These new companies even get their customers’ issues resolved faster through the use of AI-powered chatbots that can take care of customer queries faster than a human agent can.
Fintechs moving to banking
Fintech startups can P2P payments services and other types of financial services as well, but if they don’t have a banking license, they cannot hold deposits from their customers.
Fintech companies are seeing that getting a banking license would help them do more and offer more services to their customers. A lot of these companies have larger and wider-distributed customer bases than traditional banks because of their digital capabilities, which gives them the ability to scale up substantially through cross-selling.
These companies are set to disrupt the traditional banking model through innovation, agility, and quicker decision making. They’re going to make banking more convenient and give traditional banks a run for their money. They’re closing the gap between the offerings that traditional banks provide and the speed and convenience that modern customers expect. Today’s customers are not going to be ready to wait for hours at their local bank to get their work done, they’d rather get it done online with a fintech player that can speed the process up exponentially.
Banks launching fintech offerings
A 2016 study showed that 84% of Americans make use of Fintech to manage their finances. Banks are now waking up to the reality that if they don’t find a way for them to play in the fintech game, they’re going to be bleeding customers till they die a slow death.
The banks that have wised up to the fintech landscape have already started making moves to get into the Fintech space. Goldman Sachs is now providing credit cards for Apple, JP Morgan was buying 75% of Volkswagen’s payments business with an aim to expand it to other industries.
Citi has also made investments in lending companies C2FO, BlueVine, FastPay, while JP Morgan invested in Prosper, LevelUp, and Gopago.
Fintechs and banks working together
It may seem like there’s a war being fought between the rebellious fintech startups, and the archaic banks. But that’s just on the surface.
If you look below, you’ll see that a lot of banks are trying to partner up with young fintech companies or invest in them.
Banks have the keys to the old manual and institutionalized processes that were set up before the age of the internet. They have the historical process knowledge about these processes, and young fintech companies have the technology and ideas needed to improve these processes, streamline them, and make them more efficient and convenient for the customers.
Fintech companies can help traditional banks with the innovation and agility that they bring into the mix. The major advantage that fintechs will gain from partnering up with banks is that the banks have a lot of customer loyalty and trust built up over the decades - trust which will flow over to them because of the partnership. This will make people feel more open towards making use of fintech services.
Essentially, in order to provide financial services that offer the most value to their customers, fintechs and banks would have to work together and design the financial landscape of the future.
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