Introduction to Financial Technologies (FinTech)
So much in vogue: Fintech, Fintech, Fintech!
Yes, right… Your eyes must have rolled on many articles and blogs based on fintech and its domain, but this article is no less than a ray of sun in a cave! Believe me, with the immense amount of research this piece is outstanding with all the answers to your probable questions. The concept of Fintech keeps changing with time and therefore, it is important to distinguish Fintech from traditional banking products and services.
Fintech is frequently perceived as a challenge to the banking system, although the advantages far outweigh this. We go over the distinctions between banks and fintech in this essay. New technological developments open the door every day for the creation of creative financial systems that compete with existing banks. As grains were used as collateral for loans in ancient Babylonia and Assyria, the banking sector underwent a significant evolution. Going back in time to a time before advancements in technology, we would be astounded by the banking systems. Every day, new technological advancements lead to new banking alternatives outside traditional banks. The majority of traditional banking structures are underpinned by fintech solutions.
Summary of the Article
1. Understanding Fintech with Examples.
2. Traditional Banks: What Are They?
3. Conventional Banking vs. Fintech
4. What disruptions is fintech introducing to traditional banking?
5. Can Fintech Take the Place of Conventional Banking?
6. Banks and fintech: Allies or Rivals?
7. Will traditional banks and fintech companies collaborate?
1. Understanding Fintech with Examples
Nowadays, we associate fintech with cryptocurrencies and start-up banks, but its origins can be traced back to how individuals conducted business in the late 19th century, including the introduction of digital money and double-entry accounting. Using telegraph and Morse code, the first transatlantic cable and Fedwire in the United States in 1886 enabled the first electronic fund transfer system. At that time, fintech referred to the use of computer technology to the back office of banks or trading organizations. As a result, the first ATM, the first digital stock exchange NASDAQ, and SWIFT were developed as part of the Fintech stack for finance.
In the 1990s, the first steps towards digital banking were taken, and PayPal was introduced, foreshadowing the new payment Fintech systems and IT integration that would emerge as the globe became increasingly online. With the introduction of cloud computing and back office automation, Smartphones subsequently saturated the market and individuals began using the Internet for mobile banking and other financial services. Later, in 2009, Bitcoin emerged, followed by other cryptocurrencies and NFTs utilizing blockchain technology and the rest is history.
Fintech organizations, which include startups, technology firms, and existing financial institutions, use emerging technologies like Big Data, Artificial Intelligence, Blockchain, and Cloud Computing to make financial services more accessible and effective. Since the Internet and smartphone revolutions, however, financial technology has shifted to Web 3.0 and metaverse and become more unpredictable.
Transferring money, depositing a check with a smartphone, applying for credit without visiting a bank branch, acquiring capital for a business beginning, and maintaining investments are a few further instances of financial transactions that can be completed without the assistance of a person.
Read: What Is Data Science?
A lot has been covered under the FinTech RADAR 2023 which nutshelled the boosters of the fintech domain. Fintech organizations, which include startups, technology firms, and existing financial institutions, use emerging technologies like big data, artificial intelligence, blockchain, and cloud computing to make financial services more accessible and effective. Since the Internet and smartphone revolutions, financial technology has shifted to Web 3.0 and metaverse and become more unpredictable. Transferring money, depositing a check with a smartphone, applying for credit without visiting a bank branch, acquiring capital for a business, and maintaining investments are a few further instances of financial transactions that can be completed without the assistance of a person. According to EY’s 2017 Fintech Adoption Index, one-third of consumers utilize at least two or more fintech services, and their awareness of fintech’s role in their daily lives is growing.
Fintech has grown rapidly since the middle of the decade, with established financial institutions either picking up new enterprises or developing their own fintech products, and startups obtaining billions in venture capital (some of which have become unicorns). The majority of financial businesses are still created in North America, with Asia coming in second place and Europe in third. The following areas, among others, are some of the more active ones for fintech innovation.
Cryptographic currencies and electronic money.
Intelligent connections that can execute contracts.
Digital tokens (such as non-fungible tokens, or NFTs), digital cash, and cryptocurrencies (such as Bitcoin, Ethereum, etc.). They frequently rely on blockchain technology, a distributed ledger technology (DLT) that doesn’t have a central ledger but instead keeps records on a network of computers.
Smart contracts, which use code to carry out agreements between parties automatically.
Open banking develops applications that connect different financial institutions and third-party service providers.
Insurtech is a movement that aims to modernize and streamline the insurance sector through technology.
Regtech aims to assist financial services companies in adhering to compliance regulations, particularly those pertaining to anti-money laundering and know-your-customer fraud prevention measures.
Investment advice is automated by robo-advisors like Betterment to cut costs and broaden accessibility. One of the most popular uses for fintech is in this industry.
Unbanked/underbanked services aim to assist low-income or underprivileged people who are neglected or underserved by conventional banks or financial services providers. These programs encourage monetary inclusion.
Cybersecurity and finance are related because of the rise in cybercrime and decentralized data storage.
Robo-advisors are programs or online platforms that automatically invest your money in the best possible ways, frequently at a low cost, and are available to regular people.
The adoption of AI chatbots in 2022 is another illustration of how fintech is becoming more prevalent in everyday life.
Fintech Radar 2023 has the full list of the Fintech companies but we have mentioned a top few. Fintech has been used in numerous financial fields. Here are a few illustrations.
It’s simple to purchase and sell stocks, exchange-traded funds (ETFs), and cryptocurrencies from your mobile device, frequently with little to no commission, thanks to investment apps like Robinhood.
Payment services like PayPal, Venmo, Block (Square), Zelle, and Cash App make it simple to send money instantly and digitally to people or businesses.
You can view all of your financial information in one location, create budgets, pay bills, and more with the help of personal finance apps like Mint, YNAB, and Quicken Simplifi.
Individuals and small company owners can borrow money from a variety of people who provide micro loans directly to them through peer-to-peer (P2P) lending platforms like Prosper Marketplace, LendingClub, and Upstart.
You can retain and conduct transactions in cryptocurrencies and digital tokens like Bitcoin and non-fungible tokens via cryptocurrency apps, such as wallets, exchanges, and payment processors (NFTs).
The use of technology specifically in the insurance industry is known as insurtech. One illustration would be the employment of tools to track your driving and modify auto insurance premiums.
Is fintech limited to the banking industry?
No. While banks and startups have developed practical fintech tools for everyday banking (such as bank transfers, credit/debit cards, and loans), many other fintech fields that focus more on personal finance, investing, or payments (among others) have become increasingly popular.
How Did It Become The Buzzword Of The Decade?
As the globe shifted towards a more digital lifestyle, consumers became as user-friendly as a sip of coffee while doing daily tasks using digital tools. This is evident in the manner in which they manage their finances. Between 2014 and 2021, global Google searches for “fintech” climbed by a staggering factor of over 1,000. After the introduction of the credit card, financial technology advanced and introduced several key innovations to the mass market, including automated teller machines, electronic stock exchanges, bank mainframe computers, and online stock exchanges.
The above chart shows the global Fintech market revenue of 2017 vs 2024(expected).
The above chart shows the number of startups in the fintech domain worldwide from 2000 to 2022. Therefore we can clearly imagine the size at which this market is robustly growing and has become aptly the most talked about terminology of the decade.
2. Traditional Banks: What Are They?
Traditional banking is used to describe banks with a local banking license and a physical location. These are well-known banks, to name a few, ING, Bank of America, and Banco Santander. All financial transactions are processed by traditional banks, which are also licensed to solicit deposits from the public and provide loans to both people and businesses. Certain banks on the market are capable of providing additional financial services like wealth management, currency exchange, and safe deposit boxes. Retail banking, investment banking, and corporate banking are just a few examples of the several forms of traditional banking. Additionally, they are typically governed by the national government or central bank in the majority of locations. Additionally, they are typically governed by the national government or central bank in the majority of locations. Conventional banking services include receiving deposits, disbursing personal, commercial, and mortgage loans, and providing check-writing, savings, bill-paying, and safety-deposit box services. The origins of traditional banking can be found in the earliest types of banking. Under this approach, banks have a physical location, a domestic banking license, their own branded ATMs, a corporate office, in-person customer support, and dedicated account managers. Relationship lending, core deposit funding, traditional banking services revenue streams, and “bricks-and-mortar” street-level branches are the four main components of the traditional banking business model.
The Drawbacks of Conventional Banking
It’s possible that you can’t access online banking or that the features are out-of-date.
Charges are typically greater than at online banks.
Money in a savings account could yield less interest.
Establishing an account can take longer, and a paper application could be required.
In order to eliminate such disadvantages, the system has culturally shifted to the fintech era which has enhanced overall productivity and has given the desired result in an error-free manner. In the United States, there are three main categories of depository institutions. They include credit unions, commercial banks, and thrifts (which also include savings and loan associations and savings banks). Banks are particularly vulnerable to credit, operational, market, and liquidity risks. Banks can increase earnings by using prudent risk management since they will experience fewer losses on their loans and investments. Minimum balance costs, direct deposit fees, late fees, over-limit fees, check fees, and debit card fees are frequent charges made by traditional banks. These fees, like their low-interest rates, are a result of traditional banks’ greater operational expenses.
3. Conventional Banking vs. Fintech
Banking institutions’ ability to quickly adopt new technologies is constrained by their outdated systems and regulatory environment. Because of this, banks are unable to introduce new services or solutions that address customer needs or problems as quickly as FinTech firms. Banks are more focused on procedures compared to FinTech. FinTech is forward-thinking, and customer-focused, and makes complicated financial procedures simpler so that the general public can access them. These businesses use lean operating techniques that are free of legacy system problems and are able to circumvent unfavorable restrictions. The flatter organizational structures in FinTech make it simpler to innovate, adapt, and rebuild systems that aren’t working. FinTech uses cutting-edge technologies to give customers a one-of-a-kind experience, including artificial intelligence, big data, and cloud computing. Consistency, customization, speed, and relevance are given top priority. FinTechs streamline complex financial processes to make them more approachable for customers, particularly millennials and younger generations. Due to a more efficient corporate structure, fintech companies can also provide goods and services at prices up to ten times lower than those of traditional banks. A typical bank needs a lot of real estates and employs thousands of people, whereas many FinTech businesses only need a small amount of real estate and a far smaller workforce. The cost savings benefit consumers. The banking sector that utilizes a fintech ecosystem differs significantly from legacy financial institutions in many ways, including the following:
Organization and Purpose
Fintech is a cutting-edge, client-focused idea. It has the capacity to simplify intricate financial procedures. And because of this, consumers can easily and quickly access all kinds of banking services. And the firms that create the best fintech solutions typically employ lean operating strategies to identify the problems with outdated systems. Fintech also makes it simpler for businesses to make adjustments, replace outdated systems, and innovate existing systems with fresh ideas. Fintech is a concept that also makes use of big data, artificial intelligence, and cloud computing to give customers a distinctive and comfortable experience. Furthermore, these technologies place a greater emphasis on relevance, customization, speed, and seamless delivery. As a result, fintech is the ideal option for the banking sector because it allows for the streamlining of intricate financial procedures and increases public access to them.
There isn’t really a single regulatory body that specifically oversees fintech companies. Furthermore, in the absence of stringent regulation, these fintech companies are free to modify their operations and are not subject to rigid requirements. This makes it very easy for fintech businesses to respond quickly to the needs of their clients in this domain. An origin country’s central or national bank oversees the global banking system. Also, the regulatory agencies demand that a conventional bank follow all applicable laws, rules, and regulations in order to protect the client’s money. In order to maintain transparency between customers and financial institutions, banking regulations are used.
Potential for Growth
The worldwide fintech market, on the other hand, has been expanding quickly since the pandemic, and digital transformation has grown in importance and is creating new trends every day. And as a result, the financial market has experienced some incredible growth levels that have a high degree of sustainability. Conventional banks have supported the financial sector for many years, and with the emergence of fintech and its subsequent evolution, they are now adjusting to changing customer demands. This also entails having fintech elements like peer-to-peer lending, digital security, and mobile payments that allow customers to borrow money from an individual or a group of individuals.
Since fintech rules are known for their flexibility, this might increase risk for the sector. However because of its advantages over conventional banks, such as its strength, affordability, user-friendliness, and innovative character, it is thought to be a preferable choice. The standards are more stringent when it comes to legacy infrastructure, and they contribute to reducing the risks. But leveraging financial technology is crucial if the organization wants to remain competitive, and provide its consumers with better service, and reach out to more people. The users of old systems might be enticed to utilize applications by providing the greatest services.
Experiences with Customers
In order to create an account or apply for financial services, the majority of banks demand your personal presence. Some banks might not have the tools necessary to use the internet to confirm your identification. Customers find traditional banking less convenient, which has a negative effect. Using fintechs is quick and simple. Customers do not need to be present to transact or use financial services because they operate online. This makes Fintech an attractive option. Consumers can sign up using a mobile application or, in most cases, on their computers. FinTechs offer users round-the-clock access, remote account opening, quick consultations, and enhanced connectivity in general. They have flourished as a result of their emphasis on the user experience, an area where banks have fallen short.
The backend and operations of traditional banks are supported by legacy infrastructure, which is frequently decades old. This covers tasks like creating an account, setting it up, and handling payments for loans, deposits, and other items. Legacy systems restrict banks’ ability to interact with other systems and impede them from modernizing their infrastructure to offer clients new services, products, or experiences. Banks are lagging as a result.
Regulation barriers make it challenging for a new competitor to enter the financial services sector, giving the established banks considerable market clout. In their nation of origin, national or central banks oversee banks. In order to protect their citizens’ money, the governing bodies’ laws, regulations, and standards must be followed by banks. Transparency between financial institutions and their clients is ensured by banking legislation. There isn’t a single regulation for fintech companies. One reason for the proliferation of FinTech start-ups is this. These businesses can alter their operations and take any actions they desire without being subject to stringent regulations. While this enables Fintech start-ups to operate more quickly and adjust to the needs of its users, some view the sector as hazardous. Governments do control FinTech companies, depending on the nation. Also, some businesses decide to adhere to stricter regulations in order to make their clients feel secure.
- Depending on the industry that each FinTech operates in, regulations vary.
Regulations in the fintech sector are more permissive than those in other industries, which increases industry risk. But, because it provides a more effective, economical, inventive, and user-friendly experience, people continue to use it. Additionally, there are extra features that are not offered by conventional banks.
4. What disruptions is fintech introducing to traditional banking?
For instance, peer-to-peer (P2P) lending websites like Prosper Marketplace, LendingClub, and OnDeck claim to lower rates by exposing competitors for loans to strong market forces. Robinhood, a mobile-only stock trading app, also charges no fees for trades. Companies that offer business loans, such as Funding Circle, Accion, Kabbage, and Lendio (among others), give new and existing companies simple, quick ways to get working capital.
Such substantial fundraising rounds are common for fintech businesses worldwide.
Several traditional institutions have increased their investments in comparable goods as a result of this transition to a digital-first approach. For instance, in an effort to penetrate the fintech market, investment bank Goldman Sachs created the consumer lending platform Marcus in 2016. Yet, many computer-savvy business observers caution that keeping up with developments spurred by fintech involves more than just more IT spending. Fintech firms and traditional banks are utilizing new technology to reimagine banking in a digital environment. Competing with lighter-on-their-feet startups needs a considerable change in thinking, processes, decision-making, and even the organizational structure. They put a strong emphasis on smooth delivery, quickness, customization, and customer service. Fintech businesses concentrate on streamlining intricate financial procedures to increase user accessibility. Consumers adore the quick responses, ease of use, and variety of communication channels provided by fintech businesses. Fintech businesses may improve their services and make them more appealing to clients thanks to new technologies and marketing techniques. Also, fintech businesses can connect with customers who might not have access to conventional financial services or a bank account. The majority of millennials use mobile wallets from non-banking financial organizations and prefer to do their banking online. Peer-to-peer lending is also widely used by millennials, which has raised the fintech sector’s profile.
5. Can Fintech Take the Place of Conventional Banking?
Both the fintech sector and conventional banking have their advantages and disadvantages. Because of its modern financial technology systems, lean organizational structure, and capacity to tailor its products and services to the demands of its clients, fintech poses a threat to traditional banking. However, the demand for banking institutions still exists. Banks possess a depth of industry knowledge and expertise that new fintech startups do not. Also, banks are the only entities with a license to offer fintechs mandatory services like account security. Thus it seems natural that fintech firms are interested in working with conventional banking organizations. On the other hand, traditional banks can also pick up some tips from fintech firms about how to draw in new clients and provide more specialized goods and services. Due in part to non-financial sector business leaders that employ embedded financial services to increase their bottom line and client retention, the fintech industry is one of the fastest-growing segments of the economy.
Between 2018 and 2021, the number of FinTech businesses in the EMEA region than tripled, according to Statista. During the first few months of COVID-19, the use of mobile banking channels increased by 20–50%, according to McKinsey, and this tendency is anticipated to persist long after the epidemic has finished. The needs of customers for speed, efficiency, and a better user experience can be met by financial organizations by integrating technology into their services. They will be able to offer the frictionless experience that clients have come to anticipate as a result. The difference between what traditional banks must offer and what contemporary clients have come to anticipate is being filled by fintech.
6.Banks and fintech: Allies or Rivals?
Large deposits held by traditional banks make them a potential partner for FinTechs looking to improve financial systems. Both Fintech and banks serve as financial mediators and should never lose sight of their customers. Fintech companies provide their customers with more immediate and sophisticated features while offering the same services as traditional brick-and-mortar banks. If Fintech and banks work together, they will be governed by the same governmental agencies, which can promote confidence. The superior technology Fintech can bring to banking will enhance the financial sector as a whole.
Banks are extending their internal capabilities to improve integration, comfort, simplicity of use, transparency, and value since they are well aware that they must match the speed and services that Fintech offers. 60% of banks are doing this. Given that 90% of smartphone users make at least one mobile payment, this must correspond to the demand for online payments.
Financial intermediaries include both fintech and traditional banking companies. Although banks have been around for a while, they must undergo significant change in order to remain relevant in today’s market and satisfy the demands of the clientele.