What is FinTech In Simple Terms?
FinTech is a short term for “financial technology.” If you have heard about it, you likely know that it is rapidly transforming our world. In simple terms, the global FinTech market is worth more than $290 billion in 2022. Impressively, it shows no signs of slowing down.
The FinTech industry is especially impacting the financial landscape that already exists – banks. There are many reasons why FinTech will change the future of banking. We will go through those reasons and much more in this article.
The evolution of innovations due to FinTech has happened very quickly. It has changed everything from large enterprises to small businesses. FinTech has been a trend that is especially beneficial for smaller businesses. Through its emergence, it has given them more financial freedom.
Easier, faster, cheaper. These are the primary ideas behind FinTech. These are also the very ideas that make FinTech so popular.
However, banks are not exactly keen on welcoming FinTech. We will explore some reasons behind why that is and much more in this article. Let’s get started with what the FinTech industry does.
Table of Contents
What Does a Fintech Do?
In simple words, FinTech is a technology that provides us with innovative financial services. This could include anything from making transactions to making deposits.
The idea of FinTech is to simplify online money transactions for us and businesses. Overall, doing this makes FinTech applications a lot more accessible and convenient.
Companies that utilize AI, blockchain, and big data can also use FinTech. In these cases, FinTech increases its network’s transaction security.
What Does a FinTech Company Do?
Any business that uses technology to enhance financial services can be called a FinTech company. That can mean things like online banking, cryptocurrency, and stock trading apps.
A few great examples of FinTech companies include Robinhood, Klarna, and Venmo.
A FinTech company can also apply to traditional banks. Usually, they utilize new startups.
Typically, FinTech companies are more focused on the delivery of a single service or product. Large enterprises are often a contrast to this.
The FinTech industry also allows non-financial companies to offer financial products. For instance, Gusto is an online HR (human resource) platform that helps any small business owner take care of all HR tasks. It has recently launched a service that allows employees to spend with a Gusto-branded debit card.
In the same manner, Element is an online insurance company. Having partnered with Vodafone, they developed a new cyber-security insurance for customers.
Why is FinTech so Popular?
FinTech is making banking and financial services more straightforward. Not only that, but it is also making them more accessible for the average human.
Through the use of technology, users can speed up processes. This is because they no longer rely on human beings for processes. Automation does all the work now. Consequently, everything is quicker.
Many financial services still use a mix of both real advisors and software. But transactions like applying for a loan or a mortgage are now done conveniently. You don’t need any human interaction because you can do everything online.
While this is great news for end users, it has been a shake-up for banks.
Further reading: The Evolution of Money and Cryptocurrency
Reasons Why FinTech Will Change the Future of Banking
FinTech is growing rapidly. From PayPal to Venmo to cryptocurrency, it is covering a large base.
But not only does it cover so many things. It also combines the latest technological developments with financial services. It is an extremely adaptive approach to money and online finances.
It wouldn’t be an overstatement to say that fintech has disrupted the banking industry in many ways.
For the banking sector, the rise of technology can be a double-edged sword. On one hand, technology allows banks to enhance their existing services to customers. For example, banks often use chatbots to improve customer experience.
On the other hand, fintech also provides harsh competition to traditional banking. From every angle, it provides financial services that are somewhat threatening to the future of banks.
1) Better Service
A traditional bank focuses on providing customers with a wide range of services. But that often works against them. With so many services, there are plenty of increased switching costs too.
In contrast to this, FinTech companies aim to earn the trust of their customers first. They do this by building rapport and providing excellent customer service. 90% of fintech companies say that enhanced customer service is the key to their competitive edge over traditional banks.
2) Better Branding
The FinTech industry is refreshing the branding of financial services. This is because often FinTech startups have employees from non-traditional banking backgrounds. So, they can add a unique touch to the advertising and branding.
A very good example is that of gamification. Modern marketing tools make extensive use of gamification. Doing so allows them to take on tasks, like budgeting, and makes them exciting.
3) Cheaper Prices
The FinTech industry is not as heavily regulated as yet. This creates a much leaner virtual process for them to implement. There is minimal to no bureaucracy involved. Moreover, FinTech startups have major investments from venture capitalists.
All of these reasons allow them to attract customers with cheaper prices.
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How is FinTech a Threat to Banks?
According to a PwC Global Fintech Report, the question is not whether FinTech will transform finance. Rather, it is which firms will adopt it and emerge as leaders.
For instance, it used to be that financial services and companies minded their own business. But now, the lines are blurred. Technology, media, and telecommunication companies have incorporated financial services into their business models.
For banks, the best course of action is not to ignore FinTech. Instead, it is to embrace it. According to PwC, 48% of financial services organizations have integrated FinTech into their operating model.
The truth is that the marketplace is moving at an enormous speed. If banks don’t catch up, FinTech can be a big threat to them.
With that said, it is also important to note that not all FinTech is competition for traditional banking. Not every aspect of FinTech is in direct opposition to banks. There are many services that banks can diversify and monetize through FinTech.
How Have Banks Responded to Fintech?
As consumers, most of us have welcomed FinTech with open arms. But banks are a different story. These traditional financial institutions have largely dismissed this trend. They have not put large projects in place to embrace this new technology.
Furthermore, only 7% of banks have set up their FinTech labs. The majority have taken the approach of investing in FinTech startups. We can already see big banking including FinTech through their investments. JP Morgan is an example of this. The bank invested $25 million in FinTech startups in 2019. Another example is that of Capital One Cafes. They created technology-focused “banking cafes.” A community center that is open to everyone, whether you just want a quiet place to work or relax, or whether you have questions about banking.
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Conclusion – Will Fintech Replace Banks?
FinTech is a fairly new technology compared to traditional banks. It is still difficult to determine whether they will take over banks. However, it is important to remember that banks have been around for hundreds of years. These institutions have strong foundations. There are still many services that banks can offer that FinTech doesn’t.
Many people think that FinTech is a threat to the traditional banking system. Whether this is true or not is yet to be soon. But if there is anything we know about technology, it is that it can be quite disruptive. It has the power to completely change traditional systems.
Hence, the FinTech industry has a lot of room to grow. The same goes for the banking industry. But the best course of action for both seems to be integration.
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