The term “fintech” is derived from two words – “financial” and “technology”. It basically means using technology to deliver financial services to customers. It may be in many forms such as banking, insurance, investments, etc. You can link your bank account to your phone and use the money from anywhere without being present at the bank. Car insurance provider now gives “telematics-based” insurance which means your car will be monitored using a device or smartphone and you will have to pay accordingly for your insurance policy.
The Rise of Fintech
It has become more popular for several reasons:
- Advanced technology: Widespread use of mobiles and internet enabled the digital services and made them more accessible.
- Customer expectations: Customers now demand fast, convenient and cost-effective services. So they prefer online payments and money transfer instead of doing it physically.
- Growth of e-commerce: People now prefer shopping online rather than going to offline stores. This has lead to rise in use of online payment platforms such as Paytm, Googlepay, etc.
- Traditional banking limitations: They were slow, expensive and less accessible. While fintech provides better experience at cheaper rates and improved accessibility.
Payments is one of the main areas where fintech has advanced significantly. Companies, such as Square, PayPal, and Stripe, have revolutionized the traditional payment processing industry and made it easier for businesses to take payments online. In addition, people may now send money to one another more easily without using traditional banking services thanks to peer-to-peer (P2P) payment apps like Venmo and Cash App.
Lending has seen growth. Online Lenders such as LendingClub and Prosper help people and small business to get loans quickly with less hassle. Furthermore, by providing more flexible repayment choices and cheaper interest rates, fintech startups like Earnest and SoFi have upended the conventional student loan market.
Fintech’s Potential for Disruption of Traditional banking
There are several ways in which fintech could challenge established traditional banking practices. These organizations possess greater agility and speed at innovation when compared to conventional banks. They will be able to respond to shifting customer wants and create new goods and services more swiftly as they operate virtually and need less investments for the upgradation.
Additionally, fintech businesses can offer their goods and services at a lesser cost because they frequently have lower maintenance expense than traditional banks. Due to this, traditional banks may find it harder to remain competitive.
Compared to traditional banks, fintech companies frequently provide more individualized and customized goods and services. For instance, a fintech business could be able to provide a loan to a person whose credit file is weak and who a traditional bank would reject.
Lastly, fintech businesses frequently use analytics and data to improve the goods and services they provide. For instance, a fintech business might provide individualized financial recommendations based on information about a customer’s spending patterns.
Challenges in traditional banking
Fintech has the potential to replace traditional banking, but there are several issues that must be resolved first. The largest obstacle is adhering to regulations. To make sure they are in compliance with laws and regulations, fintech companies must negotiate a complicated regulatory framework.
Establishing trust with customers is another difficulty. Fintech services continue to arouse customer apprehension, especially when it comes to sharing personal financial information. To gain customers’ trust, fintech businesses must show that they take data security and privacy seriously.
Traditional banks have the chance to collaborate with fintech startups in spite of these obstacles. Traditional banks can benefit from the creativity and agility of fintech startups while also leveraging their experience in areas such as regulatory compliance by working with these companies.
For instance, fee-free online banking services and user-friendly mobile apps from digital banks like Chime and Varo Money facilitate simple money management for its clients. The millennial generation and other tech-savvy customers have shown a strong preference for these services, and traditional banks are beginning to take note. In an effort to compete with fintech firms, some conventional banks have begun to provide their own online banking services.
Fintech Opportunities in traditional banking
Investment services is another area where fintech is upending traditional banking. Consumers can now invest their money more easily thanks to the new investment products and services provided by fintech companies. For instance, investing advice is provided automatically by robo-advisors such as Wealth front and Betterment, utilizing artificial intelligence and algorithms. These services are easily accessible online and frequently less expensive than working with a traditional investment advisor.
Fintech is also facilitating consumer loan availability. Fintech companies are upending this paradigm by providing alternate sources of credit to consumers, who have historically mostly obtained credit from traditional banks. Peer-to-peer lending websites such as LendingClub and Prosper, for instance, link borrowers with lenders who are ready to lend them money. This concept can be conveniently accessed online and is frequently more affordable than typical bank loans.
Even with all of fintech’s benefits, there are still issues that need to be resolved. The possibility of fraud and cybercrime is one of the largest obstacles. To safeguard client data and stop fraud, fintech companies need to make significant investments in cybersecurity.
The possibility of false lending practices by fintech companies presents another difficulty. Fintech businesses have an obligation to provide consumers with cheap loans and to be open and honest about their lending methods.
Conclusion
Fintech’s expansion has the potential to significantly alter traditional banking in a number of ways. Fintech businesses can provide more individualized and customized goods and services than traditional banks since they are frequently more inventive and nimble. But there are also issues that must be resolved, especially those pertaining to customer trust-building and regulatory compliance. The ability to adapt and change in a financial world that is evolving quickly will ultimately be critical to the success of both fintech startups and traditional banks.