Future of fintech – Can Big Banks keep up?
Fintech | Financial Technology | Challenger Banks | Digital Banks

Financial technology (fintech for short) is transforming the global economy, rapidly changing how service providers cater to businesses and customers.

Fintech technology covers a range of financial services. The word describes start-ups disrupting the financial services market by offering better alternatives to traditional banking.

The rise of financial technology has proved troublesome to the banking sector. While one would expect the two to always work hand-in-hand, the immobility and lack of infrastructure afforded by high-street banks have frustrated fintech providers, spurring them to compete instead against well-known institutions.

Fintech | Financial Technology | Challenger Banks | Digital Banks

How fintech was born

Most traditional banks still lack the agility to rapidly improve services and quickly exploit opportunities in the market. Bureaucratic drag may have some upsides, but a shockingly slow response to technological progress in the banking sector has left many banks in the dark ages.

 A 2019 study revealed that 43% of US banks still use the COBOL programming language, which dates back to 1959. COBOL was created before the advent of the internet, and some regard it as an archaic prototype of modern computer languages. Not only are COBOL-based legacy systems unable to easily interface with modern tools, but due to its age, there are scant few able to still programme in the language. 

It is this outdated infrastructure that has given fintech the opportunity to outpace banks at every turn. Fintech makes banking and financial services more accessible. Users can take advantage of the widespread automation which characterises fintech to quickly and efficiently execute transactions which some banks still do by hand. 

7 Examples of fintech products 

Fintech is known for the speed with which entrepreneurs have turned concepts into reality. New competitors in the space seem to emerge monthly. Small teams of multi-disciplined developers can create products disruptive to traditional banking seemingly in the blink of an eye.

Let’s take a look at some of the areas fintechs have exploited to grab a significant amount of the market away from traditional financial institutions: 

1. Micro-loans

Banks and other lenders typically don’t issue small loans because of the costs involved in setting them up and relatively low returns on investment. Many UK banks will charge as much as 7.9% APR on loans below £1000. Generally speaking, only loans between £7000 and £25,000 charge a more reasonable 3.9% APR.

Fintech companies have been fast to exploit this gap in the market. While not a particularly new idea, modern technology has revolutionised how lenders provide this service.

‘Instant buy’ buttons and ‘buy now, pay later’ schemes on e-commerce websites allow customers to purchase products without entering personal details or bank information. Customers can buy almost anything outright with the option to pay in instalments. 

Most of these loans are offered at 0% interest. Micro-loan providers make money by selling detailed customer information and purchase histories to buyers who create highly-customised marketing offers using this information.

2. Payment gateways

Payment gateways allow the transfer of funds between customers and sellers without going through a bank. Banks typically charge sizable fees to handle transactions using credit or debit cards. 

Fintech companies have side-stepped this inconvenience to customers by integrating dozens of payment methods into convenient apps that online merchants can integrate into their e-commerce platforms. 

Perhaps the most well-known payment gateways are Payal, Google Wallet and Apple Pay. But, newcomers to the arena, such as Stripe, Alipay and iZettle have each introduced unique services and have grabbed a growing portion of the market in recent years. 

3. Digital banks

Challenger banks such as Monzo, Revolut and Starling Bank aren’t content to only take the business customers looking for niche services, but rather, have chosen to compete directly with traditional ‘brick and mortar’ high street banks. They offer the same individual and business bank accounts but have a completely digital infrastructure. With the huge reduction in overhead costs, digital banks can pass their savings on to customers.

4. Peer-to-peer (P2P) lending

P2P lending bucks the trend of standard loan applications through traditional financial institutions. These new lending platforms let users connect and transfer funds through an online marketplace. P2P clients never directly interact. Rather, their chosen platform acts as a facilitator between the two parties. 

Depending on the platform, P2P loans may have more, or sometimes less, strict qualification standards. Many platforms cap loan amounts at between £30,000 to £40,000. This is lower than some traditional lenders but is often the only alternative for those who do not qualify for a traditional loan. 

5. Digital wallets

Digital wallets combine bank accounts, P2P lending and payment gateways. Users can pre-load their wallet with any currency and use it to transact with merchants who accept digital wallets as payment mechanisms.

Typical end users of digital wallets often include e-commerce platforms, customers who use digital wallets to send money to family, and, more recently, cryptocurrency traders who use purpose-built digital wallets to store and trade crypto. 

6. ‘Smart’ credit scoring

Credit-rating fintech companies have taken it upon themselves to correct some of the aged, failing architecture of traditional banking.  

Millions of people across the UK, EU and US (even those with a steady source of income) do not pass conventional credit score checks because of outdated criteria and predatory practices.

Fintech companies are taking a new approach and offering ‘smart’ credit scoring that looks at alternative data points like social media signals and percentile scoring amongst similar demographics.

Combined with computer learning, this data can help lending platforms (including those banks which have since adopted similar services) make better, safer lending decisions.

7. Digital stock brokers 

Fintech startups enable investors to trade while avoiding the rates charged by most banks. Much like payment gateways and digital banks, low overheads and profits derived primarily from the sale of user data allow these platforms to offer better services than high street banks. 

User data in these examples is sold to high-frequency traders, who then influence the asset price. Even though investors might pay slightly more for assets, the money saved in trading fees offsets this increase in their favour. 

Fintech | Financial Technology | Challenger Banks | Digital Banks

Are big banks soon for the trash heap? 

It used to be that financial services and technology worked independently. Now, however, the lines have blurred to make the two indistinguishable. Fintech is at the centre of this transformation.

Embracing the ‘gung-ho’ attitudes prevalent in fintech seems to be the route to remedying traditional banking shortfall and ensuring its survival.

According to a 2019 report, 48% of financial services organisations had embedded fintech into their operating model, while 37% had incorporated new technologies into their products.

These numbers will likely have improved with the global pandemic, when customers needed innovative products more than ever. Businesses changed how they operated and collected payments. While banks were positioned to survive, by virtue of them being ‘too big to fail,’ none saw growth over the two years.

On the other hand, customers who were more accustomed to using traditional banking services, were forced to turn to online banking and fintech to make transactions. While a small proportion may return to their pre-pandemic habits, most will not.

Changing expectations of end-users, both old and new, fuelled the success of challenger banks. To compete, banks will need to meet the needs of a tech-savvy generation and improve their services to facilitate the personalisation consumers expect. 

Fintech | Financial Technology | Challenger Banks | Digital Banks

Can banks work alongside fintech? 

Though much talk has been about fintech competing with banks, the reality is that banks still have the chance to compete because fintech faces its own struggles. Furthermore, a steady stream of mergers and acquisitions has continued to converge fintech products with traditional banking services. 

More often than not, ‘challenger banks’ work together with traditional banks. The market incumbents have the capital to simply buy out their competitors and diversify their suite of products rather than risk competition. 

Big banks are now starting to invest heavily in fintech. Doing so allows them to offer new services to previously under-served consumers while reducing transaction costs and providing greater convenience. As an effect, the number of new fintech companies joining the Crunchbase Unicorn Board in 2022 dropped to a 2-year low. It seems the sheer buying power of Big Banks has allowed them to not only stay in the race but begin making innovations of their own.

The rise of financial technology also creates a worrying skills gap. Fintech startups struggle to fill important roles, with almost a third of mechanical and engineering roles left vacant. Additionally, roles that didn’t exist a decade ago now account for a large proportion of jobs in fintech. New startups don’t have the luxury of poaching experienced hands from long-standing businesses. They must rather rely on an annual influx of inexperienced university graduates. 

This might all be caused by the pronounced gender gap seen in fintech: Less than a 1/3 of fintech staff are women. There is no quick-and-easy fix to this problem. As a result, the fintech sector might see a steep plateau in coming years if they cannot fix the societal roots of their staffing worries. 

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Matthew Swaile

Copywriter