Fintech is financial technology, meaning the use of technology to improve financial services. The term may have been coined in the 21st century, but financial technology has shaped how we manage our money for over 100 years. Historically, fintech dates back to the late 19th century. Back then, money could be transferred by telegram and Morse code – but its unlikely investors would be delighted in today’s world.
Fintech is now a booming industry powered by far more advanced technologies than the telegraph or landline. Instead, we have smartphones, advanced software, and blazing-fast internet connections. Fintech is only expected to grow in the next five years. By 2026, the market is expected to be worth $324 billion. Nevertheless, fintech is still often misunderstood as a copy-paste of existing financial processes and institutions into the digital world.
However, this is not the case. Fintech is the rival of traditional banking and a catalyst for change. The 2008 financial crisis led to a widespread lack of trust in established financial institutions and prompted people to turn to new financial practices. Customers were attracted to more accessible and faster services and lower fees offered by digital startups. For example, in Russia, the online payment system WebMoney offers fast, secure, and convenient online payments and transfers with easy registration and attractive exchange rates.
Russian fintech pioneer web money. And no matter how much market share fintechs gain or lose in the banking sector, they are always developing new business models and redefining customer expectations. To stay competitive as fintech companies transform finance, banks need to adopt new practices.
How fintech is changing the banking system
Fintech’s impact on banking is already visible. Things have changed drastically since Zopa, a UK peer-to-peer lending platform, launched in 2005 and we first heard the word fintech. In 2021, we won’t need to go to a branch to send money abroad, apply for a mortgage, or check our creditworthiness. All of this is possible due to the disruptive business models of fintech.
How does fintech affect banks?
In general, fintech is changing the global financial industry in two ways:
Customer Orientation – Unlike traditional banking, Fintech puts the customer first. Financial technology companies that only offer one or two types of products or services focus on doing their job well and exceeding customer expectations.
Go fully digital – Digital solutions such as mobile banking apps enable customers to open accounts, pay bills and conduct other transactions remotely. It’s time-saving and convenient, especially in the context of Covid-19 lockdowns.
By moving away from traditional banking practices, FinTech companies optimized staffing and reduced costs. This resulted in lower service fees for customers, making fintech products even more beneficial for users.
Lower fees and real-time remote payments have rapidly changed how consumers view financial services companies. To remain competitive, banks accelerated the adoption of new practices and technologies. As proof of this, financial institutions have invested more than $27 billion in digital innovation since 2015.
Leveraging technology has helped banks like CenterState Bank build better banking architectures, increase processing speed, and streamline staff and workflows. This, in turn, lowered transaction fees, reduced borrowing costs, and allowed customers to get products tailored to their needs. Overall, it improved the banking experience for customers and allowed banks to compete with fintech, at least for now.
How will Fintech change the future of banking?
Financial institutions will continue to monitor fintech advances. Some take a defensive approach, trying to keep what they already have and not branch out any further. Others strive for growth and build advanced fintech solutions in-house. So far, neither strategy has proven to be “right”, but integration aka “fintegration” is the mainstream approach.
Partnership between banks and fintech: The rise of the “Fintegration” trend
Fintegration is the collaboration between banks and fintech companies. On the other hand, this collaboration enables banks to take advantage of the agility, innovation, and technological strength of fintech companies. On the other hand, it allows fintechs to make good use of banks’ reputation, experience, and capital.
The Economist’s 2015 Disruption of Banking Report cites integration as a highly plausible scenario. The relative strengths and weaknesses of banks and fintech companies are complementary rather than competitive, meaning that a collaboration between fintech and the banking industry is a win-win. Benefits of fintegration include:
Improved customer experience
Access to cutting edge services including artificial intelligence, blockchain, and key mobile banking trends such as open banking solutions
Improved processing efficiency
- Opportunity to scale business and improve ROI
- Better funding
- Improved risk management
- Greater customer reach
- A wider range of innovative financial products
- Faster transactions and responses to product inquiries such as loans or mortgages
- Greater cybersecurity through advanced technologies like blockchain
- Deposit protection guaranteed by supervisory authorities
- Lower service fees
- Fintech banking solutions
For some time, some banks and fintech platforms have been working together and developing partnerships. Some of these collaborations have resulted in innovative solutions. Here are some examples of fintech solutions used by major banks:
ABN Amro and Tink
Dutch bank ABN Amro has partnered with Swedish fintech Tink to develop an interactive solution nand retains its market share. The result is Grip, a personal finance app that allows users to simultaneously manage accounts at six different Dutch banks. With over 500,000 downloads, Grip is one of the top financial apps in the Netherlands.
Bank fintech apps like Grip, HSBC, and Tradeshift
In 2017, HSBC announced its partnership with Tradeshift, a global supply chain finance company. As part of this agreement, HSTradeshift’s shifts are developing a platform to automate supply chain processes and accelerate and provide visibility into long payment cycles
City National Bank and Extend
City National Bank partnered with fintech startup Extend to launch a virtual Visa credit card solution. The new solution allows customers to issue virtual credit cards connected to Apple Pay and Google Pay mobile wallets for easy and contactless payments. Visa Virtual improves e-commerce opportunities, allows businesses to set spending limits and expiration dates, and gain greater control over corporate cards.
As you can see, there is a bright future for banks and fintech companies working together. Together, financial technology and banking can bring innovative financial solutions to market quickly and cost-effectively. This is a favorable and permanent situation for all parties involved and also for the customer who gets advanced financial products and services at a lower price.
Now is an excellent time to start your fintech business and find a bank to work with. And your fintech may change banking even further. “The first step is to establish that something is possible, then the probability will occur.” – Elon Musk.