What Is Fintech?
Fintech is a combination of the words finance and technology, so its meaning is fairly self-explanatory. It is the word used to describe new-age technological solutions to banking and financing.
Banks have served as the seat of human power since the dawn of modern economics and have time and time again taken advantage of and abused that level of power. With that, entrepreneurs and organizations have sought to fill that gap in the market for banking systems that do not involve traditional banks.
That’s how Fintech came to be. You may be aware of a notable example that has been around for ages in the form of PayPal, or perhaps you’ve seen Revolut explode onto the scene, growing in billions of dollars worth of market value in just a few short years. Or perhaps you’ve heard the buzz word, and you’re wondering what all the fuss is about. Either way, this article is here to run you through everything you need to know about Fintech, from the differences between it and traditional banking, to whether or not you can still get a loan and a mortgage from it.
Differences Between Fintech and Banks
While both Fintech and traditional banks offer many of the same services to its consumers, there is one notable difference, and that is the purpose of each. Fintech is a new player in the market, seeking to put up barriers and draw power and customers away from banks – meaning, Fintech companies identify gaps in the market and target potential niches to try and capitalize on an opportunity, whereas traditional banks are catering to its already established wider audience.
There is also one key operational difference. Fintech, again with it being a new player and trying to attract customers, puts a lot of focus and effort into user experience and utility instead of focusing primarily on risk management like typical banking firms.
On the note of user experience, the difference between the two here is night and day. Banks are old school, formal types of institutions. It’s a business model full of standardized rules, regulations, processes, and a grandiose sense of self-importance and arrogance. It is not, traditionally, a business model to care too much for the user experience of its customers, so long as it gets the job done. While that approach has changed drastically in recent times, with many banks adopting elements of Fintech with mobile banking apps, it still has a way to go to catch up to the big Fintech players.
Since its inception, Fintech has focused on cloud computing, speed, user interfaces, utility, mobile data, and convenience as major selling points, and the result is profound. The technology and processes are accelerated, and it’s all done through mobile or an online platform, playing into people’s lack of patience and access to handheld technology in this new age.
Continuing on the note of customer experience, let’s talk about how in tune each is with the needs and desires of its individual customers.
As mentioned, Fintech is founded on the premise of customer experience, and banks are merely catching up – and catching up slowly. For example, think about how long chatbots have been around for. While it may seem like it’s been a while, the AI functionality query machine was only implemented by banks in 2018. That’s only two years ago. Even later than 2018, banks have introduced mobile apps and online banking solutions, and in the future, it’s a safe bet to not expect it to have its finger on the market pulse.
Both banks and Fintech have grown considerably alongside the evolution of AI, data-driven technologies, and machine learning, and it’s safe to say both institutions are going to continue growing side by side regardless of competition.
Banks aren’t going anywhere anytime soon, and Fintech is still too new to take over as the market dominator. On top of that, banks are themselves acquiring Fintech companies to enhance their services. It acts both as a way to enhance the customer’s experience and as an insurance policy, keeping them on top of the evolution of the market, minimizing the risk of falling into obscurity.
It’s not just a case of acquisition, though. There are little hostilities between the two, with many banks funding and working with Fintech companies to help them integrate into the banking industry better. As Fintech continues to grow, everybody benefits.
How Can Banks Respond?
While Fintech does present a threat to the traditional banking structure, especially as time moves forward, it isn’t red alert quite yet; in fact, it isn’t going to be a red alert for a good while. Regardless, banks are going to want to respond to this new trend in the market, whether to bring new customers in, to retain existing ones, or as a long-term insurance policy.
Before we look at that though, we need to understand why this technological threat has emerged in the first place. The first is the most obvious: the advancement of technology. Historically, there had been a massive barrier for entry when it came to the banking industry. You needed a branch building, staff, security, computers, servers (or some old school booking keeping equipment way back in the day), and somewhere secure to actually store all the deposits you get. However, nowadays, that simply isn’t the case. Technology now means that fiery young upstarts can run complex and large-scale operations automatically and easily. All functions are virtual, so the financial barrier for entry, while still high, is far smaller than it has ever been before.
The second reason for the new trend is the lingering resentment for banks after the Great Recession and the recessions of other countries around the globe. The third is the abundance of regulations banks are forced to follow. Compliance with government regulation is a big deal for banks and a big spender, with certain banks employing tens of thousands of people just in its compliance division alone. Fintech companies are not technically banks, so they don’t have this level of restriction applied to them.
So how can banks respond? For starters, to tackle the technological issue, the banking super giants can start investing in Fintech themselves. We touched on it briefly, but the importance of this cannot be overstated – both for short term and long-term gain. Any and all notable banks are sitting on a hoard of gold, coin, and notes worthy of an elder dragon, so it’s not like the funds aren’t there. To its credit though, the banking industry at large has been very good in this regard by both buying up Fintech companies and investing in them as partners and shareholders.
Then, there is the reputation issue to deal with. This one is a lot harder to address than the others purely because of just how bad the damage that the recession caused was. There would be no way for the banks to appropriately apologize for its disastrous impacts on people’s lives, even if your local branch started handing out free money. People would love it, but it would be seen through very easily.
Instead, what banks really have to do is start taking a more corporately responsible approach to its business dealings. That could start with a change to more eco-friendly business practices and investments in renewable energy – not necessarily a social justice approach, as traditionally that has not gone well for companies, but a more ethical and moral one.
Ideally, all the old rich suits who played a part in the corruption of the banking landscape would be relieved of their duties, but that’s a long shot, even if it would send a profound message.
As for regulations, there really isn’t much that the banks can do. Banking legislation is a minefield, and it’s a minefield that Fintech doesn’t have to navigate. So all the banks can really do is continue ensuring compliance, and working on eliminating any oversights.
Fintech Players to Look Out For
Stripe was worth $22.5 billion dollars as of 2019.
Founded by two Irish brothers who both dropped out of college, Stripe started out life as a humble platform to help sellers process payments. These days, the company serves the likes of Microsoft and Amazon.
It has evolved from its payment processing roots to include credit card distribution, its own point of sale computer software, and a billing platform for subscription services.
Stripe is the market leader by a country mile, but it’s likely that other Fintech startups are going to catch up to it during the 2020s.
At the same time that Stripe was worth $22.5 billion dollars, Coinbase was its closest competitor and was valued at $8 billion dollars. That’s not to say Coinbase is an inferior service, just one that doesn’t have the same consumer base as Stripe.
CoinBase was founded by a man named Brian Armstrong and originally provided service as a bitcoin wallet and a retail exchange. It has evolved beyond that and now offers full cryptocurrency custody, as well as professional and institutional platforms for trading.
While staying in the cryptocurrency nice, CoinBase continues to expand its operations, having bought Earn.com in 2018, which is a service where people pay in bitcoin to start an email correspondence with industry experts, kind of like a mentorship program. That acquisition was reported to be worth around $100 million dollars.
Worth $5.6 billion dollars, it’s clear where the inspiration for the naming convention came from.
Robinhood is a trading broker that offers commission-free trading on stocks, ETFs, and cryptocurrencies, as well as has options for consumers to use through mobile. They also have a subscription service starting at a mere $6 dollars per month called Robinhood Gold. The service gives potential investors access to margin trading. It has also begun the launch of a cash management program, meaning Robinhood is planning on expanding into markets beyond trading.
Ripple is a little different from some of the other entries here on account of the fact that it isn’t so much geared towards the general consumer as it is companies.
Worth $5 billion dollars, Ripple is a blockchain-based global settlement network. Its primary goal is to push out SWIFT, replacing it as the industry standard interbank messaging platform. It also offers a service that allows companies to settle its creditors across borders in its own cryptocurrency called XRP.
SoFi is worth around $4.4 billion and was founded all the way back in 2011 by the former COO of Twitter, Anthony Noto.
Since its beginning, SoFi has been very much geared to catering to millennials and below, with the first service ever offered being online student loan refinancing. It has since expanded into offering more services for the younger generations of the world, including mortgages, life insurance, and interestingly advice on robo-investing.
Credit Karma is a service provider with over 85 million members and is worth $4 billion dollars.
Credit Karma has an interesting business model in that it offers up all kinds of free services for its users. Things like accessing your credit score, alerting you to when accounts are opened in your name to combat fraud, helping you prepare your tax with access to specialized software, and assistance with fixing any errors in your credit report is all free. The company earns a referral fee when its users opt-in for the personalized advertisements for credit cards and loans it presents to them.
Circle is a crypto-finance giant worth a reported $3 billion dollars. It burst onto the exchange market in 2018 when it purchased Poloniex. Since then, it has gone on to offer trading services for trading cryptocurrency and has partnered with CoinBase to launch its own crypto asset, known as USDC stable coin. It uses the infamous Ethereum blockchain and is backed by the U.S. dollar.
It also introduced what is known as Circle Pay, which is a method for friends to pay one another.
Those above are some of the newer, innovative players to watch out for in the coming years, but keep in mind that there are far, far more than what is listed. The list wouldn’t be complete without PayPal though.
Perhaps one of the first companies to really popularize the idea of Fintech publicly, PayPal is worth a staggering $102 billion dollars.
PayPal is sort of a one-stop-shop for managing online transactions, and it does it very well. It acts as a platform for both personal and business payments, with its own built-in invoicing creation system allowing you to transfer money to different accounts, provides credit services, and can be used to pay for goods online in over 200 markets, with it even launching its own MasterCard in certain countries.