Fintech is a phenomenon that has completely changed the worldview regarding financial processes. Fintech’s market value is expected to reach $305 billion by 2025 at an exponential growth rate of more than 20 per cent per year. With the statistics provided, it is impossible to become oblivious to this revolution.
Financial technology or more commonly known as fintech is the combination of financial services and technology merged to provide a seamless user experience to businesses or consumers. Even though fintech is a relatively newer structure as a whole, the concept is not so much.
The first ever fintech product made available to the public was in the 1950s as the real breakthrough: credit cards, a product that is now an essential financial convenience tool around the globe. Later, in 1998 PayPal was founded as the first fintech company operating only on the internet and that is where it all began.
Fast forward to now, there are countless fintech businesses worldwide operating on algorithms, blockchain and data science. They provide a horizon of services from basic mobile banking or neobanks to investment and savings through companies like Finja and SadaPay. They are also the sole medium for cryptocurrency and blockchain companies such as Binance and Opeansea. Other services include machine learning and trading, payments, lending and insurance.
Financial technology is convenient but banks have access to larger sums of money and are more trusted by the public
The traditional banking system has gradually built its way up for centuries and thus its roots have been embedded deep into the soil. Traditional banks are regulated financial institutions with a central function of receiving deposits and lending to individuals and organisations.
However, they also provide a broad range of other services such as wealth and asset management, safe deposit lockers and currency exchange among others. The importance of traditional banking to any economy cannot be ignored since routine transactions take place through this channel such as withdrawals, deposits as well as bill payments. They are also the source of interest-earning for lenders.
Moreover, the banking system is not only limited to commercial banks; there is a major stake of corporate and investment banks involved in it as well, all of which are regulated by a central regulatory body of a country.
As in any two mediums of service, there are features of fintech and traditional banking services that set them apart from one another.
The procedures of traditional financial services were set in place decades ago which is why in the present day they are old, time-consuming and majorly outdated.
This is a massive setback for the banking system since customers today are yearning for anything that is quick and convenient to match their fast-paced life. This is where fintech comes in.
A digitised platform that provides any and all financial services for the ease of the customers. This concept eliminates the requirement of a physical location to carry out financial services which reduce the cost and hassle for both the providers and consumers.
Customers feel more involved and informed with the use of fintech as all data is disclosed at the speed of a few clicks. These platforms are user-friendly in comparison to traditional banking which consists of lengthy and complex steps; fintech skips all of that and only requires an online registration on a mobile app or website.
Fintech is wholly reliant on technology. Any advancement in tech has its ripple effect on advances in the fintech industry. They are built around machine learning and artificial intelligence to provide high-quality and smooth processing services.
However, this reliance on automation also causes a lingering risk of a breach in cyber security which can ultimately cause the entire fintech industry to collapse. This is because no physical data or money is stored instead all of it is stored via the cloud.
Banks are regulated by the national central banks of their country. These regulations are put in place for banks to adhere to legal requirements, restrictions and guidelines through which they may operate to safeguard public money and ensure transparency between banks and customers.
Fintech on the other hand is very loosely regulated which is why countless fintech start-ups easily make their way up. They operate faster and more in tune with their customers’ needs but the absence of rules and regulations makes it a risky industry for consumers. Due to this, the public at large feels safer when opting for traditional banks because it has a regulatory body at the back holding it accountable.
Is fintech a possible threat to traditional banking? On the face of it, traditional financial providers are adapting well to the entrance of fintech into the market. Most banks have now launched an extended fintech version of their banking system through online banking applications and websites where their customers can engage in online banking facilities such as mobile payments, peer-to-peer lending and digital security.
However, in a broader capacity, traditional financial service providers do consider fintech as a prominent threat. Since fintech’s business models are almost 10 times less costly than traditional banks, it cuts down on 90pc of human resources and thus requires more skill-based employees, especially in the tech space. This shift from human capital is a threat to employees of traditional financial services.
Furthermore, fintech has become a source of financial inclusion to (primarily low-income) individuals who were previously not on the grid.
Both fintech and traditional financial services act as intermediaries for the consumer. To expect either of the two mediums to have a 100pc control over the financial industry is beyond practicality because they both cater to different yet essential needs of the public. The complete shift to any of the two would in fact impact the financial processing methods of consumers leaving them at more unease than with the use of both simultaneously.
Ideally, if fintech and traditional banking collaborate in the long run, together they can amplify the quality of their services and features and make a bigger impact. Banks hold huge amounts of deposits whereas fintech holds relatively smaller amounts. To make full use of this, banks can partner with fintech to build better financial systems and fintech can in return benefit from the large sums of money.
This partnership can churn best of the best outcomes by combining the technology and innovation of fintech and the support and trust that the public has for traditional banking services to progress into a trusted digital future.
Published in Dawn, The Business and Finance Weekly, August 8th, 2022