Fintech is changing virtually every aspect of the financial services and banking industries. To keep pace with the game-changing innovations being produced by fintech companies, banks are adopting new approaches.
The usual narrative is that banks face strong competition from digital intermediaries, and there is some truth in this. However, the advent of fintech has also benefited banks and the finance industry as a whole. More often than not, fintech startups and established financial institutions are working together.
The consumer technologies pioneered by startups are being embraced by banks, and banks are working with fintech startups to bring new products to customers. And of course, many fintech companies are building software and technology platforms used by banks and financial institutions. The upshot is that the entire industry is evolving to become faster, more efficient, and more customer-centric.
Rise of FinTech
Fintech is credited with reinventing customer service within the finance sector, placing the consumer front and foremost in the development of innovative new banking solutions. Fintech disruption of the banking sector has been driven by technological advances, but also changes in consumer behavior over the past three decades. In the past, people were tied to a physical bank. Consumer choice was also generally far more restricted, and although service was more personal, it was often slow, unlike in today’s “always-on” economy.
The advent of the internet and digital payments changed everything. Consumers took their spending power online. Suddenly, it became possible to purchase items via the internet, meaning that consumers were no longer limited to buying within their immediate locality. All of a sudden, we were spoiled for choice, perusing goods from a multitude of different vendors and making purchases with a few clicks of a mouse.
While ecommerce took off with full force, banks were slower to catch up with the shopping revolution. They struggled to accommodate changes in consumer demand, creating gaps in the market for innovative early fintech startups like PayPal to edge in.
Three core trends have driven the rise of fintech:
- Technological innovations: In the past, a financial services company needed a physical location (and all the expenses associated with this) to reach customers. Now, of course, the internet and mobile phones have made this unnecessary. Consumer-focused fintech companies can reach their customers without any physical location at all. Technology has also enabled the creation of new financing methods, like crowdfunding—something that would have been virtually impossible just 30 years ago.
- Evolving consumer attitudes and needs: The global financial crisis of 2007-2008 was a disaster for the banking industry, and created mistrust of banks among many consumers. Accordingly, consumers are demanding more of their banks.
- Increased regulatory oversight: After the 2007-2008 crisis, government regulation of banks and financial services in the U.S. increased significantly. Restrictions on lending, for example, have reduced banks’ ability to offer loans. Fintech companies—most of which are not banks, and therefore not subject to the same regulations—were able to step in and offer alternative products.
Commercial banks remain profitable, cash-rich, and widely used. Some, however, lag behind the innovative consumer banking solutions offered by fintech companies, particularly those related to payments and lending.
Traditional banks are adopting a three-pronged approach. Firstly, they are becoming more customer-centric, offering a full spectrum of different products and services not presented by specialized fintech companies. In addition, many banks have leaned toward more competitive pricing, lowering monthly fees and interest rates to lure customers. Finally, banks are working to improve their digital services to not only make them more competitive, but make life easier for their customers.
Banks and fintech companies as partners
Many experts underline the importance of banks and fintechs working together in sync, redefining the future of banking together. These partnerships can be mutually beneficial. Startups bring new technologies to the table; banks are often powered by older, legacy software systems and technological platforms. By partnering with a startup, they gain quick access to new, advanced technologies. Meanwhile, banks have the built-in customer base and regulatory compliance expertise that startups need to operate in the space.
In the U.S., for example, banks are subject to both federal and state regulation. To provide a uniform product or service nationally, startups can either spend time and money figuring out how to comply with and obtain licensure in 50 different jurisdictions—or simply partner with an established national bank. In this way, partnering with a bank is a good way for a fintech company to avoid complicated usury, money transmission, and other regulatory demands and focus instead on what they do best: engineering the best product and user experience.
The built-in customers base that banks offer startups is also significant. Despite the fact that consumer opinion of banks took a dive in the aftermath of the 2007-2008 crisis, people still need banks. The biggest banks have widespread name recognition, alongside familiar household brands like Apple and Disney. Though people might be all too willing to try out the newest social media network, they may be more hesitant to entrust a scrappy, inexperienced startup with their financial information and live savings. Money is serious business. The size, stability, and inherently conservative nature of banks is an advantage in this regard.