With over 1,600 fintech firms in the UK and 42% of financial services partnering with fintechs, the world of finance is changing by the second.
While the big banks still reign high and mighty, the new kids on the block are certainly ruffling some feathers as they challenge old-school financiers to rethink banking.
Developing cutting-edge technology can streamline slow and costly procedures to deliver powerful financial solutions. From user-friendly banking apps to blockchain-driven currencies, fintech is reshaping the way we handle money.
Our article explores the future of finance and how the rise of fintechs is changing the world of banking for good.
Difference Between a Fintech and Traditional Bank
It’s important to recognise that the words’ fintech’ and ‘bank’ aren’t necessarily mutually exclusive.
While early fintechs focused on creating bolt-on products to enrich existing financial services, the line between banks and fintechs is becoming increasingly blurred.
The likes of Monzo and Starling Bank have grown to become much more than just prepaid card services that integrate with an app. After showing the world that it is possible to combine clever tech with a trusted banking service, they earned their rights to fully-fledged banking licences.
A fintech can evolve from one of three ways:
- A stand-alone startup creates tech-driven products to solve specific problems in the marketplace.
- A startup grows arms and legs to evolve into an actual bank.
- A traditional bank adopts new technologies by absorbing smaller fintechs to modernise its service.
How is Fintech Changing Financial Services?
Whether it’s finding shortcuts to do things more efficiently or cutting costs through automated processes, here are some of the key ways fintech is changing the financial sector:
- Improved service. While traditional banks rely on hooking customers into an entire ecosystem of services and products, fintechs narrow their focus towards doing the small things well. Fintechs target specific problems and build trust with customers through referral-based acquisitions. 90% of fintechs agree that customer experience is king.
- Clever branding. As fintechs grow independently to traditional financial services firms, their marketing teams take a refreshing approach to building brands people love. The gamification of marketing can create customer-friendly experiences which turn somewhat mundane and boring tasks into something engaging and personal.
- Better Value. If a fintech isn’t regulated as a deposit-gathering institution, they have the freedom and flexibility to create lean business operations which save customers money.
Applications of Fintech
So, how are financial services firms using technology to keep pace with the changing financial landscape?
A recurring trend among fintechs is to isolate a single process and build a solution that works for the customer.
Instead of becoming a jack of all trades and an expert of none, fintechs create bespoke technologies to optimise the customer experience. Whether it’s a mortgage fintech firm offering a price comparison service or a prepaid card providing free international FX rates, the applications of fintech are endless.
73% of financial executives believe consumer banking is most likely to feel the full force of disruptive fintech innovations. Banks like Revolut and Yolt are challenging the big banks to offer targeted solutions.
While only 53% of the banking sector adopt a customer-orientated approach, 80% of fintechs are committed to building services and products that meet their customers’ individual needs.
Adapting to a Technology-Driven Generation
With a generation of tech-obsessed teens on the horizon, fintechs are paving the way for a digital future.
The financial sector must remain relevant to younger audiences by moving with the times to build banking solutions for digital natives.
A report by PWC explains how 2020 is the year for social media to take a leading role in the way financial services “connect, engage, inform and understand customers.” The ‘Millenials’ and ‘Gen Zs’ of this world expect convenience at their fingertips.
Challenger bank, Monzo recently launched a Twitter campaign called Year in Monzo. Similar to the successful Spotify Wrapped campaign, Monzo surprised the banking world by creating a finance-focused stunt which people actually shared.
While personal finance will usually bore people to sleep, Monzo has finally made finance sexy.
Diverse Communication Channels
While account managers, helplines and local bank branches were the backbones of traditional banks, technology allows fintechs to communicate with customers through a cocktail of exciting new channels.
Primarily, integrating banking services with mobile apps is set to be the #1 communication channel for disruptive fintechs to guarantee transparency, convenience and enhanced functionality.
With over 90% of banks developing dedicated mobile apps, the adoption of digital communication channels is a prime example of established banks learning from disruptive fintechs to enhance their service.
Square Pegs in Round Holes
Many traditional banks struggle to squeeze their established practices into a mobile format. While emerging fintechs have the agility to adapt to new technologies, ‘going mobile’ can be like hammering square pegs into round holes for big banks.
The increasing popularity of ‘mobile-first’ banking challenges the financial sector to backpedal and rethink the way things are done.
Check out this helpful video by David Brear explaining why trying to digitise an existing process doesn’t quite cut the mustard compared to a ‘digital-first’ approach.
B2B Fintech Solutions
Increasingly, banks are adopting fintech-driven Software-as-a-Service (SaaS) solutions to streamline their services and invest in a digital-friendly future. Application program interfaces (APIs) and open-source plug-ins provide financial institutions with a toolbox of opportunities to modernise existing systems.
Here are some of the key B2B applications of fintech in the banking sector:
- Omni-Channel Banking. It’s time to wave goodbye to physical branches. The rise of digital banking offers convenience at our fingertips. While location-specific branches were a form of heightened convenience, the tiny machines in our pockets render them obsolete.
- Customer Service Chatbots. Innovations in machine learning and natural language processing provide fast, quality and cost-effective customer care. Intelligent chatbots open the door to a new era of customer service, which integrates seamlessly into the digital landscape of modern banking.
- Artificial Intelligence (AI) for Fraud Detection. The application of intelligent systems will help financiers and regulatory associations spot fraudulent activity and promote a trustworthy financial system. AI can increase the efficiency of existing fraud detection processes by almost 50% by learning from historical records to spot unusual transactions.
- Blockchain for Digital Transactions. Trustworthy digital ledgers present financiers with a new approach to managing, safeguarding and trading currencies. The rise of cryptocurrencies throws a spanner in the works for banks as they scramble to adapt to a new era of finance. Blockchain will promote safe and rapid transfers across the globe and form the basis of trading platforms and security exchanges.
Will Fintechs Replace Traditional Banks?
In short, yes.
With just a pocket-sized device and a handful of apps, you can do anything from trading cryptocurrencies to applying for a mortgage.
Even from a business owner’s perspective, fintechs offer a smorgasbord of invaluable tools to help businesses save money, time and effort. Whether it’s managing your business banking or paying employees as part of the growing gig economy, tech-driven finance is the future.
And, before anyone mentions ‘trust’ — let’s just roll back a few years and talk about Northern Rock and subprime lending!
That said, it’s only a matter of time until the blurring of the line between fintechs and traditional banks becomes almost unrecognisable. Traditional banks will continue to acquire smaller fintechs to bolster their technical capabilities.
The so-called ‘disruptors’ will become the very thing they set out to disrupt. As the saying goes: “once the centre collapses, the periphery becomes the centre.”
Future of Fintech and Banking
With only 7% of banks taking any action to set up their own fintech labs, the financial services sector still has a long way to go to keep pace with emerging fintechs.
Despite the clear demand for tech-driven services, 63% of banks have taken a more conservative approach by setting up fintech accelerators or investing in promising ventures with an eye of acquisition.
Innovations in seamless payment technologies and automated lending are expected to steal the show in the retail sector as customers demand unrivalled convenience.
However, a McKinsey report explains that only 11% of fintechs have dared enter the cutthroat world of corporate banking as smaller startups struggle to find their voice.
Going forward, the disruptive force of the fintech movement will have a dramatic impact on the organisational structure and function of established financial institutions.
As highly-specific fintechs drive innovation in isolated areas of the industry, large banks will undergo an ‘unbundling movement’ in which they expand their organisational structure horizontally to optimize individual products and services.
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