Nov 04, 2021

Fintech Companies: Are They a Threat to Banks?

Fintech
Banking
Innovation
Finance
4 min
Photo of a man withdrawing money at an ATM on a busy street
The financial industry is changing rapidly, with new innovations forcing legacy banks and fintech challengers to be more competitive. Which will survive?

It's like a tug of war between the traditional and contemporary. Fintech companies are disrupting banks, but they are also looking to work with them in order to have stability.

Banks have been working hard to integrate new technologies into their businesses, such as mobile banking apps and other digital services. The question is: will this be enough?

What are fintech companies, and what do they offer?

Fintech means financial technology. It is a new and emerging industry focusing on using new technologies to make banks of the future more efficient, transparent, and easy to use for both customers and businesses alike. It is said to improve the customer experience according to research by PWC, Deloitte, and KPMG - among other multinational accounting firms.

Fintech companies also offer loans or help with investments in stocks, bonds, and new forms of assets like cryptocurrencies.

From lending to savings, fintech companies provide a wide range of services. They also bring forth more digitalisation, which banks have been slow to adopt. As a result, financial technology companies are taking advantage of this opportunity in the market by offering similar services at lower prices.

How are legacy banks and financial service providers responding to the challenge of fintech companies?

Banks are coming up with strategies to enable them to compete against these disruptive firms. They are also collaborating with fintech incumbents by opening bank accounts for them, which has come to be known as a lucrative business model called banking-as-a-service (BaaS). After all, no legally registered startup can survive without a bank account - yet.

Even though first-generation banks and legacy financial service providers have been slow to adapt, nearly all now have smartphone apps. Some even offer robo-advisory services to compete with fintech companies, such as Vanguard (founded in 1975) and Citibank (founded in 1812).

According to a report by IBM, "Innovation is no longer optional, but has become a necessity, fundamental to the success of traditional banks." 

Many banks are actively engaging in the fintech community and opening digital innovation labs to disrupt themselves from within. In fact, a large number of fintech companies are actually subsidiaries or side-projects of first-generation banks.

Is it possible for both parties to work together successfully to survive, or will one inevitably win out over the other?

In the future, every financial services company will fall under the fintech umbrella; most already do. This reality does not mean banks are going bust. It simply indicates they are going through a technological transition into fintechdom. They are either embracing financial technology or facing a dismal future.

There are many benefits to having fintech services in the market, including lower fees and faster services. As legacy banks adjust their business models to survive, which has been common practice in banking for centuries, the ones that fail to do so are increasingly falling behind.

Failing to act is causing some banks to find themselves under threat from other disruptive newcomers. If they do not remain competitive, many fintech incumbents have the flexibility to move fast due to less beaurocracy and better position themselves in the market.

Some fintech companies have even become valued at higher market capitalisations than traditional banks. For example, the merchant payments provider Square was valued at a whopping $120bn (USD) at the time of publication, which was already higher than Lloyds Bank at $47bn (USD).

Even more, some fintechs are buying out legacy banks altogether, such as in the case of Argentine fintech Ualá purchasing Mexican bank ABC Capital in November 2021.

Why is the fintech transition important for consumers?

People have more choices about how they handle their finances and spend money, thanks to fintech. The disruption also pushes banks to improve their services, often making them cheaper and faster to use. Furthermore, fintech is a benefit to financial inclusion since it enables people who would otherwise be unable to access such services.

Unfortunately, it's not all sunshine and rainbows for everyone, as some consumers complain they do not understand all of the jargon of fintech companies or have difficulty engaging with high-tech gadgets. Others are concerned this transition will lead to financial exclusion or risk for those who can't afford new technologies such as smartphones or learn how to use them in the first place.

As artificial intelligence advances, many employees in the financial services sector also feel their functions will become automated and their jobs taken away. Although this is a concern, fintech companies have created thousands of jobs in other areas. They require a wide range of occupations, from designers and developers to salespeople and human relations.

The future of banking with fintech companies

The relationship between legacy banks and disruptive fintech companies is complicated, but one thing remains clear: both parties need each other to survive - for now. It's anyone's guess what will happen in the next decade, but it is safe to note there are going to be a lot more disruptive newcomers and incumbents shaking things up.

The technological remodelling of the entire financial system leaves banks with no choice but to transition into fintech or become obsolete. Are fintech companies a threat to banks? Perhaps. However, these two industries are both looking for the same thing: growth and innovation. In that regard, they can work together more than against each other and all take on technology in the long term.

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