What is fintech?
Aside from being a thriving industry worth over $4.7 trillion globally, the term ‘fintech’ refers to technology that competes with traditional methods in the delivery of financial services.
There’s a certain image that springs to mind with fintech. I suddenly find myself in a spacious penthouse office, observing a cult of tech-savvy millennials as they work round the clock to improve the way that we as consumers manage our finances.
For a long time, consumers have been forced to tolerate the complacency of the big banks when it comes to financial technology. They haven’t kept up, and now a new wave of youthful innovation threatens to erode their market share. With over 12 million fintech start-ups currently existing worldwide, could we now be in the midst of the revolution that brings an end to the reign of the banking giants?
What falls under fintech?
Fintech covers a broad spectrum of activity. Here are a few examples:
Coinbase: An online platform for buying, selling, transferring and storing digital currency.
Monzo and Revolut: As digital-only banks, these organisations have no brick and mortar branches. Their services are accessed exclusively online and through mobile apps.
Brighterion: This AI and machine-learning platform is capable of identifying anomalous financial activity in order to detect and prevent fraud.
Onfido: Useful not only in finance, Onfido’s technology verifies identities by comparing photo documentation like a passport or driving license to a selfie-style video.
Why is fintech growing?
A 2019 Mulesoft study revealed that 55% of consumers found the service they receive from their financial providers to be ‘disconnected’, reflecting the lack of tech channels being integrated into these services. Moulded by the frictionless experience found elsewhere online, our expectations are higher than ever before; we demand speed, efficiency and a polished user-experience. If Amazon can facilitate a purchase in seconds, why should it then take an hour-long face to face meeting to open a bank account?
By filling the user-experience void between what the traditional banks are offering and what the modern consumer expects, the fintech industry has experienced enormous growth in recent years. Between 2017 and 2019, for example, global adoption of fintech services almost doubled, exceeding the forecasted adoption rate by 12%.
Why haven’t we all switched to fintech already?
Unlike traditional financial institutions, a typical fintech company doesn’t strive to be everything to everyone. They tend to find a niche and excel in it. Take ‘Acorn’ for example. This app invests users’ spare change. If a cappuccino costs £2.75, Acorn will invest the spare 25p automatically.
By filling very narrow gaps in the market and filling them well, fintechs have managed to gain ground with users looking to focus in on one particular area of their finances.
The problem here however is that having your finances scattered across multiple providers does not appeal to the masses.
According to Deloitte, 60% of consumers prefer to access services through a single platform, and whilst many digital-only banks do now offer a range of services within their platforms, as well as the option to integrate products from elsewhere, the big banks have a well-established one-stop-shop status that continues to appeal to the more apathetic consumer.
They attract those not in search of a better service but those content with how things have always been: current account, investments, savings accounts and credit - all under one roof. Not a particularly special roof but it’s one they’re familiar with and one they trust won’t cave in.
Trust itself serves as another major influencer here. With many fintechs offering one specific service, they are limited in the number of touchpoints they have with their customer. The traditional banks on the other hand, by offering a range of services, pop up time and time again throughout a customer’s life.
Brick and mortar branches also serve a purpose in forming and solidifying relationships. People crave reassurance where finances are concerned. Real people and real places help to soothe clients. By only communicating through faceless digital channels, fintechs may struggle to instil that same trust.
The big banks have the trust, so can’t they just improve their tech?
It’s not that easy. Traditional banks are burdened with antiquated processes and vast workforces accustomed to doing something in a certain way. This makes it difficult for a bank to quickly bring out a new product to meet the shifting needs of customers.
Fintech firms on the other hand are incredibly agile. The structure of these organisations is flatter; they are relatively young companies and face fewer barriers to change. This allows them to test out new ideas like AI, cloud and biometrics with greater ease.
What is the future of fintech?
Whilst customer inertia may have afforded traditional banks a firm hold on market share up to now, thanks to COVID-19 that grip might soon loosen. Physical branches and cash have become practically redundant, and it’s uncertain as to whether we will ever return to our old ways. The current situation therefore presents a real opportunity for fintechs to prosper, as demand for digital grows and we become less tolerant of online services that don’t quite hit the mark.
However, with start-up investment and cash reserves drying up in the post-COVID-19 economy, while some fintechs might flourish, others could flop. Equally, the situation could present an opportunity for fintechs and traditional banks to team up. The latter will need help to adapt quickly in the new digital world, while the cash-strapped fintechs will be seeking collaboration opportunities in order to stay afloat.
Disclaimer: The views, thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.