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Will Fintech Replace Traditional Banks?

Fintech has brought about considerable innovation and new technologies to the financial industry. Thanks to fintech, processes are quicker, smoother and more cost-effective. Innovation in banking practices is undoubtedly a fine thing, especially when compared to legacy institutions that are extremely reluctant to implement change.

According to KPMG, $31 billion was invested in fintech last year. Does this mean fintech will replace traditional banks? Let’s consider the pros and cons:

Why fintech?

  • Focus on customer needs and interests

Fintech is customer-centric as opposed to banks, which are profit-centric. In practical terms, this means that fintech companies provide alternative and far less costly ways to deal with overdrafts, loans and foreign exchange. Additionally, they are constantly seeking ways to upgrade and develop customer offerings.

  • Out-of-the-box thinking

Fintech companies approach risk differently than traditional banks, thereby allowing more customers to acquire credit cards, take out loans and open checking accounts. New fintech initiatives offer overdraft extension at far lower costs than traditional banks. With the ongoing development of open banking, fintech will undoubtedly develop various competitive services.

  • Technological agility

Fintech startups are revolutionizing the finance sector with new technologies such as Internet banking, blockchain for instant transfers, and biometrics for secure user authentication. Technology is also used to replace costly bank services such as consulting with foreign exchange and investment experts.

Why traditional banks?

  • Extensive services

Legacy banks offer a far wider range of services than fintech. Currently, fintech focuses mainly on retail banking services such as lending and financing, payments and services. For all its innovation, fintech does not touch on many traditional banking areas.

  • Regulatory compliance

One of the reasons that banks are perceived as monolithic and rigid is due to regulatory compliance. Regulations were enacted for good reason – to protect all parties involved in financial activities. While fintech startups are geared for rapid scaling, they are also bound by regulations, and must tread carefully to avoid breaches.

  • Security in numbers

For all their impressive growth, fintech companies are dwarfs in comparison to many traditional banks. Banks have large customer bases and stable infrastructures. So, for example, JPMorgan Chase claimed to have 50 million online users last year, while fintech leader TransferWise had just 1 million users. There is much to be said for eminent institutions that have been in existence for decades, especially when we are talking about putting a good deal of cash on the line.

A synergy with mutual benefits

There is no doubt that fintech can infuse a good deal of technological innovation and new products into the stolid banking sector. Traditional banks, on the other hand, bring many years of experience, a huge clientele and considerable regulatory know-how.

At its current level, fintech does not constitute a threat to banks. However, banks that fail to innovate and offer new services may be left behind in the not-so-distant future. Within a new financial ecosystem rapidly evolving before our very eyes, cooperation between fintech and banks is the best course, offering significant benefits for both sides.  




Image courtesy of jannoon028 

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