Fintechs and traditional banks: a love/hate relationship

Before we can talk about fintechs one should first explain what are modern banks and from where they came from.

Traditional Banking origin

Modern banks can trace their origins all the way back to Ancient Babylon, where people deposited gold; in Ancient China standard letters of credit were developed along with paper money later on; during the Crusades the Knights Templar provided banking operations to pilgrims to and from the Holy Lands; From then on banking in Europe gradually grew around Italian city-states like Venice, Genoa, Florence(the famous Medici dynasty); later on the Netherlands and the United Kingdom picked up the reins and with the age of colonialism the first large multi-national banks were established. Their main purpose was to provide financing operations for the companies that traded in the newly found lands and moving that capital safely back to the mother-countries. This completely revolutionized trading operations and set the foundations of globalization. In fact, banks have been at the forefront of technological innovation for ages. From modern credit and debit cards, ATM, telephone banking, online banking, contactless payments and many more.

But what has changed? Why have banks become stagnant?

It is not a clear cut answer but it is a combination of factors.

The 2008 financial crisis and the recession that followed hurt banking giants badly and showed that they are sometimes built with feet of clay. Millions of people across the globe felt the pain, when the global financial system went almost to the brink of a meltdown and that completely changed people’s perceptions of banks. Instead of being seen as risk-averse caretakers of your hard-earned cash they became of risky and irresponsible behavior.

This didn’t go unnoticed and a wave of new regulation hit banks hard forcing them to close businesses from commodities to research, severely restructure their lending operations and increase their capital requirements several fold.

But could traditional banks recover in the face of all the risks they face from innovation and fintechs?

Fintechs’ origins

“Fintech are coming soon!” “Fintech are coming for banking!” “Fintech to rule the markets”

Does this sound familiar? A brief overview of articles published over the last decade that have professed the rise of fintechs.

But what exactly is fintech?

Fintech-the new buzzword of the last decade. The term is used extensively and encompasses almost all of the new technology companies that have moved into financial services.

Wait you thought that only banks provided financial services?

That used to be case up to the financial crisis of 2008/9 and the severe recession that followed. However, since then emergence of new technology has allowed smaller companies with a clear agenda and more nimble framework to encroach on traditional banks’ territory by enticing consumers with the speed, reliability and quality their of services. All of these factors when taken together meant that banks have lost the first battle, when it comes to keeping their once prized users in place for years to come. Fintechs had their foot in the door so to speak. In the good old days if you opened a bank account with one bank you tended to stay with it forever.

For modern consumers this is extremely counterintuitive, as they are used to constantly shop for the best deals on the market.

Another problem with traditional banking was that almost any type of service was too cumbersome to execute. Even procuring a simple loan wasn’t a small feat. To get a loan you would have to go to the bank, where the loan officer would collect all kinds of information on your financial status, employment prospects, and marriage status. Once all these variables were taken into consideration a loan would be provided at an interest rate that reflects your risk profile. A similar process had to be followed for even the most mundane of things such as opening a bank account.

Well fintech has changed all that or rather made the process more straightforward and significantly less burdensome.

So you want to open a bank account? You can easily do that on your phone using a myriad of online banks that check your details and send you a card to your home in a few days. Wait you want to pay now? No problem as you don’t even have to wait for your card anymore-you can pay with your virtual card on.

Fintechs and their technological benefit

Doesn’t this sound like something from a sci-fi movie? And yet this is the largest and most important trend within financial services. Everything from transfer payment options across continents that let you send money abroad to almost any point in the world at a very low cost (significantly lower than normal banks); to an application that lets you combine multiple cards; to untraceable cryptocurrencies that can be used as payment (still not everywhere); to the blockchain that could revolutionize how data is being recorded and updated. And you can do all of the above from one place with just a press of a few buttons on your smartphone and without going to a branch offices, where you could wait for ages? It seems very easy you easily command your finances better, more efficiently and easier than any point of history up to now. That is fantastic right?

But is it too early to drum the end of traditional banks? After all they have been around for hundreds of years and are multi-billion conglomerates that have offices, staff and operations on almost every continent on the planet (except the South Pole; for some reason polar bears don’t need cash). Would they simply watch from the sidelines and do nothing? Have banks always been this stagnant?

Not really. In fact modern banking has been one of the success stories of the modern age.

Some are taking a more pro-active approach and have formed partnership agreements with the new incumbents in a sort of symbiotic relationship- traditional banks have the client data, history and brand, whilst the fintechs bring the new technology, drive, and know-how.

Still funding for fintechs is sky-high these days-Crunchbase boats close to 1,766 companies being funded. In the UK the most recent data the government suggests that the current size of more than 1,600 fintech firms would double by 2030, employing close to 76,500 people. Investments have been significant from 984 million pounds in 2012 to 3.3 billion in 2016(https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/801277/UK-fintech-state-of-the-nation.pdf).

In any case, fintech companies are here to stay and banks would have to adjust to that reality and if they don’t history has shown that even established players can fail if they don’t continue to innovate and offer consumers what they want.

Sources Used(not an exhaustive list):

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/801277/UK-fintech-state-of-the-nation.pdf

https://www.pwc.com/gx/en/industries/financial-services/publications/fintech-is-reshaping-banking.html

https://www.toptal.com/finance/investment-banking-freelancer/fintech-and-banks

https://www.ey.com/Publication/vwLUAssets/ey-unleashing-the-potential-of-fin-tech-in-banking/$File/ey-unleashing-the-potential-of-fin-tech-in-banking.pdf

https://www.forbes.com/sites/ronshevlin/2019/10/14/bank-fintech-partnerships-the-fad-is-over/#1ca638ee7527

https://www.forbes.com/sites/billybambrough/2018/10/17/global-fintech-warning-to-tradional-banks-the-threat-is-real-and-growing/#68263af22c71

https://www.ft.com/content/d0ab6b84-c183-11e8-84cd-9e601db069b8