The coexistence of fintech and traditional banks – Business

Fintech is a phenomenon that has completely changed the worldview when it comes to financial processes. Fintech’s market value is expected to reach $305 billion by 2025 with an exponential growth rate of more than 20 percent per year. With the statistics provided, it is impossible to remain ignorant of this revolution.

Financial technology or more commonly known as fintech is the combination of financial services and technology brought together to provide a seamless user experience for businesses or consumers. Although fintech is a relatively recent structure as a whole, the concept is not so much.

The first fintech product ever made available to the public was in the 1950s as the real breakthrough: the credit card, a product that is now an important tool of financial convenience worldwide. Later, in 1998, PayPal was founded as the first internet-only fintech company, and that’s where it all began.

Fast forward to now, there are countless fintech companies around the world operating with algorithms, blockchain and data science. They offer a horizon of services from basic mobile banking or neobanks to investments and savings through companies such as Finja and SadaPay. They are also the sole medium for cryptocurrency and blockchain companies such as Binance and Opeansea. Other services include machine learning and trading, payments, lending and insurance.

Financial technology is practical, but the banks have access to larger sums of money and are more trusted by the public

The traditional banking system has gradually built up over centuries, and thus its roots have become deeply embedded in the earth. Traditional banks are regulated financial institutions with a central function of receiving deposits and lending to individuals and organisations.

However, they also offer a wide range of other services such as asset and capital management, safes and currency exchange among others. The importance of traditional banking to any economy cannot be ignored since routine transactions take place through this channel such as withdrawals, deposits as well as bill payments. They are also the source of interest income for lenders.

Moreover, the banking system is not only limited to commercial banks; there is also a large proportion of corporate and investment banks involved in it, all of which are regulated by a central regulatory body in a country.

As in any two service mediums, there are features of fintech and traditional banking that set them apart.

The procedures for traditional financial services were put in place decades ago, which is why today they are old, time-consuming and very outdated.

This is a huge setback for the banking system as customers today long for anything quick and convenient to match their hectic lives. This is where fintech comes in.

A digitized platform that offers all financial services to facilitate customers. This concept eliminates the requirement for a physical location to perform financial services which reduces the cost and hassle for both providers and consumers.

Customers feel more involved and informed using fintech as all data is revealed at the speed of a few clicks. These platforms are user-friendly compared to traditional banking which consists of long and complex steps; fintech skips all this and only requires an online registration on a mobile app or website.

Fintech is completely dependent on technology. Every advancement in technology has its ripple effect on advancements in the fintech industry. They are built around machine learning and artificial intelligence to provide high quality and consistent processing services.

However, this reliance on automation also causes a lingering risk of a cybersecurity breach that could eventually cause the entire fintech industry to collapse. This is because no physical data or money is stored instead everything is stored via the cloud.

Banks are regulated by the national central banks of their country. These regulations have been put in place so that banks must follow legal requirements, restrictions and guidelines through which they can operate in order to secure public money and ensure transparency between banks and customers.

Fintech, on the other hand, is very loosely regulated, which is why countless fintech start-ups take off easily. They operate faster and more in line with customers’ needs, but the absence of rules and regulations makes it a risky industry for consumers. Because of this, the general public feel safer choosing traditional banks because they have a regulatory body behind them that holds them accountable.

Is fintech a possible threat to traditional banking? On the face of it, traditional financial providers are adapting well to fintech’s entry into the market. Most banks have now launched an extended fintech version of their banking system through online banking applications and websites where their customers can engage with online banking facilities such as mobile payments, peer-to-peer lending and digital security.

But in a broader capacity, traditional financial service providers consider fintech a prominent threat. Since fintech’s business models are almost 10 times less expensive than traditional banks, it cuts down on 90pc of human resources and thus requires more skill-based employees, especially in the technology area. This shift away from human capital is a threat to employees in traditional financial services.

Furthermore, fintech has become a source of financial inclusion for (primarily low-income) individuals who were previously not online.

Both fintech and traditional financial services act as intermediaries for the consumer. Expecting one of the two media to have 100% control over the financial industry is beyond practical because they both cater to different but important needs of the public. The complete shift to one of the two would actually affect the financial processing methods of consumers, causing them more uneasiness than using both at the same time.

Ideally, if fintech and traditional banking work together in the long run, together they can enhance the quality of their services and functions and make a bigger impact. Banks have huge amounts of deposits, while fintechs have relatively smaller amounts. To make full use of this, banks can collaborate with fintech to build better financial systems and fintech can in return benefit from the large sums of money.

This partnership can deliver the best of the best results by combining the technology and innovation of fintech and the support and trust that the public has for traditional banking to evolve into a trusted digital future.

Published in Dawn, The Business and Finance Weekly, August 8, 2022