Fintech, short for financial technology, is transforming the financial landscape, rapidly changing the ways that financial services are provided to businesses and consumers. The global fintech market was valued at about $127.66 billion in 2018, and is expected to grow to $309.98 billion by 2022 at an annual growth rate of 24.8%.
So, what is fintech? Financial technology covers a range of financial services and refers to companies, often start-ups, that are disrupting the financial services market. According to KPMG’s Fintech 100 the areas where fintech companies are most prevalent are payments and transactions, lending and credit and wealth and brokerage.
However, fintech is also growing in other financial spheres, including blockchain, mortgages and neo-banks. Digital natives such as Pockit or Stash, either without, or with a recently granted banking license, challenge the products, services and user experiences of traditional banks and financial service organisations.
"Fintech has been used for many of the newest technological developments - from payment apps like PayPal (PYPL) - Get Report or Venmo to even cryptocurrency” writes Anne Sraders for financial news site TheStreet. “Combining the latest technological developments with financial services or applications, fintech has helped businesses - largely start-ups - disrupt the industry and provide better financial services to businesses and individuals alike”.
The rise of financial technology is double-edged for the banking sector – on the one hand it is providing ways to enhance the services they provide to their customers, with banking institutions using tools like chatbots to enhance customer experience, mobile apps to give customers a real-time view of their bank accounts and machine learning to secure against fraud. On the other, fintech is providing stiff competition to traditional banking and financial services from every angle, which is threatening the future of some of our most well-known institutions.
For the past three years, a 100% digital bank – Starling – has been voted ‘Best British Bank’ at the British Bank Awards, beating off competition from traditional contenders including Barclays, First Direct, Halifax and Nationwide.
Fintech also allows non-financial companies to offer financial products. Gusto, an online HR and benefits platform, has recently launched a wallet service that allows employees to save with an interest-bearing cash account and spend with a Gusto-branded debit card and Element, an online insurance company, has partnered with Vodafone to develop a new cyber-security insurance for private users of Vodafone’s mobile net.
Why is fintech so popular?
Fintech is making banking and financial services more streamlined and accessible. Through the use of technology users can take advantage of automation to speed up processes which previously a human would have managed. Whilst some financial services still use a mix of both advisors and algorithms, other transactions such as applying for a mortgage or a loan can now be done quickly and conveniently online, without any human interaction at all. Whilst this is great news for end users, it is causing a significant shake-up for more traditional players in the market.
So how is big business responding to fintech?
According to the latest PwC Global Fintech Report, the question is no longer whether fintech will transform financial services, but which firms will apply it best and emerge as leaders:
“It used to be that financial services (FS) companies and technology, media and telecommunications (TMT) companies travelled side by side, sometimes on the same roads but not usually in each other’s lanes. But now, the lines between FS and TMT firms have blurred to the point that the roads are a free-for-all and previously distinct sectors are colliding. Many TMT companies are applying for FS licences, and FS organisations have begun calling themselves technology companies. Fintech is at the epicentre of this transformation.”
It seems that embracing fintech is the best route to traditional banking's survival. According to PwC, as of 2019, 48% of financial services organisations have embedded fintech fully into their strategic operating model and 37% have incorporated emerging technologies into the products and services they sell.
It will also be important for businesses to use fintech to improve the ease and speed of their services, as well as to facilitate the mass customisation and personalisation consumers have come to expect.
“In a marketplace that’s moving rapidly towards mass customisation, we expect that using fintech in this way is more likely to create differentiation, so it would be good for FS firms to adopt [this approach]. In fact, FS companies that don’t will get left behind” reports PwC.
However, not all fintech is in competition with traditional banking.
“While digital banks are referred to as fintechs, and have certainly challenged traditional banks in terms of luring away their customers, it would be simplistic and inaccurate to identify that all fintechs are in direct opposition to traditional banks” writes Will Hurst, Head of Commercial Development at Monevo. “In many cases, fintechs are often working in tandem with traditional banks, and allow market incumbents to diversify their suite of products and further monetise their client base”.
As well as traditional banks diversifying their product portfolios and offering technology-based services, we are also seeing big banking harness fintech through their investments. JP Morgan invested $25 million in fintech start-ups in 2019, Capital One has created technology-focused ‘banking cafes’ and Citi has launched the Citi Developer Hub to invite third party programmers to test and share feedback on their APIs.
What does this mean for the future of banking?
According to a report produced by the Bank for International Settlements, fintech innovations hold potential benefits for all users of financial services:
“These include expanding access to financial services (financial inclusion), reaching under-served consumers, reducing transaction costs, providing greater transparency with simpler products and clear cost disclosures, providing greater convenience and efficiency, and enabling tighter controls over spending and budgeting. Collectively, these can result in an enhanced customer experience by providing a better understanding of products and terms”.
However, the rise of financial technology is also creating a skills gap. According to Autonomous Research over $1trn of the current financial services cost structure could be replaced by machine learning and AI by 2030.
Although there is still huge potential for a successful career in banking and finance - 75% of financial services organisations are creating jobs related to new technologies - 42% are struggling to fill these roles.
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