How Fintech is Changing the Way We Deal with Money
By Philip van Wijngaarden
Fintech (financial technology) isn’t a novel concept. Everything from ATMs to signature authorization is technically fintech. However, it’s more widely recognized as companies and concepts disrupting traditional incumbent banks and ways of dealing with money.
In 2018, the global fintech market was valued at $127.6 billion and had a predicted CAGR of 24.8% up to 2022. To understand why fintech is so popular (and revolutionary), it’s worth looking at what it does so differently.
Neobanks
Perhaps the best place to start is with neobanks, as these are a major driving force in the fintech space. Put simply, a neobank operates entirely online without any physical infrastructure. Aside from more streamlined operation, neobanks typically adopt disruptive technology to give users faster, easier, and more “modern” banking experiences. As of 2020, neobanks had a market share of 23%, and this is only set to grow.
Like many startups, neobanks benefit from building models from the ground up. It means they can be more adaptive to new technologies and lack the legacy infrastructure found in incumbent banks. Much of the technology discussed below features heavily in the neobank’s business model.
Some popular examples of neobanks include Chime, Upgrade, and Aspiration in the US, and Monzo, Revolut, and Starling in the UK. Some, such as Revolut, offer multiple currency spending and cryptocurrency, while others, such as Upgrade, offer credit and personal loans.
Artificial Intelligence
No discussion of disruptive technology could ignore the concept of artificial intelligence (AI). Fintech is no exception, as AI is a major driver behind innovation, security, and customer communication.
An obvious place to start is chatbots, which have become a central feature of almost every online banking service. Chatbots are powered by AI and help triage customers by either dealing with their basic query or sending them elsewhere for specialist help. While not unique to fintech, chatbots are used by incumbent banks and startups alike to ease pressure on human advisors.
But AI can also be used for fraud detection, behavior analysis, personalized banking services, and much more. Mint, the personal finance app, recently integrated AI to predict when customers would use cards and inform its Mintsights service.
Blockchain
Another buzzword in the disruptive technology space is blockchain, a concept intimately tied to fintech. While not invented specifically for cryptocurrency, it rose to prominence as the basis for bitcoin in the late 2000s. However, its applications in fintech go far beyond cryptocurrency.
The reason for this is one of its founding principles: immutability. A transactional ledger is shared across all devices in the blockchain network, meaning it can’t be altered from a single location. It has infinite possibilities in the financial space for things as simple as P2P transactions to more complicated concepts like smart contracts.
Companies like Circle Pay use blockchain infrastructure as the basis for their P2P payment networks. It obviously forms the basis of cryptocurrency payment and investment platforms, too, but when combined with other Web3 technologies, such as IPFS, could potentially revolutionize every aspect of finance.
Payment Providers
Again, payment providers aren’t unique to disruptive fintech companies. However, the way fintech companies provide payment services is what separates them from existing methods.
A great example of this is Stripe, one of the better-known fintech payment providers. Its business model isn’t revolutionary: it’s a payment platform. What sets it apart from traditional options is that it’s focused primarily on online business. It facilitates faster, more accessible payments in more than 100 currencies and offers customers APIs and dashboards.
The main benefit for online businesses is that they get security and convenience, as they don’t have to handle any aspect of the payment process. They simply embed the service in their site and let Stripe (or another provider) handle the payment process. Also, payment providers accept multiple methods, allowing businesses to increase their sales reach.
BNPL
Within payment providers, we have the buy now, pay later (BNPL) companies. At their core, BNPLs offer credit, but in a more accessible and streamlined way than traditional credit cards.
First, they only offer credit on a per-transaction basis rather than a long-term credit agreement. It means customers don’t need to worry about managing debts past a single transaction. Also, they only perform a soft credit check, which not only makes it easier to get the credit, it also doesn’t affect the user’s score.
You’ll probably recognize some of the bigger names in this space. Affirm is among the leaders, and Klarna is probably the leader in the industry, and has seen major growth since it entered the US market. Then there’s Zilch, the fastest unicorn out of Europe ever, and soon to enter the US market. BNPLs offer different payment processes, but the core concept remains the same: pay a portion upfront and split the rest of a set period.
Regulatory Developments
Recent regulatory developments aren’t in spite of fintech companies, but more because of them. Payment Services Directive Two (PSD2) is a prime example; an EU law that came into force in 2016. It relates to increased security for electronic payment services and adapting to new technologies. In short, banks had to provide better authentication processes for their customers and allow third-party services to use customers’ bank accounts.
As you can see, PSD2 was arguably aimed at traditional banks, forcing them to accept the fintech revolution. After all, what are most of these fintech companies if not “third parties” entering the banking space? Companies like Mint or Klarna would hardly be impacted by the integration of disruptive technology, as this is what they’re built on.
Is This the End of Traditional Banks?
In short, probably not if they embrace new technologies. Traditional incumbent banks, at least for now, will remain a staple feature in how we handle money. They still have too much security and financial power to be overthrown anytime soon. However, disruptive fintech companies are threatening established banking practices. The fact that venture capital firms, such as Ramphastos Investments, invest so heavily in them, and that their growth is so strong, is telling for challenge they are facing.
