The Fintech revolution: Divide and conquer!

16 November 2016

During the past several years, digitalization has gradually transformed numerous industries, like retail or transportation. Another revolution is under way – now in the banking sector. We are moving to a new financial environment where big name banks will no longer have a monopoly on the provision of banking services but rather where a lot of smaller businesses will flood the market. From payment processing to fund lending, from money transfers to wealth management, a new breed of Fintech startups is penetrating into at all spheres of the established banking industry to offer a faster and more convenient customer experience.

Narrow banking: shift to microservices

What would you do if you needed to take a loan several years ago? Or to make a money transfer? Or to open an account? The answer was obvious: you needed to go to a local bank branch and talk to a manager. Nowadays, Fintech platforms promote another trend: “narrow banking”, or fragmentation. Instead of going to a bank that manages all financial needs, you can find a company focusing on a particular kind of financial services, like issuing payment cards.

Fintech revolution

New technological advancements transform the nature of all banking services offered to customers, especially in such areas as lending and payment processing. Nowadays, these two markets are crowded with numerous tech-savvy service providers having a more customized approach to customers’ financial needs. Compare this situation with the brewery industry: instead of having only large, mass-market breweries, you can take advantage of independently owned craft beer breweries offering different creative blends.

Ten years ago, if you wanted to get a personal or business loan, there was quite a limited number of options. You needed to go to a bank, provide tons of personal and financial information and wait several days for a decision. The promising collaboration of IT specialists from Silicon Valley with financial magnates from Wall Street is reshaping the existing bank-customer relationships. Now you can just go to Lending Club, Zopa, Prosper Marketplace or any other lending website and calculate online which loan you can qualify for, fill in an application and get a reply in several hours or even minutes.

As for payment processing, merchants can take advantage of dozens of reliable and cost-efficient non-bank payment platforms which integrate seamlessly into checkout pages and allow visitors to make a purchase without leaving the site. Such companies as Stripe, Square, Braintree, Authorize.net, BlueSnap help merchants accept not only bank transfers and credit/debit cards, but also other forms of electronic payment – Visa Checkout, Apple Pay, Android Pay, PayPal, MasterPass, Skrill, Webmoney, and many others.

The advantages of banking fragmentation

Fintech firms offering online banking services typically operate at a lower cost than traditional brick-and-mortar financial institutions. For example, TransferWise takes just 0.5%-2% for sending money abroad, big name banks usually offer less beneficial rates for international money transfers – from 5% to 20%.  Lending Club’s ongoing expenses are about 2% of the amount its borrowers receive, while the analog for traditional lenders is around 6%. This cost-efficient digital business model allows Fintech companies to reduce the cost of doing business and pass the savings on to consumers in the form of better rates and to investors in the form of solid returns.

Another selling point for these smaller financial companies is business transparency – contrary to old-guard banks, they are not afraid to share, talk and listen. For example, mobile-only bank Monzo uses their community forum to discuss product roadmaps, pricing structures and personal team achievements. Thus the financial services market is becoming more user-friendly – some product features appear as a result of online collaboration between Fintech companies and their customers.

banking fragmentation

Plus, don’t forget that online Fintech companies offer 24/7 access and availability. You can make a research and find the most suitable deal from the comfort of your own home – and anytime you want. Funding Circle, an innovative peer-to-peer lending marketplace, reports that they receive 50% of the loan applications outside standard business hours.

Fintech startups vs. banks: friends of foes?

Since the beginning, the Fintech industry has experienced a steady growth – for example, in 2014, Fintech firms globally drew around $12.2 billion, in 2015 – around $19.1 billion. So the question arises: will the new generation of Fintech startups kill off traditional banking institutions? No, the Fintech industry is too young to undermine banks. Just compare the figures: Lending Club, one of the leading P2P lending companies in US, has arranged around $9 billion in loans through its online credit marketplace, while the total amount of credit card debt in America is around $885 billion.

Instead of fighting with the future, banks can gain a lot from technical innovations. Experts say that in 20 years banks will look like giant hubs for financial microservices developed in cooperation with or outsourced to third-party companies. That’s why nowadays much of the investment in Fintech comes from big banking brands. The market leader is Goldman Sachs with its numerous investments in Fintech startups, including such companies as funding payments app Circle, commercial real estate investment firm Cadre, Asian comparison platform CompareAsia, and financial software provider Plaid Technologies.

Silicon Valley is coming! Digitalization favored the appearance of a new wave of forward-thinking entrepreneurs and start-ups looking to reform the existing financial ecosystem and create a more diverse banking landscape. The financial services market is becoming fragmented with a large number of smaller companies having a more tailor-made focus. And the winner will be the customer: banking institutions will have to cut down their costs and improve the quality of their service to survive.

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