How will fintechs build their advantage over traditional banks in the coming years?
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In recent years, fintech services have become an extremely important branch of software development used in the financial industry. The combination of new technologies and banking, payments and more specific financial-related services means that customers can use extremely sophisticated, innovative and more accessible tools that are now becoming new trends. It’s worth saying more about why fintech solutions are now so popular and how they are changing our world!
Fintechs speak directly about the merging of the financial world and technology. The emergence of innovations in this area is a direct result of the high level of development of the software industry, modern connectivity technologies, as well as very strong security features so much needed in all financial solutions. So it’s not surprising that more products are appearing all the time, either becoming new standards or being adapted by banking institutions, which are increasingly implementing what was previously associated mainly with fintech startups.
One of the more popular fintechs is Revolut – a forerunner of a new approach in the field of financial products. Among other things, it was the first in the market to introduce very fast, simple and at the same time cheap currency conversions. In its time, this was a revolutionary approach: many people who love to travel previously had problems with currency conversions. Vacation trips ended with them either having to buy currencies at exchange rates or accepting high fees from banks, which in addition made money on the differences in the price of currencies. Even if we managed to buy currencies at a good price, there was still the problem of having to carry cash with us. The possibility of losing money and the resulting lack of convenience as well were things that were absolutely the point of Revolut’s business strategy – this one solved the above inconveniences perfectly and quickly won the huge favor of many users from all over the world. Revolut started out as a financial institution that was not a bank: it then received certification from successive financial market regulators, until it finally became a bank itself as well – thus obtaining the necessary guarantees of the kind that are the norm for classic companies handling our finances.
Today Revolut offers a very wide range of financial services – with a single application it is possible to buy travel or life insurance, purchase cryptocurrencies, and even…. take a loan or use deferred payments. Revolut’s customers can also count on instant cashback in some stores and special discount codes. All this makes it an extremely popular service among users who are more “technologically aware”: making many online transactions, shopping online and frequent trips abroad are just some of Revolut’s uses and elements of its advantage over market rivals. A slightly different path has been taken by the Polish fintech ZEN.com: this one focuses on the maximum simplicity of the application and such points of its offer as, among others, an additional warranty period for electronics, as well as a very high quality of customer service. It is a much smaller fintech than Revolut, but still worthy of attention.
Fintech or bank? The boundaries are often blurred
At the beginning of the “fintech revolution,” there was a very clear separation between fintechs and typical banking products. Today, however, this boundary is very fluid. Previously, fintechs were very much associated with innovative products in the financial industry that operate in a technological environment. Today, it is often the case that many of the solutions previously associated mainly with fintechs are adapting to banks. This is completely understandable – banks continue to enjoy great public trust as institutions: they are directly associated with safety and security. Many people who choose between a fintech and a bank believe that the latter is more secure due to the aforementioned guarantees. However, the existence of fintech institutions on the market is already being regulated – to ensure the highest possible level of security for everyone.
It is also important to remember that fintechs very often become the property of banks, or some solutions are adapted from fintechs to banks. In fact, it can be considered that many of today’s banks either operate strongly in the fintech circle, or they themselves function like fintechs subject to specific laws or offering specific guarantees, if only due to the curatorship of the guarantee fund. All this makes the availability of modern financial products huge: many customers can afford truly innovative products from the fintech circle and use them as they wish. Proximity payment technologies, facial scan payments, use of modern forms of authentication or secure code payments (such as BLIK in Poland – used by a multitude of banking institutions, created by the company “Polish Payment Standard”.
The development of fintechs is a huge opportunity for the financial services sector
New technologies in fintech software development allow to reduce costs, stand out in the market, increase the chances of customer retention and increase income. Not surprisingly, they are competing more and more boldly with banks in an increasing number of services. First it was money lending. It was technology companies that paved the way for online lending. Innovations in scoring and risk assessment made it possible to borrow money instantly over the Internet. This was followed by fast online and mobile payments, real-time exchange rate tracking, online currency exchange and so on.
Fintechs, however, have not said the last word and are increasingly boldly trying to become an alternative in products that traditionally belonged to banks. An example is the free charge card introduced by one of them, which works like a classic credit card. Soon there may be more such solutions previously characteristic of banks, but taken over by fintechs. Until recently, banks were providers of all kinds of financial services: from credit cards to mortgages to investment advice. Now their authority is under threat. Even the volume of deposits, which are reserved for entities with a banking license and are subject to lending, is melting away. First, banks have suffered because interchange fees have fallen worldwide through financial applications. Second, the latter can leverage their market position to create silos that facilitate various activities on the platform. Third, the number and value of loans made by banks, their main source of earnings, has declined. And fourth, banks lost confidence in 2008. In order to survive, they will have to evolve by collaborating with fintechs, sometimes even absorbing them, and certainly taking over the technological spirit from them.
Banks have traditional ways of assessing creditworthiness, such as credit history or current assets. They often require collateral, such as a house or car, minimizing the need to monitor the individual borrower. Meanwhile, apps like Ant, Grab and Tencent, using data drawn from payment transactions, can determine a borrower’s creditworthiness. In the case of financial platforms, it is intelligent cross-checking of data that replaces physical collateral. The information that payment platforms collect on users through open banking is so extensive that lenders can better assess the creditworthiness of borrowers than they can themselves.
Who uses the services of fintechs?
Market research shows that the main service recipients of virtual banks are young people, for whom virtual money circulation is nothing foreign, and therefore are not afraid to entrust their funds to an institution that functions exclusively online. Due to the fact that the main recipients of neobanks’ services are young people, the greatest demand is for simple banking products such as bank accounts or the ability to exchange currency at favorable rates. Neobanks, in meeting their customers’ needs, mainly offer simple banking products, which is why, as of today, they may not be considered viable competition by traditional banks.
The digitization of services makes the cost of maintaining a neobank lower than banks operating in the traditional way. Compared to the latter, digital banks have an advantage due to lower infrastructure costs, which is obvious given the lack of fixed branches. This also entails hiring fewer employees which in turn improves the ratio of customers per employee. In addition, due to the lack of the need to visit a branch, it becomes faster and simpler for neobanks to acquire new customers because all formalities are completed online.
More and more digital banks are using the subscription model
The idea of subscription means that all fees that traditional banks charge on a daily basis – whether in the form of account fees, foreign transfers or withdrawals from certain ATMs – are replaced by one fixed monthly fee. Apart from the subscription fee, the customer does not incur any additional costs resulting from the activities performed with the bank. Thus, for the first time in the history of banking, we are dealing with a membership (subscription) model, instead of the traditional model based on maximizing profits from each customer by charging small fees on banking activities performed.
Most potential customers may approach a bank that does not have stationary branches, while access to its functions is only possible through a computer or smartphone, with some uncertainty. That’s why it’s worth knowing that any bank operating in the European Union, or a virtual bank operating under the license of a traditional bank, is covered by a deposit guarantee of up to €100,000 and is subject to the supervision and control of the European Central Bank.
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