Fintech, a portmanteau of “financial technology,” has been disrupting the financial services domain for some time. While for the smartphone-savvy, it means a new and exciting world of opportunities, for the established financial services providers such as banks, it is being treated as a disruptor that is challenging them to keep up. Fintech-based companies, usually small to medium start-ups, are bringing a host of financial services on much easier terms than those of the established financial services providers, all at the fingertips of the smartphone-savvy and internet-savvy people. The industry has been going through some ups and downs, but all figures and statistics point to the industry becoming a significant player in our lives. (To learn more, see The Impact of Mobile Banking.)
What Is Fintech?
Fintech is about delivering financial services of different kinds to intended customers leveraging the latest technology, primarily mobile and internet. Fintech companies directly compete with larger financial institutions such as the banks in domains such as money transfer, loan processing and various other services. Fintech is rightly considered as a disruptive force in financial industry.
The mobile device and internet have brought unprecedented convenience to our lives. Now, we are able perform transactions such as transferring payments, checking bank balances and applying for loans just with a few clicks of the mouse. Compare this scenario with the services offered by the traditional and established financial institutions and banks. While the offerings and services by the established financial institutions and banks have been good, the expectations from customers have been changing. The expectation is for faster and better quality of services. And this is where the financial technology companies and start-ups have been scoring big over the traditional financial institutions. While the traditional institutions do realize the challenges posed by fintech, with a behemoth structure, it is not easy to be agile. (Sounds like the big banks may need to adapt. For more on this, see Reboot: How to Adapt to a New Tech Environment.)
Advantages and Disadvantages of Fintech
The main advantages and disadvantages of fintech are discussed below. An interesting aspect of the industry is that advantages for fintech can also turn out to be challenges, depending on the situation.
- Smaller management teams make for a nimbler and more agile organization. Unlike in the case of a big organization, there is no bureaucratic delay in decision making. Decision making and execution can be fast. However, the same advantage can turn out to be a challenge because a smaller team can also mean limited skills and budget, unless funded by a venture capitalist. Skill gaps because of a smaller team base can cause problems in the quality of offerings.
- Limited credit lending experience can be both a boon or a bane for such companies. Smaller setups do not tend to follow the credit lending processes or rules typically followed by bigger financial institutions, and this makes them an attractive option for their client base. However, on the flipside, such companies may lack the experience with rules and regulations. For example, they may have limited knowledge of FCRA-compliant data versus using non-FCRA compliant data when they are trying to assess the creditworthiness of a customer.
- Fintech companies are usually start-ups that are funded by venture capitalists. While the venture capitalists may allow them to operate freely to an extent, these capitalists may also interfere in the business operations and in determining the business model to a large extent. This can curtail the freedom of the founders in a large way. Additionally, the founders of the start-up are likely to face pressure to quickly become profitable.
What Is Fintech's Impact?
Fintech companies have had a disruptive influence on the traditional financial institutions such as banks. Their impact can be gauged in many areas. It has been found that young, high-income consumers of financial products such as loans and credit cards have started taking active interest in the offerings of fintech companies. The main reason for this phenomenon is that such customers are big adopters of technology. It has been revealed in a survey that in big cities, at least 15.5 percent of the young people who have high income have used at least two products from fintech companies in the last six months.
Big banks and financial institutions that may not be as nimble or agile might be forced to work in partnership with fintech companies. According to Clare Burman, who is an associate director at Osborne Clarke, a law firm in the United Kingdom, “We may see banks working in partnership with fintech companies and funding the development of the new products that they will need in order to gain a competitive edge. The involvement of major banks may also reassure consumers who are wary of engaging with less familiar names from the fintech sector.”
Governments and regulatory authorities in various countries are waking up to the reality of fintech companies and adapting their regulatory framework accordingly. In the United Kingdom, for example, the Project Innovate has been created by the government to start initiatives to encourage the fintech start-ups. Clare Burman adds, “Project Innovate has already worked with 175 businesses that are developing new products and services, and the FCA’s proposal to launch a ‘regulatory sandbox’ in spring 2016 is a very welcome extension. However, being such a hot space, and with so many new market entrants all wanting to be first to market with innovative products and services, there is a risk that the regulator may find itself overstretched on occasion.”
The regulatory sandbox aims to provide an atmosphere for enterprises to innovate and provide groundbreaking financial products to consumers. To that end, it accepted applications from 69 firms of varying sizes, products and goals. The application process closed on July 8th, 2016. The testing has already begun and it will be interesting to watch the outcome of this sandbox initiative.
Overall, it can be said that the fintech companies have made the world take notice. It is changing how financial transactions are taking place around the world.
Does This Improve Business?
Whether the arrival of fintech companies improves business will depend on a lot of factors. Now, it might be premature to conclude anything other than simply saying that it has had a disruptive influence on the financial industry. The following factors need to be considered:
- It is clear that the perceptions and expectations about established financial institutions have been changing and there are a number of reasons for that. One, the financial meltdown in 2008 brought to the fore the contentious issue of corporate governance and greed. While people lost a lot of money, honchos at big banks gained a lot. So, people are looking at alternatives that offer transparency.
- Established financial institutions have had a vise-like grip on the entire financial system and have denied people the opportunity to look for better, more transparent alternatives. Fintech start-ups have a huge opportunity to claim the space created by the problems surrounding the big financial institutions. However, they will have to first establish stability, financial solvency and sound business models in order to even reach the position where they can claim to have earned the faith of their target customers.
At the moment, we are watching the fintech companies growing at a scorching pace. However, it will be rather interesting to see whether they can sustain their pace and over time, become stable players. Since most fintech companies are start-ups, they will be backed by venture capitalists. History does not have favorable records on the survival rates of such start-ups. Still, only time will tell how this industry will develop.