Some people believe that traditional banking and fintech are mutually exclusive but it is much more likely that they can be mutually beneficial. First though, let’s take a look at how things started before we gaze into our crystal ball to try and predict what may happen in the future.
We’ve all been banking electronically for some time. Whereas once we may have gone into a branch to do transactions with a teller, we now conduct our own affairs with a tablet or smartphone. Paying bills, moving money between accounts and even ordering online can be done quite easily. And, if you’re in the Netherlands you will no doubt have used iDeal for online transactions.
In terms of fintech development, iDeal was actually a little ahead of the curve on account of the fact that fintech development didn’t really take off until 2008. It’s probably not a coincidence that the rise in fintech coincided with the global financial crisis. Necessity is after all, the mother of invention. At that time, the banks were on their knees, having to pay fines, restructure how they approved loans and close down branches and services just to stay in business. It was a genuine concern and if Lehman Brothers were anything to go by, it became true that no one was too big to fail. Many more less famous institutions vanished without trace.
Investment is a great indicator of an idea’s viability or potential for success and in these early days of 2008, investment in fintech was worth $100 million. Not much by today’s standards I know but in just eight short years that figure had risen to $17.4 billion. I will leave it up to you to draw your own conclusions on whether this had anything to do with the banks beginning to recover from the financial crash in mid 2016.
With the evolution of fintech, banks knew they had a serious challenger on their hands and had to up their online game in response. They developed apps and increased the number of services that that could be accessed over the web, but they were always going to be playing catch up. Consumers wanted access to more freedom and more agile solutions rather than being tethered to the traditional methods of banks. The success of PayPal, Google Wallet and Apple Pay are all testament to this.
History of trust
The one thing that banks have on their side is a history of trust. They are old, established institutions that project strength as an asset. The thing is though that in this climate that strength had better be able to adapt fast because fintech is not going away. Not only is it not going away but the services it is now offering are expanding into territories that were once exclusively controlled by banks. For instance, there are insurance comparison sites, insurance rate calculators, crowdfunding platforms, investment management solutions and online investment advice. It doesn’t stop there as there are short term loan alternatives and financial planning services too.
So what are the banks to do in the face of such unprecedented competition? One sensible solution would be for banks to embrace fintech and bring it into the fold, perhaps even becoming investors themselves. Ultimately of course, it will be the customer who provides the direction of change. As the beneficiaries of these services, they will choose whatever is most convenient for them. So, if a bank can’t compete with an app that offers currency exchange with very low commission then the banks will need to look at what services they are offering and how they can better serve the consumer. Flexibility will also be a factor as will dispute resolution. The banks have their own guidelines and processes for dispute resolution while some apps may not have such high codes of conduct.
The success of certain apps does show that the population as a whole is prepared to turn its collective back on the way that banking used to be done and how the banks respond will be key. Don’t forget that banks would turn away someone with a bad credit history, while apps don’t discriminate in the same way. Apps act in the here and now, not the then and there.
Whether banks and fintech compete or collaborate, it’s a win–win for the consumer in terms of choice, flexibility and the ability to use whatever is the right solution at any given moment. Banks are not going to disappear and neither is fintech and that’s good for everyone.