Natalie Monko Lead Project Manager

    How Fintech Will Change Banking: Main Trends And Steps Towards Industry Transformation

    We are witnessing huge changes in the global financial technology sector: brick-and-mortar banks are now becoming less popular and give way to booming fintech solutions. This trend has been reinforced by the 2020 pandemic: fintech has become a buzzword in the modern financial world. It is changing the very way we manage our funds. According to the Business Research Company’s report, the global Fintech market reached a value of nearly $111.2 billion in 2019, having grown at a compound annual growth rate (CAGR) of 7.9% since 2015, and is expected to grow to nearly $158 billion by 2023. 

    So, obviously, fintechs are the emerging force leading in setting the rules on the market. But what exactly are financial services technologies and in which ways they are transforming traditional banking? Surf has extensive expertise in working with both fintech firms and traditional banks, so in this article, we will analyze the way these two players of the global financial market co-exist and affect each other. 

    What is fintech? 

    The term fintech dates back to the 1950s when the first credit card was invented and has been largely transforming over the years. In the early 2000s, it was used to refer to the technology employed at the back-end systems of established financial institutions. ​Since then, there has been a shift to more consumer-oriented services and therefore a more consumer-oriented definition. 

    While answering the question of what is fintech, it’s important to remember that the central goal of such technologies is to improve and automate the delivery and use of financial services. Fintech gives companies, business owners and consumers a chance to better manage their funds by using specialized software and algorithms on computers and smartphones. 

    Innovative financial services offered by fintech actors can be divided into several categories: 

    • Payment systems, which provide people with the opportunity to send and receive payments (PayPal, Apple Pay, Google Pay and so on).
    • Digital banking solutions that ensure better daily money management (for example, Ally, American Express, Barclays)
    • Insurtech products that help customers to insure themselves and their property in an easier and faster way (Flock, Relay, Halos). 
    • Fintech lending solutions, which offer smart schemes to lenders and clients (HES Fintech).
    • Investment software and Robo-advisors to help clients invest their money in anything they want, from stocks and shares to cryptocurrency. Robo-advisors advise clients using the latest in AI technology (Robinhood, Betterment). 
    • Blockchain and cryptocurrency that offer customers a new way to do finance (Bitcoin, Ethereum, Litecoin).
    • Crowdfunding to aid fundraisers in gathering donations for a charitable or personal cause (Patreon, Kickstarter, GoFundMe).

    The main concept behind any fintech project is to create more value for end-users by providing innovative services. In this context, fintech is disrupting the financial technology sector, as it tends to unbundle offerings of financial service companies and create new markets for them, thus spreading financial inclusion and cutting down on operational costs. Fintech companies usually offer such services in the form of apps, business processes, models or separate products. 

    Fintech focus parameters
    • Why is fintech on the rise? 

    The rise of the financial technology sector is largely determined by weaknesses of traditional banking that have become increasingly evident in recent years. Below are the main issues of traditional banks that impede their ability to compete with fintech firms: 

    • Traditional banks are strictly regulated and bound to multiple compliance rules.
    • Traditional banking implies high operating costs covering maintenance of brick-and-mortar branches. 
    • It’s difficult to go beyond traditional business lines, as banks are often publicly held institutions that tend to avoid the risks related to using disrupting technologies or launching new divisions.
    • Low engagement of customers in bank’s operations.
    • Low investment in projects related to innovations and technology.
    • Low focus on individual profit-making products.
    • Difficulties in changes or replacing odious traditional banking. infrastructure that had been built for years. 

    At the same time, financial services technology is revolutionizing target niches that had always been in the hands of traditional banks: lending and payments

    • When it comes to lending, fintech firms entered this niche allowing borrowing money online to both individuals and small businesses, thus creating a win-win situation for all participants of the lending process. Fintech also popularized the peer-to-peer model of lending that allows connecting borrowers to lenders and vice versa in real time. So fintech lending makes the process of borrowing money easier and faster. 
    • Payments have been the most disrupted line of business for traditional banks due to the availability of advanced mobile gadgets, easy access to various data networks, multiple innovative products and apps introduced by fintech. These products facilitate the direct interaction between user and merchant vendor and allow cutting costs for a better customer experience. 

    Overall, fintech made payments more secure and omnichannel: users can easily make a transaction by just pushing a button on their smartphone or do it in a contactless manner. This advantage proved to be especially important with the start of the pandemic: mobile payments have disrupted the whole payments industry and become the hottest sector in fintech. 

    So, how is fintech changing banking? 

    It would be wrong to say that fintech is displacing traditional banks from the arena and will fully replace them soon. In the global financial market, there is rather a situation, when fintech adds value to banks, transforming the whole banking industry, making it more progressive and competitive. Here are several ways in which fintech technologies are changing banking as we know it: 

    • Digitalization

    One big way the financial technology sector is changing the banking system is by going fully digital and abandoning the brick-and-mortar concept. Modern banking fintech solutions can provide a variety of services – from transferring money between accounts to chatbots with investment tips and loan calculators – just in one app. Users can even apply for a loan or credit card without visiting a bank branch (Surf has recently developed the app for a top-15 European bank with such an option included). 

    On the one hand, the rise of digital banking services allows banks to save a lot of money by shifting from the brick-and-mortar model for good. On the other hand, digitalization makes the issue of cybersecurity more pressing than ever. 

    • Smaller fee policies. 

    Another way of how fintech is changing banking is about transaction fees. Banks faced the need to reconsider the base of their business model, which depends heavily on charging customers large fees for domestic and international payments. With the rise of fintech, consumers got the opportunities to make it cheaper and they’re already turning to them.

    • Convenience and better user experience. 

    Fintech solutions offer users greater variability and opportunities to choose the most suitable product, thanks to the wide usage of artificial intelligence and machine learning. Customers no longer need face-to-face consultation from a bank employee when they choose the type of mortgage, for example – everything they need is to go through a little test in the app, spending about 1 or 2 minutes of their time. 

    In addition, many banks still require that customers visit a branch for identification and verification purposes. With fintech, it could be easily dealt with by the use of facial recognition technology on a smartphone. 

    • Blockchain technologies

    Blockchain technology is the most trending financial tech tool now. Blockchain provides the opportunity to make instant transfers of money and other financial assets. No fees, no third parties, no minimum value of the transaction – just instant transfer of funds. Bitcoin can do the same transfer in minutes and some other blockchain platforms can do these kinds of transfers in seconds. Banks have started to use this technology in their mobile banking apps to provide their customers with the ability to quickly transfer financial value at any time they want. 

    • Small business lending 

    Traditional banks and fintech firms are often partnering in this area: fintech can quickly fund small business loans, while banks are reluctant to take risks that this market represents. As a result, a partnership appears, when banks send risky borrowers to fintech companies. 

    • Open banking

    The open banking concept lowers entry barriers for financial services providers and enhances the potential for innovation by mandating traditional financial institutions to share financial data through APIs (Application Programming Interface). The extent of sharing differs across countries, but there is a huge potential for new collaborations and financial service technology products made with the use of open API. Sharing APIs paves the way for more personalized and contextual products on the market: many incumbent financial services providers are building new financial tech tools independently and in collaboration with fintech providers.

    • Embedded banking

    The wide use of data and applied analytics facilitated the embedding of banking services such as payments, deposits, and lending within non-financial solutions. This is a huge step in terms of improving user experience – users and small businesses don’t longer need to go to a specialized financial institution to meet their financial needs and waste time on additional arrangements.

    Bottom line 

    For a long time, banks enjoyed a monopoly in managing the finances of businesses and individuals due to their unwavering reputation and size. The rise of fintech has violated this status quo and led to the appearance of new competitors in the financial services market. Users of financial services can now choose banks or fintech providers depending on their needs and goals. 

    At the same time, fintechs have created an additional stimulus for traditional banks to change and stay current with new technologies such as blockchain, cryptocurrencies, and artificial intelligence. Obviously, future growth and development of the banking industry is not possible without the integration of fintech technologies in traditional business lines and mutually beneficial partnerships between banks and fintechs. 

    If you are planning to launch your fintech product and looking for a reliable partner in developing a user-friendly and secure app, Surf team is ready to do its best in making an efficient ready-to-go product from scratch. Fill in the form and we will return shortly with estimations regarding your project.