Bank services have provided financial services for ages, with the evolution of Fintech more technological innovations have disrupted the financial services industry. Fintech companies have created new banking methods other than traditional banks.
Fintech companies and banks provide consumers with financial services such as bill payments, deposits or withdrawals.
What are Fintechs?
Many individuals now deposit cheques with smartphones, send or receive money through applications, managing investments, applying for credit on a website etc. Fintech is customer-centric harnessing technology to offer a seamless and convenient customer experience including retail banking, education, wealth management.
Financial Technology (FinTech) describes new technology that automates and improves the delivery of financial services using software to manage financial products, processes, operations and service delivery.
What are Banks?
Banks have been used to finance loans, deposit and withdraw money but mostly, the main function of banks is manage risk and cater to a wide range of consumers. There are different types of banks such as commercial banks, retail banks, investment banks etc.
What is the Difference Between Fintechs vs Banks?
There are differences between Fintechs vs Banks ranging from their definition, purpose, potential coverage, structure, technology, target customers and collateral. They foundational differences include:
Definition: Fintech is a term used to describe new technology that automates and improves the delivery of financial services while banks refer to financial institutions that are licensed to accept deposits from its customers and make loans.
Purpose: Fintech companies focus on making the customer experience seamless through convenience, functionality, personalization and accessibility while banks focus on security and the management of financial risks.
Potential coverage: Due to the use of technological trends and advancements such as smartphones, fintech has a larger market distribution while banks have a limited market distribution.
Are Fintechs Better Than Banks?
There are 4 broad categories in which banks and Fintech (Internet Finance businesses and Blockchain) differentiate. While some factors between either are better; as a whole, neither fintechs nor banks are better than the other.
The four broad categories differentiating services by the Fintechs and banks are:
| Banks | Fintech | |
| Customer experience | Uniform and homogeneous services resulting in poor customer experience | Personalised and engage customer journey resulting in good customer experience |
| Scale and brand | Banks have a broad customer base in place | Incoming Fintech are more specialised and still growing thus newer customer base |
| Efficiency | Complex processes with many intermediate links with low efficiency | Point – to – point transmission and disintermediation thus highly efficient |
| Cost | High costs due to a lot of manual inspection | Automated processes, less intermediate links and in other cases disintermediation thus lower costs |
| Security | Highly centralised data storage thus customer information may not be safe | Relatively safer with use of both centralised and distributed data storage and authentication measures. |
| Funding models | Banks have more stable, lower cost, deposit driven funding models. | Fintech companies have more volatile funding |
Will Fintech Replace Banks?
Since the 2007 Financial crisis and the growth of fintech, many predicted the death of banks. However, banks have utilised technology to generate revenue, manage risk exposure and reduce expenses but not without lowering the barrier of entry into the Financial industry and increasing competition exponentially enough that among the top 10 financial institutions, Fintech banks hold half top 5 rankings.
Currently, technology is a key differentiator in long term success of banks, while big banks won’t close their doors, they are either partnering with or acquiring Fintechs or using technology to boost their operations. Some banks like JPMorgan Chase & Co. and Citigroup Inc. offer their own digital platform. The issue is revenue, since fintech companies offering cheaper, better and faster services are increasingly attracting more market share and revenue than banks depending on the type of financial solution they provide.
Smaller banks are at a closer and distinct competitive advantage with Fintechs in relation to; firstly, regulatory burden as opposed to freer restrictions in Fintech industry whose regulatory landscape is growing slower than the innovation in the industry; secondly, specialisation of services, due to technology fintechs are specialising in services to offer better customer experience. However, smaller banks may not have the resources to harness technology to specialise in areas such as small business lending. Finally, emerging technologies utilised by Fintechs allow them to scale and increase distribution channels while smaller banks may rely on one distribution channel due to threats, mostly technology-related, in other channels.
Will Banks Collaborate with Fintech?
While banks decide on their objectives in regards to market and technology, Fintechs continue to disrupt the industry. These banks are responding in different ways such as increasing spending on in-house technology such as banking applications to enhance customer experience. Others partner with fintech companies such as Goldman Sachs and New York-based Esusu Financial Inc. that enables renters to improve their creditworthiness by reporting their rent payments to credit bureaus.The partnership will enable renters in selected Goldman Sachs properties in America to potentially benefit from rent reporting.
Overall, technology is here to stay and companies willing to thrive long term will utilise technology effectively and efficiently taking subjective approaches to integrating technology into their operations and services. Additionally, Fintech companies need to consider their scaling and branding strategies, harnessing more stable funding models and engagement with regulatory authorities as they serve the financial industry.
Hear What CFTE’s Expert Has To Say
Alexandre Prot, CEO at Qonto and an Expert on CFTE’s Fintech Foundation Specialisation, highlights the contrast between banks and Fintechs discussing both organisational and business approaches in the operation of banks vs Fintechs.
