When ancient Babylonia and Assyria began using grain as collateral for loans, a significant step forward was taken in the development of banking. If we could visit a time before technological advancements, we would be very shocked by the financial systems of that time. Each day brings fresh possibilities for the creation of cutting-edge banking alternatives to the conventional banking system.
Banking systems today would not be functional without the goods and services offered by the financial technology industry. Despite concerns that fintech would threaten the viability of traditional banking, its benefits are unparalleled. In this essay, we’ll contrast traditional banks with fintech companies to see how they stack up against one another.
What is Fintech?
In this context, “financial” refers to money and “technology” refers to gadgets. It’s a word for the emerging tools that seek to streamline and enhance the provision of monetary services and goods. Fintech refers to the use of software and other technological innovations to make financial and business management simpler for individuals, businesses, and governments. They can use their computer or other devices, like a smartphone or tablet, to gain access to the technology.
The advent of the Internet and subsequent e-commerce enterprises in the late 1990s marked the beginning of fintech. By the turn of the 21st century, financial institutions had implemented the technology into their back-end systems, completely digitizing the banking industry.
Since then, the financial technology industry has moved its emphasis to serve end users. It has found widespread adoption in sectors as diverse as retail banking, investment management, nonprofit and charity fundraising, K-12 education, and personal finance. The rise of virtual currencies like Bitcoin is also an example of fintech innovation.
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What are banks?
The primary function of a conventional bank is to accept deposits from customers and extend credit to businesses and consumers. Some banks additionally provide investment advice, safe deposit lockers, and foreign exchange services in addition to the basics.
Banks come in many forms, including investment banks, retail banks, and those catering to corporations. Furthermore, they are typically controlled by a national government or central bank.
Why is fintech growing?
McKinsey reports that the use of mobile banking channels surged by 20-50% in the first few months of the COVID-19 epidemic, and that this trend is expected to continue long after the pandemic has ended.
According to a second McKinsey survey, customers expect a customizable digital banking experience. Seventy-one percent favor a variety of contact options, and twenty-five percent are interested in a private banking experience that is entirely digital with the option of remote human support. In addition, consumer payment habits are changing.
Financial institutions must incorporate technology into their services if they want to keep up with clients’ demands for increased convenience, responsiveness, and speed. Because of this, they’ll be able to provide the kind of seamless service that modern consumers have grown to demand. If e-commerce behemoths like Amazon can facilitate instantaneous purchases, then opening a bank account shouldn’t necessitate a personal visit.
The services offered by traditional banks fall short of what today’s consumers have come to anticipate, and this is where fintech comes in. The market has expanded significantly.
The differences between traditional Banking and FinTech
Function and Form
What sets FinTech apart is its focus on the customer. Complex monetary processes can be simplified with its help. Change, system replacement, and the incorporation of new ideas are all simplified by advancements in financial technology.
FinTech can differentiate itself and make clients feel at ease by leveraging Big Data, AI, ML, and cloud computing. In addition, these innovations prioritize timeliness, efficiency, individualization, and consistency in their delivery. Because of its ability to simplify and expand access to complex financial processes, it is an excellent choice for the banking industry.
The ability of traditional banking to take advantage of new technology evolves throughout time is constrained by rules and the financial system as a whole. More process-oriented than FinTech, traditional banks have been around longer.
Models of Enterprise
While both traditional banks and FinTech companies serve borrowers, their organizational structures are very different. A typical bank requires you to physically visit the branch in order to open an account or apply for a loan. In contrast, financial technology businesses can be operated entirely online using convenient mobile apps or an Application Programming Interface (API).
Compliance with Regulations
In order to protect the money of its customers, traditional banks must follow all rules and regulations set forth by the government. Banking regulations ensure open communication between banks and their customers.
Consumers of all ages, with the exception of the oldest, favor digital banking instruments, according to a study by the Bank Administration Institute. Customers are beginning to see the convenience of online banking and are increasingly likely to switch.
Possible Dangers
It might appear that traditional banks have an edge over FinTech when it comes to digital security, what with the stringent regulation they face from central banks and the various measures in place to secure customers’ funds.
More lax regulation in the FinTech industry raises the stakes for businesses in the field. People keep using FinTech because it meets their needs and provides a better, cheaper, and more creative user experience.
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Bank and fintech: What relationship?
Providing financial services to consumers is a mission shared by both traditional banks and fintechs. That is to say, traditional banks see fintech firms as formidable rivals. Traditional banks still rely on antiquated and time-consuming methods and means, whereas fintech banks deploy cutting-edge technological solutions. As fintechs continue their momentum in terms of innovation, traditional banks fall more and further behind. That’s why an increasing number of people all across the world are turning to fintechs. The logical conclusion is that fintechs are intruding on the domains of conventional banks, particularly with respect to payment and credit processing. In this space, traditional banks face serious competition from fintechs.
From a different angle, the two leading players in the banking and financial sector share a complementary relationship.
In fact, fintech firms aim to supplement the services provided by conventional banks. Simply put, these are regulatory technologies (regtechs) designed to make it easier for financial institutions to keep tabs on the various rules and regulations that apply to their operations. This is also true of paytechs, which, in the context of a cooperative partnership with the banks, function as supplementary services that permit greater flexibility in meeting the demands of individual customers.
Conclusion
By utilizing cutting-edge technology to meet client expectations, boost customer loyalty, and provide faster customer care, the FinTech industry is disrupting the traditional banking system. The growth of the FinTech industry can be attributed to its many advantages over traditional banking, such as portability, availability, and simplicity. Companies in the financial technology sector combine service specialization with technical expertise to help businesses streamline their complex financial operations. By acting as third-party vendors, FinTechs help businesses outside of the financial sector improve their customers’ experiences.
FinTech companies are leading the charge in reshaping the FinTech ecosystem and its operations through the provision of cutting-edge financial services made possible by progress in information and communications technology.