In 2021 the overall worth of the financial services industry was $23,319.52 billion while the fintech activity reached $210 billion. The comparison between these two might seem unrealistic at the outset but bear with us as we unfold the strands of the relationship between banks, fintech services, and the economy. Let us first locate the key differences between a bank and a fintech company.
What Segregates A Bank From A Fintech Company?
Banks and fintech firms differ in many things and they have yet more things in common. But the main point of difference is in the mode of lending. Banks engage in ending directly with the borrower and fintech platforms orchestrate a peer-to-peer lending operation between the borrower and the lender or investor. The mode of lending aside, what segregates banks and fintech companies is the speed of transactions and the involvement of physical steps.
What Does Peer-To-Peer Lending Do For The Market?
Peer-to-peer lending does two very significant things. A) it democratizes credit. Makes credit more accessible, especially to low-income groups. B) Creates serious competition for banks and traditional financial institutes, while also complementing their services in a way by catering to a population that fails to acquire a loan from a banking and financial institute.
Where Else Is Fintech Winning?
Technology is the main strength of the fintech industry. It has done two things with its technological prowess. Firstly, fintech companies have made financial transactions easy and made cashless transactions the norm. There is a sheer lack of demand for cash in the USA. If you add to that the more disruptive ways of transactions like cryptocurrencies, things lean even lower on fintech’s side.
Removing Bias From Lending Services
Fintech companies use machine learning-powered algorithms to analyze credit profiles of individuals to decide how much credit a person should receive, if at all. The process removes loan officers from the middle along with the biases that come with human mediators. This definitely democratizes the whole process.
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How Are The Banks Reacting To It?
Banks and traditional financial services have realized very well that technology is the future of financial services and the big players have started by buying fintech companies to enhance their own technological standing. For instance, JP Morgan Chase bought InstaMed, a healthcare-based fintech company. Fintech companies have pushed banks to integrate technology into their systems. More and more banks are now accessible through mobile apps for branchless banking.
The Downside Of Fintech
The fintech industry is growing fast and speed often comes at the expense of security. Security risks are a real threat for fintech firms and it’s something they need to get under control fast. The usage of cryptocurrency in illegal trade is another matter of concern. 46% of all Bitcoin-based transactions are made on the dark web. Another issue is that the mining of cryptocurrency requires enormous amounts of energy.
The numbers clearly suggest that the fintech industry has a long way to go before it catches up with banks and financial services. Nevertheless, race is one and fintech is pushing the traditional institutes. Maybe in a few years it will be difficult to segregate the traditional and the fintech approach to banking.