Competition Between FinTech Companies and Traditional Banks

Customers have put up with the traditional banks’ lack of technological advancements for a considerable amount of time. However, because of the emergence of fintech companies, traditional banks are finding it difficult to keep up and provide customers with the innovative products and services they seek. The question is, will it be fintech companies competing against traditional banking institutions? Or, is it possible for them to work together to develop the kinds of financial services that today’s customers require?

Statista estimates that the number of fintech companies operating in the EMEA region will nearly triple and venture capital funds throughout the world spent more than $254 billion on around 18,000 new businesses that were developing financial technology.

According to McKinsey, the fintech industry is a significant contributor to the potential expansion of the economy as a whole. Fintech companies have been responsible for the creation of around 134,000 jobs across Europe. During a time when traditional banks in Europe have been decreasing their work forces, fintech companies in Europe have significantly increased the number of employees they are hiring. As of the month of June 2022, the total valuation of Europe’s fintech companies was close to 430 billion euros. This value exceeds the whole market capitalization of Europe’s seven major publicly traded banks as of June 2022.

The data demonstrates that the fintech industry is a rapidly growing sector. A sector that combines traditional financial services with technological advancements to assist individuals and companies in better managing their payments and financing needs. But how long will it continue?

In this piece, we will take a more in-depth look at what exactly “fintech” refers to, the key distinctions between “fintech” and “traditional banks,” as well as the expansion opportunities presented by financial technology.

The Rise of Fintech within Traditional Financial Institutions

How Fintech Differs from Traditional Financial Services Businesses?

The provision of consumer financial services is an activity that is shared by both traditional banks and fintech companies. This activity is referred to as the “register.” In other words, traditional banking institutions view fintech businesses as front-and-centre competitors in their industry. Traditional banks, on the other hand, continue to rely on antiquated practices and methods that are laborious and time-consuming. The primary distinction between the two types of financial institutions is that fintech banks utilize innovative technologies. Traditional banking institutions are falling further and further behind in terms of technical progress and creativity.  Meanwhile fintech companies continue to build momentum in this space. Because of this, customers all over the world are rapidly gravitating towards the use of fintechs. Therefore, the conclusion that can be formed is that fintechs are making inroads into the areas of responsibility that are traditionally held by traditional banks, and this is the case for a wide variety of financial services such as payments or credits. In this context, traditional banks and fintech companies are serious rivals.

The two main players in the banking and financial sector can be seen to have another kind of relationship, namely one of complementarity, when viewed from a different angle. Indeed, the goal of enterprises in the financial technology sector is to become complementary to some tasks carried out by traditional banks. In their most basic form, these are examples of regulatory technologies, often known as regtechs, whose primary objective is to streamline the monitoring of regulatory limits that are imposed on financial operators. This is also the case for paytechs, which, within the context of a collaborative relationship with banks, are designed to provide supplementary services that enable better adaptability to the requirements of individual customers.

How Banks are Competing with Fintech?

Traditional banks are going to have to accept change and the rise of mobile banking. It is necessary if they want to remain competitive with fintech companies. In order to adopt new technology, traditional banks need to rely on their expertise, know-how, client knowledge, and resources. Only then will they be able to keep up with the shifting demands of their customers and remain competitive? They can accomplish this goal in a few different methods.

The Use of Digital Banking

In the next ten years, an increasing number of banks will shut down at least some of their traditional physical branches. Then they will redirect their resources towards enhancing the customer experience by revamping their financial advice services, increasing the level of personalization, and providing additional digital banking options. Customers of digital banking services are able to conduct a variety of banking tasks, including making transactions, online or via mobile application. The expectations of consumers are always shifting, and an increasing number of them are asking for individualized services as well as the most cutting-edge products and services that offer real-time transactions and data. As a result, traditional financial institutions ought to make certain that their technology is current so that their customers may access their accounts in real-time. However, in addition to that, they should make investments in UX (user experience) and develop apps and online account management systems that are simple to use. The beginning is just as crucial as the completion of the process. The goal that banks should strive for is to provide their customers with an experience that goes beyond only offering a service that is efficient and dependable.

More Time and Effort into Artificial Intelligence

The use of AI can assist traditional banks in enhancing the customer experience. They do this by enabling the banks to better anticipate their customers’ requirements and offer individualized solutions. One example of this would be the provision of wealth management services to the entire customer base. Adopting AI can help businesses serve customers more effectively while also allowing them to do it more swiftly. Especially in a time when customers’ demands and expectations are rapidly evolving. The use of AI would also assist in reducing expenses by boosting productivity and making financial services more competitively priced.

The Use of Cloud Systems

Cloud computing has the potential to revolutionize conventional banking by enabling the evolution of existing data systems. By integrating cloud services, conventional financial institutions may more effectively manage a lot of features. For instance, the customer data they process, the speed at which data is processed, and the capabilities of their legacy systems. Businesses will be able to save time and minimize the amount of human data entry they perform. It is because of new features that are being rolled out by companies such as Xero, a global provider of accounting software. These new capabilities, such as bank reconciliation forecasts, make use of machine learning. Traditionally, traditional banks have been hesitant to migrate their operations to the cloud. This is due to worries about data security and regulatory compliance. Traditional banks, however, should consider working with an advisor to establish the most effective way to migrate their systems or apps to the cloud. This will allow traditional banks to be more forward-looking and compete more effectively with fintech companies.

Banks can partner with fintech to build an ecosystem where the size of the pie grows for the banks and third parties. – Mike Henry, Scotiabank

Conclusion

Traditional banking institutions and fintech startups both perform the function of financial intermediaries. Banks still have a long way to go before they can satisfy the requirements of clients nowadays. This still applies even when banks have been in operation for hundreds of years.

Fintech provides users with more advanced technological features and practically all of the same services that traditional banks offer. So, how would you characterize the current state of their relationship? And how do you see it changing in the years to come?

We can’t anticipate that people will entirely abandon banking in favour of fintech all at once. However, if banks and finatech companies are able to work together and cooperate, then both will have a greater impact. If the two can work together, there will be instant benefits for both of the parties involved.

The creativity and nimbleness of fintech are beneficial to the conventional banking industry. They inspire confidence in the field of financial technology. This is because of their decades-long client loyalty, large corporate-size, and well-established network.

Banks are embracing fintech elements nowadays. They are doing this in order to improve their customers’ experiences as a means of meeting the technical needs. As a whole, the financial system is continuously undergoing change. This means that banks must progressively prioritize the allocation of resources towards digital agility. Long-term collaborations that combine fintech’s innovation with banks’ assistance and trust in order to build the sector for the digital future are a circumstance in which both parties can emerge victorious.

Sources: Monei, Finextra

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