Why is FinTech Such a Hot Topic?
The FinTech sector deals with technology used in the finance industry to improve services and products through innovative technology. Using technology in banking is not a new concept but recently FinTech has jumped into the headlines as a hot topic.
What is FinTech?
FinTech is defined as computer programs, software or other technology used to enable, support or improve finance and banking services and products. The term is an abbreviation of Financial Technology and can be used to describe a wide range of applications. It is only in the last decade that FinTech has become mainstream and technology in finance is now so common it can be hard to determine when a tech company becomes a “FinTech company.” FinTech describes payment service providers like PayPal, Valyuz and others. FinTech startups deal with payment infrastructure, cryptocurrency, alternative lending marketplaces, blockchain, money transfers, credit tech, cybersecurity, finance app software and many more areas.
Why now, why is FinTech only now a hot topic when it has been around for over a decade?
The financial crisis of 2008 left the financial industry devastated. Banks had to economize with lending, interest rates plummeted, fewer account holders were interested in saving and transferring funds became even slower and more expensive. However, banks retained their monopoly in the world of finance because there simply were no alternatives.
Financial Alternatives Were Born of Necessity
Things began to change as people sought new ways to manage their money. Technology exploded in many different sectors and people increasingly became reliant on their Smartphones for day-to-day tasks. We became dependent on devices, expecting information to be at our fingertips at all times. This shift in our behavior and way of life was recognized by many industries including finance. Financial startups were born, offering a much-needed alternative to traditional banks that didn’t seem to be able to keep up with the ever-changing technology.
The crash of 2008 also resulted in regulations being tightened and as innovations in the finance industry immerged regulations were adapted to keep up with the changes. Two examples of regulations that immerged as a result of the changing face of finance are the Open Banking Initiative and PSD2. This opened up the financial market to new challengers. All of these factors worked together to create the perfect environment for FinTech to flourish.
The Importance of FinTech
- Small businesses can compete on a bigger stage with the support of FinTech.
- FinTech can provide companies with everything they can’t get from financial service providers.
- Most FinTech companies are ahead of traditional banks in terms of remote banking, mobile connectivity, customer experience, streamlined processes, convenience and efficiency.
- FinTech solutions are generally cheaper than comparative services offered by conventional banks.
- In many ways FinTech is safer than traditional banks.
- FinTech can process complex processes faster.
- FinTech has increased competition in the financial sector with many new players entering the financial world.
- International transactions can be processed by FinTech companies faster and cheaper than traditional banks.
Digitalization of Banking
With digitalized bank accounts users have easier access to international banking services from FinTech providers and challenger banks at lower rates. This offers a solution to the unbanked and underbanked who previously had a hard time finding a financial services provider.
FinTech and Loans
In the same way that FinTech offers all customers an alternative to traditional banking which is cheaper, faster and more efficient FinTech also offers a lending platform that was previously non-existent. This alternative financing solution comes with better interest rates; lower fees and more flexible repayment options.
Can Fintech Replace Traditional Banks?
FinTech companies still relies heavily on their relationship with banks, mainly as a payment platform or intermediators for transfers. For many FinTech companies establishing a working relationship with a bank as an intermediary is the only way to get a foot in the door of the financial sector. In the future perhaps FinTech companies will replace traditional banks but for the mean time they make a vital addition to the financial service options available to businesses and the general public.