Fintech Threatens to Tear Apart the Banking Industry as We Know It

The banking sector is beset with challenges from disruptive FinTech companies. We are now seeing increasing levels of collaboration between FinTech enterprises and big banks. Since FinTech organizations are largely decentralized, they are not subject to the same constraints as regular banks and financial institutions. Thanks to the innovative technology that FinTech brings to the table, conventional banking is dead as we know it.

FinTech has revolutionized the way money is transferred, stored, transported, and processed. FinTech companies utilize sophisticated encryption technology, and banks are now having to play catch-up. To even the playing fields, they are feverishly working with FinTech organizations to create systems for the digital age.

FinTech Evolution: From Back-Office to Front-Office

FinTech has advanced to such a degree that blockchain technology is now the way of the future. This technology is used as a public ledger for all BTC transactions. As new blocks of information are added to the ledger, additional recordings are made available. This is done in a chronological fashion. Now, regulatory authorities are having to create oversight systems and strategies to monitor blockchain technology.

Since FinTech is decentralized, it will naturally be difficult to regulate. Various authorities will be hard-pressed to implement constraints, checks and balances in a peer to peer-based network. The evolution of FinTech is remarkable. What began as a behind the scenes operation is now front and center for clients, offering them direct access to financial markets.

The main areas for FinTech operations are found in:

• Domestic and international money transfers.
• Mobile payments.
• Personal loans – by comparing interest rates.
• Capital acquisition.

One of the most notable changes in international financing comes in the form of crowdfunding. With this option, businesses and individuals can quickly and easily raise money in an unconventional way. There is no need for clients to go through the standard banking channels, replete with all the obstacles to qualify for loans. Cryptocurrency, in the form of Dogecoin, Litecoin and Bitcoin makes it possible to expedite money transfers to eligible clients. It is possible to qualify for financing by quickly gauging a client’s tax returns, personal and/or business bank statements, credit scores and pay slips. While banks may require time to process this type of information, FinTech companies routinely beat them to the punch.

$23 Billion + Investment in FinTech in 2016

Access to credit lines is a particular niche sector that FinTech has cornered and dominated. This is particularly true of small and medium enterprises which need access to lines of credit. While banks have been increasing the amount of loans offered to clients, there are significant barriers to entry and prerequisites that need to be met. The FinTech sector is certainly more lenient, efficient and geared towards servicing market requirements.

Banks find it difficult to conduct pricing on loans, and typically avoid certain types of nontraditional loans. There is talk of rapid growth in SME lending opportunities, valued at over $280 billion with a double-digit annual growth rate for the next several years. This certainly lends credence to fueling the rapidly growing FinTech sector which reported investments of over $23 billion last year.

Dramatic Innovation in Banking

Banks have adopted a mixed response to the disruptive technology presented by FinTech companies. They are not sure how much they should invest in this new technology, and this also hinders the level of integration that banks have with FinTech. Sometimes, banks consult with FinTech organizations, at other times they buy them out and incorporate their services completely.

This speaks volumes about the low integration and high integration strategic approaches adopted by big banks like Bank of America, Wells Fargo & Company, Citibank and Morgan Stanley. What is clear is that banks are reluctant to go it alone and develop their own FinTech systems. Banks are also fully liable for the activities of FinTech companies that they partner with, making them reluctant to sign them on. BTC (Bitcoin) remains the most successful decentralized technology yet, and there is no intervention by central banks, regulatory agencies or governments.

The challenge now is what to do about FinTech: regulate it or let it operate free from constraints?