Ten years ago, nobody had really heard of fintech. Today, it is a commonly used word and a popular search term. In fact, searches for “fintech” on Google rose by 1,300% 2015-16. Entrepreneurs are busy starting fintech businesses all over the world. In 2015, around 6,000 fintech startups were launched in the global marketplace. In 2010, $1.9 billion was spent financing fintech activity. By 2016, this figure had shot up to $20 billion.
In total, $49.7 billion was invested in fintech between 2012-16, which indicates just how important fintech is. It is quite clear that fintech is revolutionising the finance world, but what is not so clear is how the impact of fintech will affect the future of financial services.
What is Fintech?
The dictionary definition of fintech is: “computer programs and other technology used to support or enable banking and financial services”. In the beginning, fintech referred to the backend technology used behind the scenes in large financial institutions, for example, the MT4 trading platform and complex databases used to record trades in the world’s stock exchanges.
Today, the term “fintech” has evolved to cover everything from cryptocurrencies, online trading apps, financial advisory websites, digital wallets, and money management tools. Its impact is far-reaching, but whilst many big banks are still running old infrastructure and change is difficult, fintech and the financial services sector are slowing coming together.
Traditional Lenders
Traditional banking institutions have changed very little in the last hundred years. Most offer online banking and mobile apps these days, but behind the scenes, very little has changed. Their backend infrastructure is very difficult to upgrade, but with customers increasingly embracing mobile, personalised, customised and accessible banking solutions, innovative fintech startups are plugging the gaps with aplomb.
Innovative Fintech Entrepreneurs
Fintech innovators are more cost-effective than traditional lenders. Their technology and business models are low cost. A traditional lender may have operating costs of around 7% compared to an online lender whose operating costs are as low as 2%. This is enormously disruptive to traditional financial institutions, particularly as customers are increasingly choosing non-traditional ways to manage their finances.
A staggering 38% of customers no longer visit banks. The rise of online banks has proven that traditional bank branches are not essential. Online lenders such as Atom have become firmly embedded in the banking ecosystem. But it isn’t only in the day-to-day banking sector that traditional financial institutions are being side-lined.
New Partnerships
The big banking institutions are slowly beginning to sit up and take notice. In 2015, banking giant JP Morgan teamed up with Silicon Valley startup, On Deck, in a bid to reach more small businesses. Alternative lenders have the technology in place to let them underwrite smaller loans much faster than a traditional lender. It’s a win-win situation.
Peer to peer lender Zopa recently exceeded $2 billion in loans. In the last twelve years, Zopa has matched 246k borrowers with 75k investors. They are a great example of a fintech led product that offers great value to customers. Their aim is to disrupt the established banks by offering value and transparency – so far, they have succeeded admirably.
Fintech hasn’t only made waves in the personal finance sector. Customers are also choosing to take out insurance policies from online companies and manage their personal finances using apps. The future is bright for fintech, and so far, it’s proving great for customers.
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