The banking industry is experiencing a threat from the ever-growing fintech industry. Whether it’s payment services or lending, fintech is increasing its exposure into the banking sector. The increasing adaptation of mobile devices and innovations in technology have provided the impetus for reshaping the financial markets. The upshot is that technology firms have crept into the banking sector by creating innovative products that compete directly with banking institutions. This encroachment has left banks with a decision on how to approach consumers and whether they should try to catch up to the technology firms before they become obsolete.
Why are Banks Ripe for New Competition?
Banks are subject to heavy regulation, which has made these financial institutions ripe for new competition. The costs for higher compliance professionals to provide the necessary people to handle strict codes have kept costs at banks near the 2% of asset value mark. Despite technological improvements, these costs at financial institutions have remained steady for several decades.
Unfortunately, large financial institutions have not been able to pass on benefits to their customers by lowering transaction fees. Strict regulatory markets have also made it very difficult for new players to enter the banking environment. The upshot is that centralized finance has been a part of developed countries for decades, allowing the banking industry to attain substantial power and avoid competition from new entrants.
Banks provide information and have the relationships to put borrowers and lenders together to generate revenue. Think about your interactions with a bank. You place money in a savings account, lending money to the bank at a specific rate. Your neighbor might borrow from the same bank to purchase a car or a home. Instead of you lending directly to your neighbor, your banks step in and handles the exchange.
The government guarantee that comes with the regulatory environment has made banks a trusted counterpart. This scenario has also allowed banks to attain information. Whether it is a transaction from a corporation or a new regulation, the information received by banks makes them the center of the financial markets.
The payment side of the equation has provided banks with a stronghold. The issuer detects fraud if someone steals money and can quickly determine if there is a breach and someone is about to hack your account. The introduction of big data has allowed technology firms to step in to determine how to process this data quickly. Companies like PayPal and Square have used technology to step in where banks have provided an opening. Both companies started with small businesses and used their innovation to take the place of a banking institution.
Digital Banking is the Root of the Competition
Fintech is making its strides in the digital banking sector. According to JP Morgan Chase CEO Jamie Dimon, fintech companies are making headway in loans, payments and investing. He believes these products are smart and have extended reach to customers that historically have not used banks. Dimon is also concerned that extensive regulation hinders innovation at financial institutions, making them less competitive relative to fintech companies.
Enter the Pandemic
The spread of COVID-19 across the globe has increased the demand for digital banking. According to a 2020 McKinsey survey, fintech companies were catching up to banks regarding the trust they provided to their customers. Younger people who are more familiar with digital technology are more likely to use digital banking applications from fintech companies which accounts for more of the gains fintech is experiencing. The surge in digital banking has also provided fintech companies with an advantage related to the introduction of cryptocurrency.
PayPal allows customers to buy and sell cryptocurrency. The products they offer have an address, and you need to accept the digital asset. This scenario differs from online brokers who provide access to CFD trading. When you engage in CFD trading, you do not need a digital wallet and can use leverage. The acceptance of cryptocurrencies by the mainstream makes fintech companies that offer admission in conjunction with banking products more attractive than banks that do not have tools that allow consumers to combine the two. The regulator environment may change and require fintech to become more regulated, but in the meantime, they can use their advantage to gain access to new customers.
The Bottom Line
The upshot is that fintech companies are making huge strides and are encroaching on the banking industry. Many fintech companies do not have the heavy regulatory environment that is a staple in the banking environment. While banks have benefited for centuries from government trust, they have yet to compete with fintech companies in the small business arena successfully. Additionally, the introduction of cryptocurrency has increased the profile of fintech companies like PayPal, who handle both cryptocurrency trading and banking assistance, but do not provide CFD trading. The combination of both services is likely to raise the profile of fintech companies and make these companies even more competitive with banks.
