Over the last five years, financial technology, better known as fintech has exploded. We have seen a rise in very many fintech startups, many of which have proven a threat to the traditional banking sector. In Europe alone, VC-backed fintech deal rose 124% compare to 2012’s total invested money. Just in 2016, European fintech companies raised $1.2B among 179 deals in total.
More and more, we are seeing people moving away from the traditional finance models to a more peer-to-peer model including crowd funding and contact-less payments. This has not been driven by corporate financial giants but by startups such as Kickstarter and Funding Circle.
There are many changes that occurred when it comes to banking in recent years thanks to startups. However, there is one sector that I think has felt the biggest change: loans. The traditional model for giving loans by banks and other financial institutions involved offering loans to borrowers at a higher rate than that offered to savers, thus making a killing off it. Banks were thriving with this model. Then came these startups that were offering a different model peer-to-peer loans.
This meant that you could, through online applications, receive a loan at a much better rate than what the banks were offering. Not only that, while it would take you weeks, to get a bank to approve your loan request after they have thoroughly vetted you, now, these startups are offering you loans in less than 24 hours.
How do these startups do this, you ask? Well, the answer is simple: Data. Using data mining techniques, these companies can easily pull data about you from the internet to get a better understanding of your finances. From your eBay sales and ratings to your Facebook data. This was virtually impossible to do 10 years ago.
What does this mean for banks?
Banks have started to recognize the amount of talent these startups have, and short of hiring them to lead departments in the bank, some of them have started adopting fintech services.
With all this in mind, fintech companies are not about to completely eradicate traditional banks. This is an uphill climb with a lot of traction to overcome at the start. No Fintech product feels as safe as a current account at a bank. Some banks will also gain from the rise of these companies, for example, Square makes it easier for small businesses to receive card payments, thus boosting the bank’s transaction volumes.
However, the Fintech disrupters will change and reshape the finance industry in many ways. Here are three of them:
- They will cut costs and improve the quality of financial services offered – fintech startups do not have the same regulations, restrictions, and legacy IT systems that banks face. Nor do they have the need to protect the existing business. While banks tend to operate within a specified period of time during the day, these startups function virtually all day every day.
- They have the advantage of so much online data available to assess risk – They can evaluate your business through social media pages, checking your ratings and getting a general sense of how viable your company is. For banks, risk assessment takes a long time and sometimes, they do not have enough information to go on. Fintech startups can, however, trace your digital presence using data mining techniques
- Fintech companies will create a more diverse and stable credit base. Banks tend to take in short-term liabilities such as deposits to turn into long-term assets like mortgages. Fintech companies, however, match savers and borrowers directly.
In conclusion, although banks have experienced some unsettling by Fintech companies, both can benefit from each other. One thing that Fintech companies definitely do not have yet, it the large client-base of banks. 42% of financial institution surveyed in Fintech Disruptors 2017 Report, want to explore potential partnerships with fintech startups.
A side note: Within the same report, we can find that 42% of surveyed banks, wants to set up a fintech incubator which honestly for me is quite a high number. Perhaps it is not really surprising data since there are so many corporates who are looking into an incubator model. My worry lies in how much bigger the incubator/accelerator market actually can be and how strong is the market need aka startups needs for such support. Will be interesting to see how “startup programs” for VC-backed and growing startups will develop over the next years.
This blog post originally appeared on LinkedIn.