Can Banks Survive Against Fintech Startups?
Banking, which emerged in the 14th century Renaissance in Italy, conjures up an image of conventionality and reliability. Conversely, startups, which emerged around the globe at the turn of the millennium, are associated with dynamism and out–of–the–box thinking.
Fintech startups, the ones which have been revolutionising the field of finance by introducing the wonders of technology, are being thought of as having the potential to give banks a run for their money.
Let’s walk through the merits and drawbacks of both traditional banking and fintech startups to have a better idea of the future of finance.
STRENGTHS OF BANKS
Banks undisputedly have the upper hand when it comes to infrastructure worth billions of dollars and the trustworthiness that is priceless. Banking activities can be primarily divided into the following major types – Retail banking, Business banking, Corporate banking, Private banking and Investment banking.
Retail banking involves dealing directly with individuals and small businesses while Business banking and Corporate banking are dedicated towards mid-level and large corporations respectively. Private banking caters to providing wealth management services to high net-worth individuals and families. Investment banking chiefly deals with raising financial capital for corporations, facilitating mergers & acquisitions and market making (for derivative securities).
STRENGTHS OF FINTECHS
Fintech startups are not trapped in the conventional ways of working and redtapism.
They have the creative vision, the relentless drive, the technological backing and the audacity to follow it through. These startups have grabbed the attention of numerous venture capitalists who have invested heavily since 2010, to the tune of billions of dollars year on year.
2018 saw around 128 bn$ invested into Fintech globally, which is projected to be around 310 bn$ by 2022.
HOW ARE FINTECHS CHALLENGING BANKS?
Fintech startups are attempting to challenge banks by creating cutting edge digital services and products that threaten the existing financial services. Some fintech start-ups pose a direct threat by capitalizing on weaknesses and gaps left by established companies.
The domain that can be majorly affected is that of peer – to – peer payments which is a part of retail banking. A plethora of startups offer instant transfer of funds at nominal fees and from the comfort of smartphone screens. Some even offer global remittance services. This is something that is definitely worrisome for retail banks.
Startups mainly focus on gathering and analyzing data and providing services at an individual level. This makes Business banking and Corporate banking relatively immune to the fintech threat. However, fintech startups use sophisticated analysis and prediction tools which make them ideal for individuals investing in capital and derivative markets.
Another field in which a number of fintech startups are flourishing is that of broking of luxury goods and crowdfunded lending. An innovative European startup analyses the investors’ investing patterns and payoffs and provides relevant feedback and advice. This makes them appealing to the small investors who welcome the help but are unwilling to receive the same from banks for a hefty fee. Another field in which fintech startups are diversifying is that of convenient currency exchange for travelers.
WHERE FINTECHS FACE CHALLENGES?
The humongous scale at which institutional banks operate is beyond the reach of fintech startups, at least in the foreseeable future. Fintech startups cannot exist without banks. Since the vast majority of consumers use banks to store their money, almost all services currently offered by fintech companies rely on financial information about users that only the banks are privy to. Should the banks decide to leverage their competitive advantage (access to consumers’ financial information) against fintech startups, it could mean big trouble for these new companies, which lack the resources or brand recognition to seriously compete without this information.
Both banks and fintech startups have their own merits, but banks are better off in terms of an established network and consumer base that cannot be so easily lured away by startups. However, banks do need to consolidate their position by reviewing and upgrading their technologies. The banking services that are directly challenged by fintech startups may need to cut their fees and become more consumer friendly if they have to stay on top of the game.
WAY FORWARD AS COLLABORATION?
The fierce competitive rivalry that existed between banks and startups initially is gradually being replaced by the ideas of cooperation and mentorship. Major Indian banks like ICICI bank and Kotak Mahindra bank have taken a few fintech startups under their wing and are working in tandem. Same is the story with a majority of European and US banks.
Banks are keen on joining hands with startups as it provides them with a fresh perspective, innovative business models, process efficiency and revenue opportunities. This way startups too get the much needed financial backing and are able to retain their identity and autonomy. The way forward is cooperation rather than competition and the entire finance industry is reaping the benefits of this collaboration !
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