Fintech VS Traditional Banks: Advantages and Drawbacks
The emerging technologies do not only change the way we live; they change the way we conduct business as well. One of the industries affected by the new technologies is the banking sector, which saw innovations that we could have only dreamed of a couple of decades ago. The invention of 4G internet and chatbots has, for example, completely changed how we perceive customer interaction and customer experience. That being said, the word FinTech is one of those that denote a completely new and innovative way of banking. Being able to conduct business, transfer funds and buy products with just one button click is, without a doubt, one of the things that made our lives easier. Apart from all that, traditional banks have been embracing Fintech to become digitally savvy. But is FinTech the same as traditional banking? What are the benefits and the drawbacks of each, and should you always opt for one of those?
But first… what is FinTech?
Even though we tried to break down the term FinTech and all it means in a separate article, it won’t do any damage if we just repeat in short what FinTech really is. According to the Merriam Webster dictionary, the combination of the words finance and technology, FinTech, actually refers to any financial technology – most commonly products and companies that employ newly developed digital and online technologies in the banking and financial services industries. FinTech encompasses
- large and well-established financial institutions such as the Bank of America or Wells Fargo;
- big tech companies such as Apple, Facebook or Google (or any other company that is not in the financial industry per se but can be active in financial services);
- companies that provide the infrastructure or technology for facilitating certain financial services (such as MasterCard or First Data);
- and companies focused on innovative technology or processes such as mobile payments, retail banking or insurance.
To put it bluntly, Fintech denotes any financial activity that is conducted online, through technology and technological services. Paying for bills online, purchasing products on e-commerce websites, buying monthly subscriptions to different websites and portals, or transferring funds from one account to another – all of these are examples of Fintech, even though the word can mean so much more.
The differences between Fintech and traditional banking
Fintech and traditional banks differ in many aspects, yet the most significant difference is in their purpose. Traditional banks are institutions that cater to the broader audience, while Fintech services are used by identifying a specific gap in the marketplace. Because of that, such companies focus more on mobile functionality, big data, agility and accessibility, and convenience. In different words, Fintech is all about faster transactions, 24/7 access, and remote account opening, which can be quite beneficial for many. On the other hand, traditional banks fall behind in this department as they are only integrating UX practices that will ensure all their customers have a flawless interaction. Just like the term suggests, Fintech incorporates such technologies that provide quick and safe services instead of traditional banks.
The benefits and drawbacks of Fintech
The most significant advantage of Fintech surely lies in its youth. This industry is relatively new, but apart from that, it is followed by an excellent media buzz. People worldwide love the fact that this is an innovative industry and thus can be closely connected to the brand of the businesses. Apart from that, companies that provide Fintech services cater for a fast and effortless payment system which can be beneficial to many. The rate of approval is faster, which means that these companies can increase accessibility and speed up the rate of approval for finance and insurance. In most cases, everything can be done in 24 hours. Moreover, mobile connectivity has to be perceived as a plus. The service is more personalized and the costs of premium services are lower as they do not undergo costs such as rent for brick and mortar branches, advertising and salaries. Finally, another benefit that has to be mentioned is the advanced security. Contrary to popular belief (which is one reason people are scared of online shopping), Fintech companies are completely secure. They invest in high-tech ways to ensure consumer data is kept safe.
As far as the disadvantages are concerned, the biggest one might be the fact that Fintech uses different providers, so plenty of customers dislike the idea of managing deposits, borrowing and investing through them. This is a popular opinion among the Millennial generation.
The benefits and drawbacks of traditional banks
It is essential to know that traditional banks conduct their financial businesses with an entirely different set of dynamics. Banks are strong players, especially because they have been around for quite some time now, and people are used to them. They have strong relationships that have been lasting for years; some even for decades. Their biggest benefit are their branch offices that people stick to, and which create a professional and tangible relationship with their clients. On top of that all, it’s not rare that traditional banks are also exploring how technology can benefit their business. In general, they are so strong that they have enough capital to invest in their digital transformation. Plenty of banks that used to be rather traditional pushed to see their limits and position themselves in the digital era in a better light.
Recessions have not only affected peoples’ lives in general, but the image of different brands as well. Because of that, banks might find it challenging to repair that trust damage that was created during the last recession. That is why traditional banks are still being perceived in a negative light. But apart from that, banks still struggle with technological innovations that seem to be taking the world by storm. Many of the initiatives still require a client to visit the physical branch or call the bank’s agents, creating frustrations, especially in this ever-developing world. Plenty of consumers expect banks to be moving towards technological innovations at a fast speed; even though they are moving, we all need to understand that certain barriers take time to be overcome. Which brings us to the following question:
Can traditional banks be Fintech?
The answer is yes. Even though Fintech is associated with something new and modern, the use of technology to assist financial services is not new. Credit cards have been introduced in the 1950s, internet banking in the 90s and contactless payment technology during the first decade of the XXI century. The need for technological advancements in the banking sector has made it popular for every bank to turn to more technologically advanced options. It’s a matter of time when they will incorporate everything that they can. Yes, Fintech companies and startups will do that faster, but it’s good to know that traditional banks will operate in a similar way as Fintech companies in several years and decades. One of the reasons this is so is the Financial Crisis of 2008, since when more customers are demanding more from their banks. Even in traditional banks, a customer can always check their balance online and conduct payment transactions from the comfort of their own home.
So, what is better – Fintech or traditional banks? This is a question that is very hard to answer, mainly because both of them have different advantages. But since the world is continuously evolving, and the ongoing pandemic will only affect our way of conducting business, we must learn more about all the perks Fintech companies and startups have to offer.