Probably the hottest topic in the financial sector today is ‘fintech’ and how it’s disrupting the traditional financial industry. Fintech is short for financial technology and refers to new innovative technologies that are changing the way financial services are provided to consumers and businesses. These new financial services come primarily from young tech start-ups and have started to take away a substantial amount of business form traditional banks. In this article we will discuss the five key areas within the financial industry, where that is the case.
Lending
Lending is the oldest and most traditional of all banking activities and has, until very recently, only been conducted by banks and credit unions. However, since the 2008 financial crisis a new type of player has entered the lending market, co-called peer-to-peer lenders. Peer-to-peer lenders are online platforms that allow SMEs, start-ups and individuals to borrow money from private investors without the need of an established financial intermediary. This has created an alternative financing option for companies that are finding it difficult to get funding from banks with reasonable interest rates. Furthermore, it allows investors to generate higher fixed interest returns than they currently would from traditional fixed income securities, such as government bonds and corporate bonds, due to the lower interest rate environment globally.
Digital And Mobile Banking
While banks have been offering digital and mobile banking services for a while, new players coming form the fintech sector are quickly gaining market share and taking away customers from banks by offering lower (or no) fees, a better user experience and better customer service. For example, digital banks Simple in the United States and Number26 in Germany are offering online and mobile-only checking accounts, debit cards and budgeting tools at no cost to the consumer. Furthermore, their platforms are much easier to navigate than many of the online banking platforms of traditional high street banks, thereby attracting new customers, especially from the younger ‘smartphone-addicted’ demographic.
Retail Trading
Another area where banks and brokerages used to dominate the market is financial trading for retail customers. However, since new technologies have enabled the emergence of online brokerages, there is now no longer a need for private investors to call their bank or a bricks and mortar brokerage firm to trade shares or invest in mutual funds. Additionally, most online brokerages now also offer smartphone apps that allow private investors to trade from anywhere and at any time for the fraction of the cost of dealing through a traditional brokerage or a financial advisor.
International Money Transfers
The remittance market is another key area where banks are facing disruption and loss of business due to the emergence of new players from the fintech space. New remittance companies, such as TransferWise, CurrencyTransfer and Azimo, are offering international money transfer services at a fraction of the cost that banks charge. Traditional banks have been known to charge substantial fees for cross-border money transactions but, by using cheaper services by fintech companies in the remittance space, consumers and SMEs can now save up to 90% of what banks charge. Hence, this has become an area where business is being taken away from banks. This trend will likely continue until banks drop their international wire transfer fees, so that they can compete with the new market entrants.
Wealth Management
The fifth area where banks are losing market share to entrants from the fintech sector is wealth management. Traditionally wealth management for private individuals has been handled by banks’ private banking or asset management subsidiaries. However, with the emergence of online wealth management services called ‘robo-advisors’, banks and investment management companies are seeing customers move away from the traditional financial advisor-based model to using robo-advisors instead. Robo-advisors offer entirely automated, algorithm-based portfolio construction and investment advice, without the need for human financial advisors.
The two leading robo-advisors in the United States are Betterment and Wealthfront and together they currently have around USD 7bn of assets under management. While this number isn’t very much, there are more robo-advisors entering the market and the demand for low-cost automated online investment services is growing, especially amongst younger investors.
