Today, I have a guest post.
Looking at the world as it is now, it’s hard to believe that online banking in its primordial form was introduced a mere 25 years ago. By 2006, 80% of banks offered online banking services, and by 2010, the evolution of online banking outpaced the growth of the internet in its entirety.
Fintech— the portmanteau of financial technology— integrates technological components into the financial services industry. A diverse array of services and offerings fall under this umbrella, from day-to-day banking to long-term investments and trade.
This evolution has led to speculation that Fintech is entirely reshaping the financial service industry, but is that just a myth? Here’s what you need to know about how Fintech is disrupting the financial services industry as we know it.
Improving Financial Literacy
One of the most significant changes caused by Fintech and the digital era is improved financial literacy among consumers. The most financially literate age group is in the range of 36-50, encompassing the elder millennials and a large portion of Gen X. The remaining Millennial generation and Gen Z— at an age range of 15-35— are close behind.
It comes as no surprise that there’s an overlap between social media use and financial literacy. It’s easier to access information in the digital age, with influencers and financial advisors sharing everything from the importance of checking your credit report to setting up an emergency fund.
It’s also worth noting the overlap with improved financial literacy and coming of age during the 2008 recession. The Millennial generations have record low amounts of trust in traditional banks and are more comfortable navigating the digital world via apps and mobile technology.
All of these considerations come together in a world where discussing finances is less taboo. People are comfortable sharing personal issues online via social media and willing to have tough discussions about topics like finances, politics, and religious beliefs. In this way, Fintech is revolutionizing how we talk about money.
Artificial Intelligence in Investing
Artificial intelligence is impacting the world’s industries in many ways, and the financial services industry is no exception. AI is driving customer interactions, making it easier to communicate with financial service customers and improve their experience. From chatbots to personalization through data collection, AI is changing how financial service providers communicate and build trust.
AI is also playing a huge role in investing, with Robo advisors growing in popularity. Using a Robo advisor rather than a traditional financial advisor is empowering investors to take ownership of their portfolios. According to a survey conducted in 2019, 33% of Fintech enterprises reported using AI for their services, and it’s expected that number increased in light of the COVID-19 pandemic.
While investing is the most notable AI-driven financial service, banks and Fintech companies also use AI for cybersecurity. Intelligent systems help detect fraudulent activity sooner, based on previous experiences and learnings.
Increasing Competition Among Traditional Banks
Choosing a bank— for both personal and business use— used to look far different. Daily banking was oligarchic to a fault, with only a few major players setting the tone for the industry. With the introduction of Fintech, that’s changed.
Online banks and financial services lack the overhead of brick-and-mortar financial institutions. As a result, they’re able to ower significantly better interest rates and banking fees to customers.
As trust in tech grows, more consumers are moving to online-only and app-based banks rather than traditional banks. Thus, traditional banks are forced to be more competitive in attracting daily and small business banking customers.
Simplifying Money Transfers
Sending money to another person or a business in another company used to be an arduous, hands-on, costly process. Now, consumers and businesses alike can send money anywhere in the world with the click of a button. Rather than heading to the bank to convert currency and send a wire transfer or money order, consumers can use services like PayPal, Venmo, and Transferwise to convert and send money for a nominal fee from anywhere to anywhere.
As a result, money moves faster than ever. Traditional banks are struggling to justify holds— a contributor to their profits— and costly business banking services when Fintech innovations allow money to move so freely.
Streamlined transactions and accessibility are also helping small businesses compete on a grander scale. Whereas many would-be successful businesses struggled to navigate costly in-house POS systems and exorbitant transaction fees in the past, modern companies have more accessible options.
Services like Square make it possible for makers to collect electronic payments at a craft fair or restaurants to offer contactless payment options during a global pandemic. This seemingly simple innovation is foundational for success for many small businesses and entrepreneurs. As the world moves away from cash and continuously toward digital transactions, there’s an increased need for this type of innovative platform.
Introducing New Borrowing Opportunities
Another major disruption caused by Fintech is the introduction of new borrowing opportunities— mainly peer-to-peer lending. This innovation allows people to secure loans and funding from others, removing financial institutions from the equation entirely.
P2P goes hand-in-hand with crowdsourcing via platforms like Gofundme and Kickstarter. The prevalence of these Fintech-driven solutions is impacting another major source of income for traditional banks: interest. This option also creates new opportunities for those with bad or no credit, laying the foundation for correcting financial inequities.
Blockchain and Cryptocurrencies
As mentioned previously, the market crash and the great recession of 2008 led to a cultural distrust of big banks. As a result, cryptocurrency was born. The inspiration behind controversial digital currencies like Bitcoin was to cut big banks from the equation and offer unregulated currency options.
As blockchain technology evolves, cryptocurrencies are becoming more accepted and trusted. Investors can even get cryptocurrency IRAs now to save for retirement. It’s expected that cryptocurrencies will become more mainstream as time goes by, creating a trade market that’s kept entirely separate from traditional banks.
Gamification and User Experience
Gamification is the act of incorporating game-like features in a non-game application or service. Many Fintech innovators are using this approach to enhance their user experience, competing with traditional financial service providers on a whole new level. In addition to offering better customer service, this feature is implemented to make boring financial topics seem more fun— for example, creating a budget.
This approach to improving the user experience is also contributing to an increase in financial literacy. As people become more engaged in the actions surrounding financial management, they’ll learn more about why these steps matter and how to make healthy financial decisions.
Evolving Need for Compliance and Regulatory
Finally, the rapidly evolving world of Fintech is creating an increased need for compliance and regulations surrounding the protection of data and information. As online banking outpaced internet growth in the early 1990s, many financial technology discoveries are outpacing the security needed to protect it from criminals.
In summary, Fintech is indeed reshaping the financial service industry and will continue to do so. Fortunately, many of the changes are beneficial to the consumer and putting the onus on traditional banks to rethink their strategy and showcase their value.
As Fintech continues to evolve, further innovations and integrations will support financial literacy, consumer convenience, and better financial services for all.