Contrary to the extensive growth of a traditional financial service firm, the presence of fintech firms has dramatically changed the financial service industry in the United States. These innovative firms use technology to deliver financial services in better, more convenient, and quite cheaper means than the conventional banking institutions.
Therefore, the fintechs have shaken the structure leading to the incumbent banks to find themselves virtually irrelevant in markets they originally dominated. This paper aims to discuss the intersections between the fintechs and the traditional banking system and in particular how these firms are providing new products and services in the financial industry.
New financial products and services
Fintech companies have offered many new product solutions to consumers and businesses to alter the experience drastically. Today’s most significant industry is peer to peer or P2P lending whereby people borrow and lend money from other people without needing to involve banks.
Furthermore, the modern payment systems have been enhanced by fintechs. Contemporary online payment solutions like PayPal, Venmo, or Apple Pay have instant and smooth transactions that big banks could not compete for.
These services meet the need of the people for easier and faster services in the financial market thus putting pressure on banks to innovate and adopt similar innovations as applied by the fintech firms.
Fintech innovations also include robo-advisors as these are the automated, algorithm-based financial planning services. These are virtual applications that give personalized advice in the investment market far cheaper than the conventional financial consultants hence making investment, possible to a larger number of people.
In addition, fintechs have led to the provision of financial services through the use of blockchains and cryptocurrencies. These technologies allow for safe peer-to-peer transactions that do not rely on existing debanking services and can serve the population that has no access to such services.
Transforming customer expectations
In this aspect, fintechs have greatly increased the benchmark of quality customer relations and experience in the financial industry. Compared to traditional finance organizations, fintech firms have a focus that directly targets the user by effectively implementing simplicity, clearness, and openness.
One of the most noted types of change is that of real time services. Fintechs have well prepared clients for speedy creation of accounts, quick approvals of loans as well as other transactions. Banks have traditionally not been very efficient in answering such demands especially due to the inheritance consequences of inefficient systems and rigid procedures.
Another region worth mentioning is personalization, which is implemented at a high level in fintech organizations. Thus, using big data and artificial intelligence, fintech newcomers provide clients with individually tailored recommendations, offers, and user interfaces tailored to their needs.
It has set the new level of expectations when it comes to personalization hence forcing traditional banks to invest in similar technologies that will enable them to understand and serve their customers individually.
Thus, such factors as transparency and clarity of the pricing and fees have become the new norm. This is quite evident that fintechs charge fairly standardized and transparent fees in comparison to numerous and often concealed fees of traditional banks.
Increased competition
Competition has also increased greatly due to the introduction of new players in the market who are Fintech companies. While traditional banks are numerous, they initially had few rivals, but had to start dealing with many cooperatively numerous small and highly innovative fintech startups.
These companies, have no baggage of old systems and compliance to regulations and thus the ability to quickly develop new deliverables based on customer needs is a lot faster as compared to traditional banks.
As such, free competition has brought the best services and products in terms of quality into the market. Banks are now more concerned with customer satisfaction index, the drive to minimize on fees and moving into more digitization.
It is normal to see many banks partnering with the fintech companies because of technological support in the market. For example, bank-fintech collaborations have created effective anti-fraud measures, enhanced credit risk assessment, and new forms of credit offerings.
In addition, it was also pointed out that fintechs have challenged the earlier sources of income for traditional banking. It is possible to name such segments as electronic payment processing, personal financial planning applications, and online lending that have captured the major shares of income, which used to go to banks.
Financial institutions have also shifted their focus in the attempts to adjudge the effects of this change, they have realised the need to diversify their portfolios and look for other sources of income.
The threat of fintechs has also given the banking industry the push needed to engage in mergers and acquisitions. Thus, incumbent financial institutions are buying fintech firms for technologies or human capital, to incorporate such solutions, and target new markets.
These and other strategic actions are designed to align the company’s operations with the best aspects of both the conventional and fintech approaches and improve the value proposition to consumers.
Driving regulatory changes
Fintechs are a relatively new phenomenon; thus, the appearance of so many of them has affected not only the market but also regulation. Whereas before the regulators were just looking for new innovative actors in the market and allowing them to disrupt the market, regulators are now faced with the challenge of observing innovation and at the same time protecting the consumers.
Among the responses, the concept of ‘’regulatory sandboxes’’ has emerged as one of the significant regulatory developments in the context of fintechs. This approach liberalizes the industry but at the same time consumer protection as well as financial stability of an economy are enhanced.
Also, through financial innovation, the fintechs have raised the concerns like data privacy and cybersecurity. Since the deployment of the digital devices, it becomes crucial to safeguard customers’ information. Governments have sought to regulate the use of customer information by both the fintechs and the traditional banks with laws such as the CCPA.
Innovation brings about change and this category is characterized by bitcoins and related applications or use of block chain and hence there is an issue of regulation. Supervisors are in the process of formulating the guidelines of properly properly employing the new forms of money and making sure that they do not create instability in the financial realm.
Banks that have been in operation prior to the emergence of online banking are now obliged to meet new standards and regulations; this has put pressure on the management of traditional banks to strengthen their system in compliance and risk evaluation.