The Disruption of Traditional Banking, and How FinTech Is Forcing Old Banks to Adapt

The financial world has been transformed over the past decade. FinTech, or financial technology, has evolved from a niche industry that many banks viewed as a threat, to a highly lucrative line of business that has banks’ full attention. From frictionless payment systems to customized lending options, FinTech is driving traditional banking into new, perhaps unprecedented realms.

Well, if you’ve been wondering how technology is revolutionising finance, or what this means for the bank of the future, this blog will explain the main breakthroughs rewriting the rules of traditional banking.

What is FinTech?

FinTech, short for financial technology, is the application of advanced technology to the provision of financial services in ways that are more efficient, affordable, and accessible. This market covers everything from mobile payment applications (say, Venmo and PayPal) to decentralized financial (DeFi) websites that use blockchain technology.

The overall mission of FinTech is to address long-standing issues with traditional banking, including slow moving transaction speeds, restricted avenues for access, and high costs. With the help of AI, blockchain, big data analytics and mobile technology, FinTech players are re-inventing the rules of the game in the world of finance.

The Future of FinTech and How These Innovations are Shaping the Financial Industry

Digital Payment Platforms

Write a check and deal with the payment-processing delays and fees? Digital payment systems like PayPal, Square and Stripe have changed the way money moves. These services enable individuals and businesses to pay one another instantly, often at a lower cost than using credit cards or wire transfers.

How Digital Payments Are Challenging Traditional Banking:

• Speed: Instantaneous money values are transferred across the network nearly in real time, negating the need for sluggish inter bank processing.
• Going Global: Simplifying cross-border payments because it’s no longer necessary to worry about exchange rates as in the past.
• Safer Transactions: Thanks for encryption, people now trust digital payments more than they trust the banks these days.

P2P Lending Platforms

Conventional bank loans involve credit checks, long applications, and they often come tied with high interest rates. FinTech companies like LendingClub and Prosper have made a huge impact by creating peer-to-peer (P2P) lending platforms where regular people can borrow money directly from other regular people, without ever touching a bank.

Benefits of Peer to Peer Lending:

• Quicker with less bureaucracy.
• Extremely competitive interest rates based on the borrower’s data profile.
• Loan access democratized, particularly for underserved who do not have credit histories.

Robo-Advisors – The Wealth Managers

Wealth management, for decades, was an offering exclusive to the folks who could afford pricey financial advisors. In come the robo-advisors — Betterment, Wealthfront and Robinhood, among others — to supplant human opinions on portfolio recommendations and management with algorithms.

How Robo-Advisers Are Upending the Staid World of Wealth Management:

• Accessibility: Robo-advisors are cheaper than traditional advisors and offer low investment minimums making investing more accessible to everyone.
• 24/7 Accessibility: Users can take care of their own portfolios and holdings no matter where they may be.
• Customized Advice: Intelligent, data-based analytics result in each portfolio being customized to individual risk tolerances and objectives.

Blockchain and Cryptocurrencies

When Bitcoin came onto the scene in 2009, it offered the public a decentralized form of banking that left out the banks. Fast forward to now, and blockchain technology is used to drive not just cryptocurrencies, but also scores of financial innovations like smart contracts and decentralized finance (DeFi).

How Blockchain Disrupts the Financial Industry:

• Transparency: With the ledger system of blockchain, users could openly trace transactions and validate without third party interference.
• Speed and Scalability: Cross-border payments can be concluded in seconds, rather than in the days it now takes the correspondent banking network to settle.
• Security: Thanks to cryptographic protocol, the data recorded on the blockchain can’t be tampered with.

Customized Online and Mobile Banking Products

Conventional banks can be slow to pivot to meet the needs of their customers since they typically offer one size fits all products and services. FinTech apps meanwhile leverage AI and machine learning to bring personalized banking experiences to each individual.

Examples in Retail Banking:

• The savings apps Chime and Ally dissect spending habits to suggest media-crafted saving regimens.
• Chatbot-based platforms help customers in real time, eradicating the requirement of long queuing lines or holding on phone.

InsurTech (Insurance Technology)

Insurance, which used to be handled through a long, physical paper process, has been made frictionless through InsurTech startups. Firms like Lemonade and Oscar Health offer policies that can be bought in minutes using AI underwriting.

Challenging Aspects of InsurTech:

• AI used for fast claims processing.
• More transparent pricing with the help of data analytics.
• Features of gamification that incentivize positive gesture of building a healthy user, when considering wellness acts.

AI-Powered Fraud Detection

Preventing fraud is one of the most important jobs for traditional banks, yet there are ways in which traditional methods have fallen behind increasingly sophisticated cybercriminals. FinTech startups address this issue with realtime fraud detection through AI.

How This Benefits Users:

• Preemptive fraud watchers for signs of spending.
• Behavioral biometrics that detect abnormal activity, like non-standard typing or login patterns.
• Doggedly expedite handling of reported transactions.

Why This Revolution Matters

The move towards FinTech isn’t simply in the name of velocity or ease of use, but is a movement in changing how customers interact and engage with their finance providers. For consumers, that means greater transparency, lower fees and personalized experiences. For old-fashioned banks, it’s a wake-up call to innovate or head for extinction.

The FinTech disruption is not a zero sum game – traditional banking won’t vanish, it has its place. Instead, the two worlds are colliding. For many banks it also means teaming up with FinTech start-ups or establishing its own digital ventures to keep pace.

What’s Next for FinTech?

We are still early in the financial tech revolution. Emerging trends such as biometric payment, quantum computing in finance and improved AI are set to take these innovations to new levels.

But for professionals and businesses, the imperative to keep pace with these changes is, well, imperative. By learning how to seamlessly integrate FinTech into your daily routines, you can future-proof your finances, and open up exciting new growth possibilities.