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How Fintech Is Disrupting Traditional Banking Models

Fintech wasn't even a phrase 10 years ago, now it's dominating the financial services sector.

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Fintech wasn't even a phrase 10 years ago, now it's dominating the financial services sector.

Opinions

How Fintech Is Disrupting Traditional Banking Models

Fintech wasn't even a phrase 10 years ago, now it's dominating the financial services sector.

Share this article

It’s safe to say the banking sector has endured a pretty tumultuous decade. This has been bookended by the financial crisis in 2008 and the increasing regulatory scrutiny of today, with numerous scandals such as PPI mis-selling, libor rigging and many more in-between.

The public’s confidence in the banks has subsequently plummeted. While the taxpayer stepped in to save some of the biggest banks from ruin, salaries and bonuses in the sector have continued to rise as if everyone’s been doing a thoroughly good job. Thank God for the FinTech sector!

The FinTech sector has exploded in the last few years and given the consumer a choice. No longer are we tied to banks we cannot trust and products that lack transparency. The FinTech sector has introduced an extremely wide range of products that businesses and consumers are seizing upon.

They offer a genuine alternative to traditional bank products, with many offering clear benefits such as improved service and better value for money.

The introduction of challenger banks

One of the biggest changes in the financial sector in the UK has been the introduction of challenger banks. Challenger banks are a group of banking businesses that have emerged to challenge the recognised high street banks such as Barclays, HSBC, Lloyds, Santander and RBS.

They are adding much needed competition to the market and driving innovation and improving customer service levels.

The term ‘challenger bank’ is used to describe banks that actually have very different models, aspirations and challenges. However, the one thing they have in common is the fact that they’re here to disrupt the traditional banking sector.

Crucially, these banks have not been mired by the many recent scandals and still rely on customer deposits to build their balance sheets. That’s why fledgling banks such as Metro Bank, Aldermore, Tesco Bank and United Bank UK and currently dominating the best buy tables. The result is better outcomes for businesses and private customers.

London - Barclays Bank

Traditional banks are facing stiff competition from new challengers

Where are we seeing the biggest changes?

Retail banking is the area that has seen the biggest change as a result of the FinTech sector, but that’s not to say there hasn’t also been a significant impact in the commercial banking sector. In a bid to stay relevant, the high street banks are having to respond to these innovations.

A perfect example is Barclay’s mobile payments service Pingit, designed to compete with Apple Pay, while other banks have launched new mobile banking businesses away from their legacy businesses in an attempt to compete in a digital age.

But this digital revolution has not been confined to retail and commercial banking. There are also many other markets, such as wealth management, that are currently undergoing significant transformations.

New entrants are using artificial intelligence to deliver investment advice on mass and these services are continuing to drive innovation in the sector.

Bringing financial services to small businesses

As the banking sector reduced borrowing following the financial crisis, it became increasingly difficult for SMEs to access the finance they needed to grow. The lack of financial assets and uncertainty over their long-term position in the market meant traditional banks were simply not willing to lend to smaller businesses.

Thankfully, FinTech came along and helped to bridge the gap between SMEs and the banks. Many FinTech entrepreneurs have focused specifically on meeting the needs of small businesses with innovative product and service offerings.

bank manager

Many fintech companies are targeting neglected small businesses

While the banks may have the regulatory advantage when serving small businesses, FinTech companies have the edge in technology and transparency, and this has led to an improved experience for many small business customers.

One example is peer-to-peer lending, a sector that has sprung up from nothing ten years ago to lend a total of £2.9bn in 2016. This is now filling the capital void for many growing businesses and lending at lower rates than many firms would be able to access elsewhere.

P2P has also unlocked new opportunities for businesses with international ambitions, with international transaction handlers like TransferWise dramatically reducing international transfer fees.

Banking customers now expect more

Commenting on the rapidly evolving FinTech sector, Mike Smith, CEO at Business Expert, said: “Bank customers, both businesses and private customers, now expect greater flexibility, price, transparency, access and convenience than ever before.

FinTech businesses are taking advantage of digital channels to open up markets that have traditionally been difficult to access and are giving customers what they need.

“To stay relevant, traditional banks will now need to find ways to offer more seamless, fully integrated services that can help them to keep up with changing customer expectations.

"At the moment they have a long way to go, but those that are willing to change and can effectively connect information, people and processes will be able to succeed in the long run.”

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How Fintech Is Disrupting Traditional Banking Models

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