Despite its long-standing history, the traditional financial sector is slowly loosing ground with respect to its disruptive start up competitors. FinTech companies are gradually taking away a heavy amount of business from the already “outdated” banks, challenging the way things have habitually been done.
Certain FinTech firms are allowed to operate outside the usual constraints of the world of finance, following this idea of decentralisation from banks, forcing them to accept lower margins. FinTech lending platforms aim is to match borrowers and savers while traditional banks would take deposits and hold only liquid assets.
Secondly, this new group of companies is disrupting the foreign exchange industry, giving power back to the consumer, by embracing the willingness of those who want to swap currency and transfer money easily. An example is TransferWise, a startup which utilises peer-to-peer technology to connect and convert currencies, matching individuals with others who have the currency you want to transfer and taking only an upfront fee for doing the transfer.
Thirdly, such revolutionary firms will cut costs and improve the quality of financial services through new user-friendly matching systems. For instance, an app called Droplet, lets users make instant payments using only their smartphones. The advantage over paying by credit card is that neither the customer nor merchant face transaction fees.
Moreover, FinTech companies have the clear advantage of avoiding forms of bias. Humans are more prejudiced when compared to algorithms. The Economist explains, Italian banks charge female owners of small businesses more than male owners, even though the women have lower failure rates. The cost of relationship lending encourages bankers to chase larger, more lucrative customers at the expense of small ones.
Finally, startups have benefited somewhat from a supportive ecosystem, a better place to work, in which the key investment is human resource, jumping into the market with more responsive and flexible teams. However, the rise of these newcomers shouldn’t necessarily frighten banks. Instead they could benefit from the flexibility of their counterparts. Using an Application Programming Interface (API), banks can incorporate the technology from FinTech firms into the key areas in which support is required – simplifying the process of adding innovative technology services and allowing even non-technical users to develop their own applications by using the appropriate API.