10 years after the financial crisis the banking industry is not only facing low interest rates, tighter regulations, but also a new challenger: FinTech. Financial technology or – what founders hope to be – the disrupter of the traditional banks.
Now, what exactly is FinTech?
The European Central Bank sees FinTech as an umbrella term. It includes products, technologies, and business models that improve financial services through innovative features. It ranges from all kinds of money transactions starting from cashless payment systems or crowd funding platforms to virtual currencies.
The term came up around 2011 long after FinTech firms started emerging around the dotcom bubble. PayPal, for instance, is seen as one of its pioneers. Since 2008 the industry has been growing at an unexpected pace and according to CB Insights 2018 marked a new high for global FinTech investments by an increase of around 20 per cent compared to the previous year. FinTech companies are leaving traditional banking services behind by adapting quicker to new technological advances such as artificial intelligence.
But FinTech startups sometimes forget that they are not real banks. So they can’t do what banks do without officially being allowed to do so. Financial regulation is key. Of course, novel technological applications pose a challenge for regulators. However, when FinTech companies behave like banks regulators are very well able to handle their action since this had been done for decades.
Take the recent case of Robinhood Financial LLC – an investing app offering trade without fees making trade accessible to almost anyone and not only to wealthy investors. At the end of 2018 the founders announced the rollout of a checking and saving account feature. This allows opening a deposit account without fees for ATM usage or a debit card and above all it offered higher interest rates than any other saving accounts. While offering all services of a conventional bank they have one significant aspect missing out: they are not a bank. Regulators certainly wouldn’t allow for uncertified banking services, as Robinhood did not own a license to provide the planned services.
FinTech is changing the way we pay, donate, and invest or even borrow money. Making the process more efficient and the usage more attractive, especially Asian countries such as China and India are relying on these novel solutions. Still, FinTech firms should not move too fast as there are speed bumps ahead.