Fintech: How Technology Is Disrupting the Banking Industry

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Financial technology, or fintech, is a massive industry. It attracted about $4.27 billion in U.S. venture capitalist investments in 2016, according to Solarino Ho of Reuters. Fintech originally described technologies used and applied within the traditional financial sector, according to Bernard Marr of Forbes. However, the definition of fintech has expanded beyond the existing finance sector with the development of new technologies like mobile payments, crowdfunding, and digital money transfers. While at one time it assisted the banking sector, today fintech is disrupting this traditional finance field.

Start-Up Businesses Are Less Reliant on Banks for Funding

An illustration of Fintech and similar concepts.

In the past, local bank branches provided funding for many new business endeavors, according to Marr of Forbes. He explains that the rise of fintech has expanded funding options for start-up businesses.

Crowdfunding has made capital more accessible for many start-up businesses across the globe. Banks will not approve business loans without sufficient credit or collateral, but these traditional requirements are not barriers to crowdfunding. Through this fintech movement, ordinary people donate money to campaigns they believe in, including new business efforts.

Along with popular general crowdfunding websites like GoFundMe, KickStarter, and Indiegogo, increasing numbers of specialized crowdfunding sites support particular entrepreneurial groups. Elle Perry of Memphis Business Journal noted that Urban Fundr, a crowdfunding website established for African-American entrepreneurs as well as members of urban communities, raised approximately $34,000 in its first two years. In August 2017, Morgan Eichensehr of Baltimore Business Journal wrote about iFundWomen, another emerging crowdfunding platform raising capital for female-led businesses. This initiative helps women-led businesses receive financing through crowd-sourced donations. This is crucial at a time when women are starting twice as many businesses as men, yet accessing half the working capital.

Businesses that cannot obtain traditional bank loans are not the only ones turning to crowdfunding. Marr explains that many start-ups prefer crowdfunding because they can access funds much sooner than they would through a traditional financial institution. Crowdfunding can help businesses access capital in just a few weeks rather than several months.

Businesses Are Turning to Fintech for Payment Systems

Once businesses are operational, many continue to rely on fintech. Traditionally, banks facilitated business credit card payments. However, mobile payment systems like Square and PayPal allow businesses to accept credit card payments without bank assistance or the landlines and large equipment investment once required. With less equipment to consider, fintech payment options are ideal for traveling salespeople, market vendors, and other organizations conducting transactions outside a fixed business address.

Less hardware is not the only advantage for small business owners accepting mobile payments. Marr highlights that, unlike bank credit systems, businesses don’t need to perform a set volume of satisfactions to qualify for a mobile payment account. That makes mobile payment systems ideal for very small and fledgling businesses.

PayPal also makes accepting payments from international customers simple, so it can be a valuable tool for businesses expanding their global reach. The online payment provider automatically converts small transactions into various currencies for easy and accurate payment from customers based in other countries.

Consumers Are Utilizing Mobile Technology

Modern Americans are increasingly dependent on mobile technology. A 2016 study from Bank of America found that 29 percent of Americans interacted more each day with their smartphones than with any other person or thing. Smartphone use was more widespread among younger Americans, with 39 percent of millennials interacting with their mobile device daily.

This dependence on mobile technology has changed consumer behavior and expectations of businesses, including those in the financial sector. When they can do so much on their smartphones and tablets, consumers don’t want to have to enter a bank branch to adjust their investments or deposit checks. When branches cannot deliver these services remotely, consumers are turning to fintech firms that can. Marr says these customer expectations are consistent whether users bank with a small financial firm or a multinational organization.

A variety of mobile apps can help businesses meet consumers’ expectations and help consumers manage their money as banks once did, according to Patricia Hart of Time. Apps like Acorns, Mint, and Digit track spending and help consumers stick to a budget, much like a bank’s financial advisor once may have. Betterment and Wealthfront are two popular apps offering mobile services previously available only through wealth managers. Rather than applying for a personal loan from a bank branch, people can secure money for personal expenses through peer-to-peer lending applications like Prosper and LendingClub.

People Are Relying Less on Banks for Social Transactions

In the past, if individuals owed friends or family members money, they would likely get their account details and go to a local bank to transfer the money. However, today it is much easier to bypass the banks and transfer money via PayPal’s website and mobile app. PayPal does not charge its members to send or receive personal payments or payments relating to friends or family members within the users’ own country, except those made with debit and credit cards.

Fintech is also helping friends in other countries affordably exchange money. Banks have long offered international transfers, but these can be expensive. According to Spencer Tierney, who analyzed the international wire transfer fees of 40 leading U.S. banks for NerdWallet in 2017, local banks charge an average of $44 for outgoing international wire transfers. New fintech website Transferwise claims Americans can transfer money overseas using its services for up to eight times less than at local banks.

Fintech Is Forcing Banks to Reevaluate Business Models

As fintech firms infiltrate the spaces formerly occupied exclusively by banks, financial institutions must consider ways to mitigate the threat to their business. Hart of Time suggested that we may see banks increasing fees associated with low-margin services and closing some branches entirely.

Banks may also develop their own technologies to challenge fintech firms or acquire existing fintech businesses. We’ve already seen some banks entering the fintech industry, including BBVA Bancomer, which acquired OpenPay in January 2017, according to Fintech News, and Deustche Bank, which bought a 12.5 percent share in TrustBills in April 2017, according to Deustche Bank’s press release.

The influence of fintech is shaping not only the finance industry but also every business sector dealing with it. This means that modern finance education must change as well. Those working in the banking and finance industries should consider upgrading their qualifications with a master’s in accounting online. Visit the New England College – Master of Science in Accounting Online page to learn more.


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