Banking without Banks
Nowadays Internet is still shaping banking with the help of mobile
technologies, which are making customer’s interaction with banks
more personal, frequent and smart.
One of the hottest trends among investors is fintech related ventures. The
industry simplifies and transforms financial operations between people,
companies and countries. Young startups with “Silicon Valley” mindset bring
serious competition for banks, targeting unbanked population and it’s only
the start of upcoming tech disruption of traditional banking.
Fintech Startups – how it all started?
Back in 1994, Bill Gates said that banks are like dinosaurs and the world
needs banking services but not necessarily banks.
Banks, as we know them, have been around for centuries and held the monopoly
on finance services. Despite the huge role of banks in the development of
modern capitalist civilization, there is still plenty of room to innovate
and provide better products. Unfortunately, history has taught us that not
giving enough attention to banking regulation could cause a great cataclysm
in whole world’s economy such as 2007-08 financial crisis did. As a result,
today banks often show a lack of innovations either because of their stable
market position or due to complex government regulations.
The whole banking system relies on communication. There are core
communication links like Customer-Bank, Bank-Bank and Government-Bank.
Integration of the internet in banking operations back in 1995 provided a
wide range of benefits such as fast transactions, 24-hour permanent access
from anywhere, immediate consultation, remote account opening, managing and
much more. Online banking has become the industry standard.
Nowadays Internet is still shaping banking with the help of mobile
technologies, which are making customer’s interaction with banks more
personal, frequent and smart. An imperfection of banking system has
inevitably drawn the attention of Silicon Valley community to it. Also
development of online business has built the ground for non-banking
online-payments solutions, where companies like PayPal took advantage and
overcame traditional financial institutions.
As the result, amount of investments in fintech companies has grown
exponentially in recent years, writes romexsoft.com in an article which
explains all about fintech innovation, its consequences for banks and how
relationships between fintech companies and banks will shape the future of
So what is fintech? It happened that fintech is an industry where small to
medium young companies utilize latest technologies to create innovative
products in such a conservative sector as a financial industry. A so-called
fintech startup often consists of several tech professionals with industry
expertise and revolutionary idea, enthusiastic and passionate approach.
Areas of the most intensive fintech innovation include:
P2P Lending, Crowdfunding
Asset Management and Wealth
Big Data Analytics
Digital Currency and other Blockchain technologies
Today banks are changing under the influence
of new technologies and innovative
Not all players on the fintech market are startups. Over the years some
companies have become established giants. Take as an example PayPal (IPO in
2002) with a valuation over $50bn and Ant Finance (launched Alipay in 2004)
worth over $60bn.
Fintech is presented by such top companies:
Also it is important to mention UK and London fintech ecosystem. According
to research more than $5.5 bn of investments were made by top fintech
startups between July 2015 and January 2016.
What are the consequences for banks and how they react
There are some key background conditions that have led to a major fintech
disruption of banking industry and they vary in different countries:
1. High national Internet and mobile penetration.
People in developed countries, especially those of young generation, are
eager for digital and mobile solutions for their everyday activities.
Fintech innovations provide them with flexibility, increased free time and
more convenient customer experience.
2. Large e-commerce systems with Internet companies focused on payments.
Such giants as eBay and Aliexpress have supported the growth of PayPal and
AliPay, that became big competitors for banking payments, especially in
3. Obsolete traditional banking system.
Today unbanked population has risen to more than 2 billion. For some people
regular banking is too expensive and mobile financial services provide cheap
remote access to accounts, savings and loans, which can also lead to overall
4. Government regulations.
Some countries like Nordics, UK and, even, Kenya are known for adaptation of
their legislation to utilize benefits of fintech finance services and to
support their growth.
5. Extensive implementation of cutting-edge technologies.
Latest technologies allow us to make banking more efficient, more personal,
cheaper and easier to access. Development of Big Data science and analysis,
internet coverage, Machine learning and AI, biometrical technologies,
fintech blockchain, quantum computing, even VR and AR will completely change
financial institutions from as we know them now.
No doubt banks are strongly affected by fintech expansion and it’s only the
beginning. For now fintech digitalization successfully replaces physical
assets of banks.
Nordic banks have already halved branches since 2008-2009. A number of
full-time staff is also constantly decreasing. On the other hand, the strong
position of Nordic banks could also be an obstacle for innovations. Not
seeing major competition from fintech players could cause significant loss
of opportunities and slower client acquisition.
The Nordic banks are on average about ten years ahead of the European banks
which are in turn about five years ahead of the US banks. Banks in
developing countries are increasing their physical presence (South and
Southeast Asia). Number of branches is growing in Indonesia, but also a
digital banking program was launched in 2015 to reach out to the unbanked.
New regulations allow tech intermediaries to spread banking services. US
branches in large cities are also growing. One of the reasons is client
acquisition when many banks due to regulations require physical presence to
open an account.
Today banks are changing under the influence of new technologies and
innovative finance market players. Some banks are acquiring fintech startups
to enhance their services. Some invest in young companies or create own
startup accelerators to support new technologies and benefit from them.
Biggest banks such as Bank of America, Citigroup, Goldman Sachs, JPMorgan
Chase, Morgan Stanley, and Wells Fargo have made significant investments in
30 fintech companies since 2009, according to CB Insights data. And some
banks created strong R&D departments to produce their own solutions to take
part in modern innovations marathon.
How relationships between fintech companies and banks will shape the future
We are now only at the beginning of complete technological disruption of
traditional banking. Young innovative companies created by people who grew
up with internet, mobile phones and smartphones are shifting paradigms in
all areas of our life, including finances.
Will banks disappear in future? As we know them now – definitely. As
institutions – unlikely. For now, startups in fintech group have taken less
than 5% of consumer banking revenue and it probably won’t be higher than 10%
in an upcoming decade. Theoretically, each service that banks provide could
possibly become the basis to a new startup. But as long as banks dominate in
their core areas of lending, investing and deposits they will keep their
respected and trusted market positions.
Banks vs fintech is competition or cooperation?
It’s both. Some of startups could help banks significantly reduce their
operational costs like digitalization helped with spending on full-time
staff and physical branches support. Some fintech companies will provide
serious competition like online payments and P2P lending does.
There are some huge innovations that are going to change completely not only
our financial operations but the whole life. And one of them is Blockchain,
which is definitely on the verge. Blockchain is the technology behind famous
Bitcoin cryptocurrency. It could replace the current centralized payment
process with a distributed network for many aspects of financial services,
especially in the B2B world. Blockchain positives are decentralization,
programmability, and immutability. It could also transform many existing
legacy systems that are stable but may not be the most cost or capital
efficient way of doing business.
So where is the financial (r)evolution going? Some developed technologies
which are available for quite a long time like Mobile, Cloud, Social
networks and Big Data are being continuously integrated into financial
services all over the globe. They improve various aspects of banking like
distribution, payments, products, risks management and, even, marketing.
Most of the changes would be about improving customer experience and
shifting from product-oriented models to client-oriented.