Rise of Fintech

Rise of Fintech

Financial technology, otherwise known as Fintech, is a new wave of financial services which is disrupting the banking industry.  Currently, Fintech is using technology to disturb the incumbent financial system. With the arrival of this new service, the traditional problems associated with banks are disappearing.  The need to go to an office, fill out forms, provide endless documentation, and even wait several weeks for approval is becoming obsolete. Fintech enterprises are gaining great levels of traction in countries all across the globe.  With such great levels of success, these firms are disrupting old financial methods and providing new and convenient services for consumers.

According to an article from Global X in June 2018, there are four main drivers behind the growth of Fintech.  The first is the digitalization of financial services. This shift has altered the interaction between financial firms and their customers.  Instead of working with the bank’s staff to conduct deposits, loans, and investments, customers now use automated versions of these services for a more streamlined experience.  

The second is the rising number of payment options.  With the arrival of digital payment methods in addition to the current physical payments such as cash or credit, there is now a need for these payments to occur instantaneously while ensuring security and integration across the business’s accounting and inventory systems.  In most cases, such a complex web of operations requires cloud-based software solutions and payment infrastructure, which are provided by Fintech firms.  

The third major trend fueling Fintech’s growth is the need to tap into the middle class of emerging markets.  The digital-only aspect of Fintech firms allows them to add many customers because the majority of their costs originate from the original software development.  On the other hand, traditional firms have much larger customer acquisition costs. For example, a conventional tax prep firm would need to hire and train a new branch of tax advisors if enough additional customers were added.  As a result, these long-established firms have had little interest in spending the money required to extend their services to the middle class of emerging markets. Thus, the shift to Fintech is becoming more important. This movement is critical given the growth of the middle class in emerging markets.  For example, in China and India, the middle class is growing 6% per year, compared to just 0.5% in developed markets. Furthermore, according to Accenture, there is $380 billion in potential revenue from providing financial services to those who currently have none. Given the highly scalable platforms of Fintech firms, they are in the best position to access these unrealized funds.

The recent expansion beyond traditional financial services has also prompted the rise of Fintech firms.  Many of these enterprises are exploring more into the prospects of blockchain and cryptocurrencies. According to KPMG in 2018, the shift to blockchain in finance is critical because it could reduce errors by 95%, increase efficiency by 40%, improve customer experience by 25%, and diminish capital consumption by 75%.  Fintech firms have realized this potential growth and have become much more prevalent as a result.

The rise of Fintech has the ability to completely revolutionize the banking industry.  Although it may damage the past institutions of financial services, these enterprises have the potential to increase revenue for banking firms and improve customer returns.

Sources

Jacobs, J. (2018, June 19). What’s Driving FinTech’s Growth? – Global X Funds. 

Retrieved June 4, 2019, from https://www.globalxfunds.com/whats-driving-fintechs-growth/.

KPMG. (2018).  Blockchain and the Future of Finance.  Retrieved June 4, 2019, from 

https://advisory.kpmg.us/content/dam/advisory/en/pdfs/blockchain-future-finance.pdf.

Teruel, A. (2018). The Rise of Fintech in the Global Financial Markets. Retrieved June 4, 

2019, from http://repositorio.upct.es/bitstream/handle/10317/7287/tfg-cas-ris.pdf?sequence=1&isAllowed=y.

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