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Evolution of Fintech, Traditional Banking, and Their Collective Impact


Today, Fintech has become a household name, yet still a brand new term for several others.

Fintechs are largely technology and financial expertise businesses that provide domain-specific products and services that were previously only available from traditional financial institutions like banks, insurance companies, and asset management businesses.

Even though fintech companies have not suppressed the traditional banks yet, they have started to make a mark in the 21st century (1).

In our previous article, Big Impact on Banks with Fintech Players Entering the AMC Space, we talked about how banks need to adopt the change and apply good strategies to stay relevant. Today, we will discuss the evolution of Fintech and how it can revolutionize the way we interact with money by collaborating with banks.

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Fintech 1.0 (1866 – 1967)

Fintech has been entangled since the 19th century (2), where promising finance innovators tried to advance how financial information is communicated beyond their locality.

The link built between financial institutions, the development of mainstream broadband communication and telephone, and public transport changes the way banks communicate with their customers. It allowed for new ways to send and receive money and expansion on a broader scale.

The first electronic fund transfer took place in 1918. By 1950, with the solidification of global communication and transportation, we built a foundation to start building financial institutes and transform how we interact with our money.

While we started to connect strongly with technology in Fintech 1.0, the financial services were mostly analog (3).

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Fintech 2.0 (1967 – 2008)

From the 1960s to 2008, financial institutes transitioned from pen and paper to digital systems. It brought us the first ATM by Barclays in 1967 (4), which marked the beginning of modern Fintech.

The digitalization of finances rose because of the development of digital technology for transactions and communication.

Another significant trend that happened in the early 1970s includes the establishment of NASDAQ. It was the world’s first digital stock exchange, ushering in the modern era of financial markets.

SWIFT, or the Society for Worldwide Interbank Financial Telecommunications, was formed in 1973 and is the first and most widely used financial communication protocol. It has made it possible to make a significant number of cross-border payments.

With the arrival of the internet and ecommerce in the 1990s, we saw the first mainframe computer, which led to online banking in the 1980s. Online banking brought a major shift in how people perceived money and their relationship with banks.

As we entered the 21st century, banks’ internal processes and customer interactions became digitized. Then came the global financial crisis in 2008, which marked the end of this era (5).

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Fintech 3.0 (2008 – Present)

We entered Fintech 3.0 after the global financial crisis, which morphed into a general economic crisis as the general public distrusted the traditional banking system. With several financial professionals also out of work, the cumulation paved the way for a new industry, Fintech 3.0 (6).

This era saw the emergence of new players, aka startups, alongside already existing traditional financial institutes. We also see already established and well-known tech companies delivering financial products and services to banks.

The birth of Bitcoin in 2009 is another event that had a major impact on the financial market, followed by the boom of various cryptocurrencies (7). (The great cryptocurrency crash followed the trend in 2018.)

Computers are widely used, with smartphones becoming the primary means for people to access the web and different financial services. It is another important factor that shaped the current face of Fintech. It increased even further with the launch of payment wallets like Paytm and Google (8).

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Fintech 3.5 (2008 – Present)

Consumer behavior and how individuals use the internet have evolved as cellphones and internet connectivity has become more widely available.

India is among the countries with the biggest number of fintech users. Emerging markets never had time to evolve themselves like the western level of physical banking infrastructure, making them more open to new solutions.

Another major factor includes deliberate government policy decisions to further their economic development. Hence, many parts of the world, like Asia and Africa, are in the Fintech 3.5 era (9).

Overall, Fintech has become the face of the financial world, with startups becoming large public organizations, such as PayPal. And with big tech also entering the fintech space, banks are getting anxious and have started collaborating with them like never before.

But the most pressing question is: what triggered the fintech revolution?

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Factors Leading to the Fintech Revolution

For a long time, traditional financial institutes have enjoyed a monopoly in space worldwide. They are licensed, highly regulated, and compliant bodies of their respective countries. Then, entered fintech startups that have started taking payments, lending, and other financial services to the next level in terms of convenience, speed, efficiency, and multichannel accessibility (10, 11).

Fintech has started to drive customer behavior and fulfill their expectations faster and better with innovative solutions across the financial space. And it has made the existing customer relationships with traditional financial firms, including banks, more vulnerable.

Hence, it has become critically important to understand how Fintech startups are disrupting the traditional financial systems and revolutionizing a new era of alternative finance.

Following are the issues with the traditional banks that have led to the Fintech revolution (12, 13):

  • Traditional banks are highly regulated and bound to multiple compliance norms and rules
  • Because of their huge network of branches worldwide, there are high operating costs
  • Poor visualization beyond the traditional business lines since they are primarily publicly held organizations that avert risk propositions
  • Low involvement of customers in the core operations
  • Investments were low in value creation from technology and innovative ideas
  • Fewer collaborations with progressive minds to increase their capabilities and competencies
  • They have primarily applied a neutral approach, which led to less focus on individual profit-making services and products
  • Challenging for banks to decide to replace and upgrade the legacy core banking infrastructure they have built over a long time

The next decade could be a challenge for banks; thankfully, they have realized that being a commerce facilitator will not be enough to get through. Today, banks have increasingly started equipping themselves with new, innovative technologies and revamping their business models to stay relevant to their tech-savvy and rapidly-evolving customer base.

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How Are Banks Overcoming Fintech Companies?

  • Making more investments in digital transformation to ensure agile operations.
  • Recruiting the right talent with innovative minds to cut operating and resource costs with constant innovative and robust growth strategies.
  • Targeting customer demand areas with the help of advanced CRM tools and customizing their offerings to keep their customers happy.
  • Making good use of ideas and concepts from Fintech and adopting them in their banking mode by leveraging their strong finance and large customer base.
  • Analyzing their core weaknesses and strengths and then selecting the right fintech partners to fill service gaps (14, 15, 16).

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The Impact of Fintechs and Banks Collaboration on Traditional Banking

Consumers, banks, government, regulators, and other stakeholders support secured investment products and services with safe transactions and decent returns in the traditional banking world (17, 18).

On the other hand, the growth of Fintech companies supports the need to shift from consumer banking to digital banking.

Both Fintech startups and traditional banks have their core competencies behind their existence in the financial market. Fintech companies cannot exist without banks since that’s where people store their money and financial information. Any Fintech company needs it to offer its services to customers.

At the same time, Fintech startups have cutting-edge technology at their grasp. Hence, a collaboration between traditional banks and new-age Fintech companies would revolutionize the traditional banking world.

Most governments worldwide, including India, support this revolution and relax their regulation to promote technology in the financial markets. Fintech companies and banks can leverage it with collaboration to gain a mutual advantage. Such partnerships will also meet customers’ expectations with constant changes in financial products, services, technology, investments, competition, etc.

In addition, collaboration with Fintech companies will allow banks to explore a wide range of new offerings to their customers, with lower operation costs, efforts, and time. And since there is a low operating cost and high transaction volumes, banks will be able to offer new products and discounts to attract new customers while also maintaining the loyalty of their existing customer base.

Overall, Fintech and banks will benefit from this collaboration since it will result in a stronger return on investment in the long term.