Collaborate or Compete? The Shifting Roles of Fintechs in the Banking World.

August 2024

What is a fintech?

A fintech, short for "financial technology," refers to companies or technologies that use innovative approaches to provide financial services. Fintech companies typically leverage software, mobile apps, algorithms, and other digital tools to disrupt traditional financial sectors like banking, investing, insurance, and payments.

Fintech covers a broad range of services, including:

• Digital Payments: Mobile wallets (like Apple Pay), peer-to-peer payment apps (like Venmo), and cryptocurrency transactions.
• Lending: Online platforms that offer loans directly to consumers or businesses, often with more flexibility than traditional banks.
• Personal Finance: Apps that help individuals manage their finances, invest, or plan for retirement.
• Insurance (Insurtech): Technology-driven insurance services that offer customized policies and faster claims processing.
• Robo-Advisors: Automated platforms that provide financial advice or manage investments using algorithms.

Fintechs aim to make financial services more accessible, efficient, and affordable, often challenging traditional financial institutions by offering more user-friendly and innovative solutions.

Examples of fintech companies.

A fintech can refer to a company, platform, or technology that provides financial services using innovative digital solutions. Below are some examples of entities considered fintech.

Fintech Companies:

• PayPal: An online payment system that allows individuals and businesses to transfer money electronically.
• Square: Provides payment processing solutions for businesses and has expanded into lending and financial management.
• Robinhood: A commission-free trading app that democratizes access to stock trading and investing.
• Stripe: Offers online payment processing for businesses, focusing on developers with flexible APIs.

Challenger Banks (neobanks):

• Chime: A mobile-only bank offering fee-free banking services with a focus on budgeting and savings.
• Revolut: A UK-based neobank providing banking, investing, currency exchange, and cryptocurrency services.

Insurtechs (Insurance + Technology):

• Lemonade: Uses AI and behavioral economics to offer home and renter's insurance with faster claims processing.
• Root Insurance: A car insurance company that bases premiums on driving behavior monitored through a mobile app.

These companies and technologies exemplify fintech by disrupting traditional financial services and offering more efficient, user-friendly, and often more affordable alternatives.

How are fintechs different than banks and credit unions?

Fintechs, banks, and credit unions each serve distinct roles in the financial sector, differentiated primarily by their approach to service delivery and business models. Fintechs focus on leveraging technology to innovate and disrupt traditional financial services. They often concentrate on specific niches such as payments, lending, or investment management, using modern technologies like AI and blockchain to offer streamlined, digital-first solutions. Fintechs are typically subject to varying regulatory frameworks that can be less stringent compared to traditional financial institutions but must still comply with specific regulations related to their services.

In contrast, banks provide a broad array of services, including savings and checking accounts, loans, and investment options. They are heavily regulated to ensure financial stability and consumer protection and often have physical branches. Credit unions offer many of the same services as banks but are member-owned cooperatives with a focus on nonprofit operations. They emphasize personalized service and community engagement, catering to specific groups or communities. While banks and credit unions blend traditional and digital services, fintechs are distinguished by their heavy reliance on digital innovation and technology.

How do fintechs make money?

Fintechs generate revenue through a variety of models depending on their services. Common methods include charging transaction fees for processing payments, collecting subscription fees for premium features, and earning interest or lending fees from financial products. They might also receive commissions for referring customers to financial or insurance services, monetize data through targeted advertising or insights, and impose platform fees for using their services. Additionally, investment-focused fintechs often charge asset management fees based on the assets they manage. Each fintech tailors its revenue strategy to its specific business model and market needs.

Will fintechs replace banks and credit unions?

Over the past decade, the relationship between fintechs and traditional financial institutions has been dynamic. Initially, many fintechs positioned themselves as disruptors aiming to overhaul the banking sector, but over time, they have shifted to become technology providers eager to collaborate with banks and credit unions.

Some fintechs are integrated as vendors or partners of established banks and credit unions that offer banking-as-a-service solutions (BaaS). These partnerships can be especially valuable to smaller banks and credit unions – members can take advantage of traditional financial services that banks and credit unions offer, while also having access to new innovations and digital-first services that fintechs provide.

However, some recent writings and surveys have suggested the fintech and traditional financial service providers partnerships are more vendor-client relationships. In very simple terms, fintechs can be put into two camps: those that compete with traditional financial institutions and those that support traditional financial institutions. Some believe the evolution of these partnerships will lead to some successful standalone fintechs, while others believe the near future will see more fintechs being acquired by the bank tech sphere to offer better services to banks and credit unions.