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Is Fintech Actually Surpassing Traditional Finance?

Is Fintech Actually Surpassing Traditional Finance?

The financial services sector is at a pivotal juncture. The emergence of financial technology (FinTech) companies has sparked debate and some contention, particularly with the world of traditional finance (TradFi). 

When you look under the covers, it is easy to wonder if Fintech is providing true disruption or if it is just incremental improvement that will simply get adopted by all players. 

There is no question that fintech has had an impact, however the real question is about the future, what will be the prominent financial services, and can this evolution see the dying of a certain species of traditional financial services. 

The Definition of Fintech vs Traditional Finance

Fintech refers to financial technology, which encompasses a broad range of tech innovations and advancements applied to financial services. This includes digital platforms, software, and applications that offer financial services such as mobile banking, peer-to-peer (P2P) payments, online lending, and investment management. A key hypothesis of fintech firms is that traditional finance firms have poor user experience (UX) in their technology and poor customer service, opening a door for competition. Another area fintech looks to compete is the removal of “unnecessary” middlemen which would speed up processes and reduce fees. Overall, fintech aims to improve and automate the delivery and use of financial services, often focusing on innovation, usabilty, and efficiency.

Traditional finance (TradFi), on the other hand, refers to the conventional financial systems and services provided by established financial institutions such as banks, credit unions, and investment firms. These services include checking and savings accounts, loans, mortgages, and investment advice, traditionally delivered through physical branches and traditional channels, however they have been moving more to remote service particularly since 2020 (COVID).

The key difference between fintech and traditional finance lies in their culture, approach and delivery methods. Fintech focuses on modern software development methods to deliver innovative, user-friendly, and often more cost-effective financial solutions, while traditional finance relies on established systems and practices, often with a focus on in-person interactions and long-standing customer relationships.

Fintech's Promise of Differentiation

The Fintech dream is to deliver a range of tech-driven solutions aimed at revolutionizing the financial sector. Unlike traditional banks, which are often encumbered by outdated systems and bureaucratic processes, fintech companies prioritize a customer-focused approach. Key features of the fintech experience include mobile-first interfaces, 24/7 accessibility, and tech-driven personalized services. This emphasis on customer experience has highlighted a potential weakness in traditional financial institutions – a delay in adapting to user needs.

There are a couple primary reasons that the gap of traditional finance exists. From 2000 to 2015, software development underwent significant changes that made it easier and more efficient. Advances in programming languages and frameworks, such as Python, Ruby, and JavaScript, offered developers more intuitive and versatile tools. Integrated Development Environments (IDEs) and code editors like Visual Studio and Eclipse evolved to include features like code completion and debugging, streamlining the development process. The rise of open-source software provided a wealth of free resources, fostering collaboration and innovation.

The adoption of agile methodologies, such as Scrum and Kanban, emphasized iterative development and adaptability, allowing teams to respond quickly to changes. Cloud computing platforms like Amazon Web Services and Google Cloud Platform offered scalable resources, eliminating infrastructure concerns. Version control systems like Git improved collaboration, while the growth of web technologies and mobile development tools simplified the creation of web and mobile applications. The proliferation of APIs and microservices architecture further enhanced modularity and flexibility. Additionally, the expansion of online communities and resources provided developers with easy access to knowledge and support, contributing to the overall improvement of software development during this period. Most of this did not exist when banks launched their web services and it is a much more difficult process for them to upgrade or refactor code.

Fintech also utilizes advanced technologies like artificial intelligence (AI), machine learning, and blockchain to offer innovative financial products. From automated budgeting tools that help individuals manage their finances effectively to quicker loan approvals that simplify the borrowing process, fintech is reshaping the delivery of financial services. This is not saying that traditional companies don’t use these technologies and methods, however they are definitely slower to adopt, which opens a door to compete.

Lastly, fintech companies often have lower operational costs due to their digital-first approach. Traditional banks’ physical branches, which are a significant expense, are contrasted with fintech’s more streamlined operations. This often results in lower fees for consumers and businesses, adding another layer of disruption to the established financial landscape.

Can Traditional Finance (TradFi) Adapt?

At first glance, the disruptive nature of fintech may seem questionable. Traditional financial institutions have the resources to implement many of the features offered by fintech companies, such as developing mobile apps, investing in new technologies, and streamlining processes. So, where does the real disruption lie?

The answer is not just in what fintech can do, but in how it is prompting traditional finance to reevaluate its approach. Fintech is driving a mindset shift in the industry in several ways:

Customer Focus Takes Center Stage: The success of fintech underscores the growing demand for a customer-centric approach. Traditional banks are now prioritizing user experience, focusing on mobile-first solutions and streamlined processes. This shift marks a significant departure from the old model, where convenience often took a backseat to internal procedures.

Innovation Becomes Imperative: The agility of fintech startups pushes traditional financial institutions to innovate more rapidly. New products and services are being developed to compete in a market where customer expectations are constantly evolving, leading to a more dynamic financial landscape with quicker adoption of new technologies.

Financial Inclusion for the Underserved: Fintech companies often target underserved populations, those who may not be adequately served by traditional financial institutions. This can lead to greater financial inclusion, with a wider range of people gaining access to essential financial services.

Collaboration Over Competition: While some view fintech as a direct competitor, there is an increasing trend of collaboration between traditional financial institutions and fintech companies. Banks are partnering with fintech startups to leverage their expertise in specific areas, such as mobile payments or data analytics. This fosters innovation and allows traditional banks to reach new customer segments they may not have been able to access on their own.

The disruption is not just about the technological capabilities of fintech; it’s about the cultural shift it has sparked within the financial services industry. Fintech is a wake-up call for traditional finance, challenging it to adapt or risk becoming obsolete in a rapidly evolving world.

A Co-Evolving Landscape of TradFi and Fintech

The future of financial services will be shaped by a co-evolving ecosystem where traditional finance and fintech companies coexist and collaborate. Traditional banks, with their vast resources and established customer base, can leverage fintech’s agility and innovative spirit to stay competitive. Conversely, fintech companies can benefit from the regulatory framework and risk management expertise of traditional institutions.

If you look at the fintech category called “Neobanks“, this is a strong example of co-existence. Acquiring a banking license is an expensive and arduous process. It can take 1 to 2 years and cost $5 million or more to acquire a schedule 1 banking license. Many neobanks are simply new user interfaces for traditional finance banks to allow them the escape the need of a banking license. For example, Neo (a Canadian Fintech bank) is a front end for Concentra (a Canadian schedule 1 bank). This is taking the best of both worlds. 

Challenges remain on the path to a truly collaborative future. Data security is a paramount concern, as both traditional finance and fintech companies grapple with protecting sensitive customer information in an increasingly digital world. Furthermore, regulatory frameworks need to evolve to keep pace with financial innovation, ensuring a level playing field for both established institutions and nimble startups.

The Fintech Disruptions in TradFi Payments

The payments landscape is also undergoing a transformation partly driven by fintech innovation. While contactless payments and mobile wallets have become commonplace, the real disruption lies deeper, encompassing several key areas:

  1. Frictionless Payments: Fintech is removing friction from the payment process, making transactions faster, easier, and more convenient. This includes in-person payments, where contactless payments using near-field communication (NFC) technology have become widely adopted, replacing the need for physical cards. Biometric authentication like fingerprint or facial recognition is further streamlining in-person transactions. Online payments have also been simplified with one-click checkout solutions and digital wallets like Apple Pay and Google Pay. Additionally, peer-to-peer (P2P) payments through mobile apps like Venmo and Zelle have revolutionized transactions, allowing instant money transfers between individuals.

  2. Rise of Alternative Payment Methods: Fintech is introducing new payment methods beyond traditional cards and cash. QR codes, for example, allow for quick and convenient payments by scanning with a mobile phone. This method is particularly popular in Asia and is gaining traction in other regions. Open banking is another innovation that enables secure data sharing between banks and third-party providers, facilitating the development of innovative payment solutions like account-to-account (A2A) payments.

  3. The Power of Data and Analytics: Fintech companies are leveraging data and analytics to personalize the payment experience and improve security. Advanced algorithms can analyze transactions in real-time to identify and prevent fraudulent activity. Additionally, payment data can be used to provide users with personalized discounts and loyalty programs.

The impact of these innovations is evident in the growth of global contactless transaction volume, which is projected to reach $18.6 trillion by 2027. Mobile wallet usage grew by 23% globally between 2022 and 2023, and the global P2P payments market is expected to reach $6.03 trillion by 2026. 

Will FinTech Surpass the TradFi Market?

The explosive growth of fintech is reshaping the financial landscape, yet the prospect of surpassing traditional finance (TradFi) in total revenue presents a formidable challenge. The global fintech market is on a steep upward trajectory, expected to reach $460 billion by 2025, with a Compound Annual Growth Rate (CAGR) of 23.8% from 2020 to 2025. Projections suggest that fintech revenue could grow sixfold by 2030, reaching an impressive $1.5 trillion.

Despite these impressive figures, TradFi maintains a dominant position with a $12.5 trillion share of the global financial services market revenue. Its established infrastructure and slower growth rate provide a solid foundation that fintech has yet to rival. To match TradFi’s current revenue levels, fintech would need to grow at an unprecedented rate. Even a sixfold increase by 2030 would only bring fintech’s revenue to $1.5 trillion, a fraction of TradFi’s current share. Furthermore, TradFi benefits from a long-standing reputation for stability and security, which fintech, as a relatively new entrant, may struggle to build quickly.

Given these dynamics, a more likely scenario is a collaborative model where both sectors leverage each other’s strengths. Fintech’s agility and focus on user experience can complement TradFi’s offerings, leading to enhanced financial services. Traditional institutions, in turn, can provide fintech solutions with wider access and a robust regulatory framework. In conclusion, while fintech’s growth is undeniable, the prospect of completely overtaking TradFi in the near future seems unlikely. A collaborative approach appears to be a more plausible path forward, shaping the future of finance through mutual enhancement and integration.

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