How Fintech Innovations are Eroding Banking’s Dominance

It’s an old adage: Dinosaurs don’t move fast enough, which gives agile creatures (or companies) an ability to survive and even thrive. Banks’s dominance over money is eroding. That may surprise traditionalists, given that financial services is the largest sector in the world and that big banks have powerful allies in politicians. However, technology and evolving paradigms are giving fintech ventures an edge when it comes to offering new financial products, services and practices that improve the customer experience. 

There’s also the issue of trust. Just 41 percent of Americans trust banks, while 27 percent are angry about the economy, according to a 2018 joint survey by University of Chicago and Northwestern University. That’s creating a culture in Main Street that’s suspicious of Wall Street.

Aside from mistrust, technological trends are giving consumers more ways to store wealth, send payments and protect data. These include decentralized finance (DeFi), tokenization of assets, artificial intelligence, regulation technology (RegTech) and cryptocurrencies, to name a few. 

Here are ways that depositors, borrowers and creditors can do business that were traditionally reserved for financial institutions.

Personalized goods and services is being embraced across industries. Eight of 10 executives say personalization is important to their organization’s strategy, according to a 2018 survey by Harvard Business Review. And nine of 10 customers expect organizations to know their interests and anticipate needs.

Peer-to-peer (P2P) lending does both by removing brokers from loan transactions and by directly matching borrowers and lenders via shared platform. In Constant’s case, the platform acts as a trading hub where borrowers and creditors pick the best deal. Moreover, the Redlands, Calif.-based venture allows users to set their own interest rates and terms — a feature that doesn’t exist anywhere else.

Because of distrust in banks, P2P firms have a receptive audience in Millennials and Generation Z. By cutting out the middleman, Constant lowers borrowing costs while increasing returns for debt investors. Risk is also managed by over-collateralized loans.

For believers of Bitcoin, cryptocurrencies are a promising way to send and receive frictionless payments worldwide. However, adoption has stalled since last year’s crash in prices. Volatility makes cryptos challenging to use for payments, and regulators are making reporting requirements burdensome.

“[Fintech] disruptors are fast-moving companies, often start-ups, focused on a particular innovative technology or process in everything from mobile payments to insurance,” writes the authors of PWC’s report, “Financial Services Technology 2020 and Beyond: Embracing Disruption.” The authors continue, “[Disruptors] have been attacking some of the most profitable elements of the financial-services value chain.