Community bank and credit union executives have decisions to make in an evolving financial services industry where technology has changed the user experience. The shift in consumer preferences toward online and mobile banking is growing, and fintech competitors are disrupting traditional retail banking.
Consumer preferences have enabled fintech companies gain market share in meeting the needs of consumers who demand to be engaged on their own terms. The rise of the smartphone has changed how consumers interact with their financial services providers. It is now expected that consumers manage their financial needs as easily and immediate as posting to Facebook, or shopping on eBay. Consumers expect to have the ability to apply for a loan, monitor their deposit accounts, and execute investment trades from their phones. Fintech companies are able to directly engage consumers by offering traditional financial services, such as deposit and lending products, payments, investing, and wealth management services.
Even though community banks and credit unions have historically been the preferred provider for financial transactions, fintechs have gained industry share while traditional delivery channels have diminished.
Community banks and credit unions should be aware of the following three areas where fintechs are posing imminent threats: customer acquisition and retention, erosion of traditional revenue sources, and diminished brand power.
Customer Acquisition and Retention
Fintechs weaken the relationships between financial institutions and their customers/members. It is already possible for people to manage their finances with minimal interaction with their banks and credit unions. Crowd source funding, peer-to-peer lending, and advisory services driven by artificial intelligence have undermined traditional financial institutions’ dominant positions. By reducing friction in the delivery of products and services, fintechs greatly improve the customer experience. For example, online lending consumers can borrow money without direct interaction with their financial institution. Simply put, fintech is luring away customers by promising a simpler way to manage money.
Erosion of Traditional Revenue Sources
Traditional revenue streams are coming under threat. Payments revenue is being challenged by applications such as Venmo, Square, and Paypal. Interchange fees and income derived from ATM transactions are also at risk, and loan revenue is being lost to unlikely sources such as Amazon, who offers loans to small and medium-sized companies.
Diminished Brand Power
Banks and credit unions are finding it increasingly difficult to differentiate themselves as consumers routinely compare financial products online (from multiple providers). Fintech companies use technology and data-mining to bring lenders and borrowers together to allow the easy raising of money without financial institutions. Consider how disruptive that is for traditional banking business models if lenders and borrowers no longer need banks to mediate.
The question that must be addressed is, “how can community banks and credit unions mitigate these threats?” The answer is they will have to make a choice:
- Compete head on with fintech by developing processes that can speed up and enhance service delivery to customers.
- Build relationships with fintech companies and create advantages over traditional competitors.
Ignoring the threat of fintech is not an option, and will only result in the loss of profitable customers/members.
Financial institutions that choose option one, to directly compete with fintech firms, can do so using the wealth of customer/member data they possess. They should use analytics, and embrace artificial intelligence to understand the needs of the marketplace, and proactively recommend personalized solutions.
Financial institutions that choose option two, to collaborate with fintech firms, can leverage their strengths by using their brand names, customer data, risk management expertise, capital, and regulatory knowledge to entice fintech partnerships. In turn, banks and credit unions can benefit from fintech’s core competencies of innovation, speed to market, and data-mining to improve customer/member retention and acquire new relationships.
Harry Brammell
Manager
Hometown: New Orleans, Louisiana
Alma Mater: University of Mississippi
Enjoys spending time with family, Following the Saints and Pelicans, Working out, and the occasional golf outing.
FAQs
As fintech companies capture market share from traditional banks and other firms operating in financial services, they pose a potential threat to the stability of the financial sector by eroding profits and raising operating costs.
What are the main problems of fintech? ›
User retention and user experience
Keeping users engaged is one of the most common fintech challenges. Low retention means fewer users, resulting in reduced income. Increasing user retention is possible by providing a better experience.
How will fintech affect the financial system? ›
FinTech is also disrupting the banking sector by offering services through digital banks and neobanks. While digital banks offer banking services entirely online, neobanks offer nontraditional services. Also known as challenger banks, neobanks are often FinTech startups that don't have physical branches.
What are the risks of fintech technology? ›
The dangers posed by fintech to consumers can be broadly categorized around loss of privacy; compromised data security; rising risks of fraud and scams; unfair and discriminatory uses of data and data analytics; uses of data that are non-transparent to both consumers and regulators; harmful manipulation of consumer ...
What is the biggest challenge in FinTech? ›
Fintech Challenges for Startups
- Raising Venture Capital.
- Finding a Great Investor.
- Competing with Huge Brands.
- Data Security.
- Regulatory Compliance.
- Lack of Tech Expertise.
- User Retention and User Experience.
- Service Personalization.
Traditional banks are facing an existential threat from FinTech firms in every aspect of their business ranging from payment services to corporate lending. Technological innovations have reshaped financial markets for hundreds, if not thousands, of years.
What are the pros and cons of fintech? ›
Fintech's advantages include easy access, transaction efficiency, and lower costs. Nevertheless, fintech also has disadvantages, such as data security issues, technological dependence, and a lack of consistent regulation.
Why fintech is difficult? ›
Learning FinTech involves mastering industry-specific tools such as Python, as well as constantly staying ahead of technological innovation in the field. Professionals in FinTech need to combine both hard skills, such as data visualization and programming, with soft skills like communication and business acumen.
How does fintech affect individuals? ›
Many Fintech applications position themselves as your trusted advisor and credit score monitor. Not only do they show specific numbers, but also provide valuable financial advice, thus making users more financially literate and more capable of securing better loans in the future.
How does fintech affect the banking and financial industry? ›
Fintech solutions enable banks to improve efficiency, enhance security, better customer experience, and reduce cost. This helps banks to grow, create new opportunities, and stay ahead in this competitive market.
Disruption of Traditional Banking Models: One of the main ways in which Fintech is disrupting traditional banking models is through digital payments. Fintech companies have made it possible for customers to make payments seamlessly, securely, and at a lower cost than traditional banks.
How has fintech affected banking? ›
Fintech startups, businesses specializing in financial technology, are disrupting the financial industry in big ways. They have several advantages that allow them to be more innovative and deliver services to customers more quickly and cost-effective than traditional banking institutions.
Is fintech a threat or an opportunity? ›
These types of non-banking financial firms are shaking the bank's comfort zone, since banks now have new competitors to worry about. But although it is being heavily observed that Fintech firms are a major danger for banks, they are even bigger opportunity for banks as well.
What is fintech risk and compliance? ›
Fintech Compliance & Risk Management
The outlines the control and oversight structures required to manage multiple third-party service providers in evolving Fintech operating models, and emphasises the role of the compliance function, throughout the customers lifecycle.
Is fintech good or bad? ›
Fintech startups are often the first movers in disruptive technologies, fashioned to address an unmet need or to introduce a novel product, positioning them at the forefront of these rapidly growing markets.
How does fintech affect banking? ›
Fintech is making banking and financial services more streamlined and accessible. Through the use of technology users can take advantage of automation to speed up processes which previously a human would have managed.
How do banks react to fintech? ›
Our research shows that while financial institutions recognize that fintech is a substantial disruptor, no single path has emerged to define how companies should approach fintech. Leading financial institutions are pursuing many different avenues — including partnering, buying, sourcing and investment strategies.
