FinTech vs Traditional Banking: What's the Difference?

It could also be considered as a term to describe technology that aspires to automate and enhance how financial services and products are utilized and delivered.

FinTech is widely used by entrepreneurs, companies and consumers to use software in a simpler way to manage financial and business operations and to streamline complex financial processes. Currently, access to technology is easily available, via a computer or other device, such as a smartphone.

FinTech categories worth noting

There are four FinTech categories that are worth noting, even though it can refer to a wide range of digital financial systems. 

#Blockchain

Currently, many companies in the financial technology industry use blockchain technology. The main idea of Blockchain is to create a decentralized network of users with a common ledger of transactions.

#Digital lending

Digital lending is the practice of obtaining loans from sources other than traditional financial institutions using technology.

According to the Global News Wire, the market of digital financing is estimated to increase from $10.7 billion in 2021 to $20.5 billion by 2026 and the annual growth rate to 20%, so the FinTech companies are probably going to play a big role in the future of business loans and related financial services.

#Wealth management

Many FinTech companies are gradually replacing investment specialists. These days, it's just easier to download a banking app, create a bank account and get expert investment advice for a shockingly low fee with little to no human interaction.

#Payments

Financial technology enables users to conduct private payments, mobile payments, and transactions using credit as well as debit cards.

What is Traditional Banking?

Traditional banking most commonly refers to financial institutions that are licensed to accept deposits and grant loans to individuals clients or to businesses. There are many types of banks, for example we can distinguish corporate banks, investment banks or retail banks.

In most countries, traditional banking is usually regulated by the central bank or national government institutes.

Relationship between FinTech and Traditional Banks

The traditional activity of an incumbent banks and the activity of a FinTech are both classified as providing financial services to consumers. In other words, FinTech firms are viewed as traditional banks' main competitors. The distinction is that a FinTech bank employs new technologies, whereas traditional banks continue to rely on antiquated and time-consuming procedures and measures.

Traditional banks are lagging in terms of innovation and technological advancement, while FinTechs are trying to keep up with the pace of innovation. FinTech businesses want to be complementary to certain activities performed by traditional banks. These are essentially Regulatory Technologies that aim to simplify the monitoring of regulatory constraints.

The differences between traditional Banking and FinTech

#Structure and Function

FinTech is an innovative, customer-oriented idea. It has the ability to simplify complicated financial procedures. Financial technology makes it easier for organizations to make changes, replace obsolete systems, and evolve existing systems with new ideas.

With the use of Big Data, Artificial Intelligence, Machine Learning and Cloud Computing, FinTech can provide a unique and comfortable experience for customers. In addition, these technologies place more emphasis on relevance, customization, speed, and seamless delivery. As a result, it is an ideal option for the banking sector, as it allows for streamlining complex financial procedures and increases public access to them. 

In terms of traditional banking, there are regulations and the overall financial system that limit its ability to take advantage of emerging new technologies over time. Traditional banks are more process-oriented than FinTech.

#Business Models

FinTech as well as traditional banks both provide banking and borrower services, but they operate under quite distinct business structures. To create an account or get a loan from a traditional bank, there is a need to go to the stationary, and actual location to confirm your identification. Companies based on financial technology, on the other hand, run virtually, using practical mobile applications or an API interface.

#Regulatory Requirements

Traditional banks must abide by all laws, rules, and regulatory framework that have been placed in place to safeguard the money of their citizens, according to regulators. Transparency between financial institutions and their clients is ensured by banking regulations.

However, the results of research conducted by the Bank Administration Institute show that consumers from different generations, except for the older one, prefer digital banking tools. Increasingly, consumers are considering digital banking as an easy way to manage their finances.

#Growth Potential

Due to the annual growth and expansion of the financial technology industry, as well as the growing importance of this technology for companies and individuals to manage personal and business finances, FinTech companies are gaining a significant competitive advantage over traditional banking and financial institutions.

Traditional banks have maintained the financial market for many years, and with the advent of financial emerging technologies, they try to evolve and adapt to changes in such a way as to balance their position.

#Risk Factors

It may seem that traditional banks have an advantage over FinTech in terms of digital security, since they are strictly regulated by central banks and have safeguards to protect the assets. 

Regulations in the FinTech sector are more flexible, which increases industry risk. Because FinTech provides a more effective, economical and inventive user experience and also fulfill customer expectations, people continue to use it. 

Is FinTech Disrupting Banking?

Technological innovations directly related to finance industry and smart solutions, such as cryptocurrencies, peer-to-peer lending, equity crowdfunding or advisory and trading platforms, could disrupt the financial services industry.

They increase competition and also blur industry boundaries, creating a lack of clarity and transparency.

Financial services offered by FinTech have the potential to revolutionize the way existing companies create and deliver financial products and services.

In developed and emerging markets, it can be seen that consumers are increasingly willing to use FinTech services due to their convenience or lower costs. 

However, despite the development of the financial technology industry, the banking sector has now recorded a larger share of the volume of global financial services.

Conclusion

The FinTech sector is upending the established traditional banking system by utilizing cutting-edge technology to satisfy client expectations, increase customer loyalty and offer more rapid customer care. The FinTech sector has an advantage over legacy banking due to mobility, accessibility, and ease, which is why it is growing in popularity.

To assist businesses in streamlining their complex financial operations, FinTech companies combine service specialization and technical skills. FinTechs assist non-financial firms in enhancing the consumer experience by serving as external suppliers.

FinTech companies are setting the pace in changing the FinTech ecosystem and how it functions by delivering innovative financial services as a result of the expanding technological possibilities.

If you are interested in the financial technology industry, be sure to read all the articles from this sector on our blog, and if you want to find out what financial projects we have worked on, check out the Case Study section!

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