How is FinTech Disrupting the Retail Banking Space?

Fintech has been a buzzword for a couple of years now and it can mean many things. Here we take a step back and look at how the world of retail banking specifically has been affected by the advances brought forth by Fintech disruption.

Retail Banking

Before we jump into the impact of fintech, I’d like to briefly review and clarify what we mean by retail banking.

Retail banking, also called personal banking or consumer banking, are financial service providers to users as individuals and not businesses. A retail bank is one option for individuals to have access to their credit cards, manage their transactions, and save money securely or deposit it in their current account. Retails banks offer a number of services such as saving and checking accounts, personal loans, certificates of deposit, mortgage, and credit cards.

Almost all the retail banks prefer to be a one-stop-shop for its users and costumers. They try to provide all the facilities in one window. If you want to loan money, deposit cash, manage transactions, or applying for a mortgage, you will get it in a retail bank of your choice. Competition in the banking space has given rise to one-stop-shop retail banks. 

A retail bank that provides services for all the retail services for its costumers is likely to thrive and get more costumers. In addition, the retail banks’ financial representatives provide all the financial advice to the costumers if they seek it. These financial representatives also happen to be the lead contact for supporting applications related to credit-approved products.

Normally the most used services offered by retail banks are the use of saving and checking accounts to deposit money. This is the common way to secure and store cash. Moreover, it enables the consumers to make money in the form of interest, upon saving money. Interest rates are, however, not decided by these retail banks but by the central bank or the Fed in the US. To facilitate withdrawals, banks provide debit cards with these accounts, which enables the consumer to pay for goods and services around the world.

Retail banks are also a great source of credit financing for consumers. For example, retail banks offer the facility to finance consumer in the form of mortgage to finance house. In addition, auto loans could also be borrowed from these retail banks to buy a car. Another great facility these retail banks provide is the credit card facility. It gave rise to liquidity to the consumer to carry out everyday transactions, which also helps the economic activities to grow.

Types of Retail Banks

Retail banks come in a variety of types and sizes, from local community banks, which are small, locally run banks to the retail banking services of large, global corporate banks such as the largest UK retail banks: 

·     Barclays.

·     Lloyds TSB.

·     Halifax (owned by Lloyds)

·     Santander (Spanish Owned)

·     Bank of Scotland (owned by Lloyds)

These retail banks earn a significant portion of their revenue by providing retail banking services. 

There is another interesting type of retail bank called Credit Unions. In retail banking, members pool their capital to provide financial services like a loan for investment to another member. Credit unions usually exist in the informal banking sector and provide excellent loan facilities to members when it comes to interest rates. The aim of Credit Unions is not profit but investment multiplication.

However, since technology has dominated almost every sector, many fintech companies and startups have been providing retail services to users via a mobile application in their smartphones. This has disrupted the retail banking sector, and the fintech has been emerging as competitors. Following are some of the fintech retail service providers in the UK:

·     Revolut – high profile fintech startups London

·     Trussle – Fintech UK rising star

·     Recept Bank – Fintech UK riser

·     Cleo – Fintech UK new kid on the block

·     Monese

·     Funding Circle

What does Fintech contribute to the Banking industry?

Fintech has been more than a revolution in the banking sector. It has introduced the latest technologies adapted by banking sectors, which has given rise to efficacy and instant service on the consumer end. Following are some of the examples:

We have witnessed a number of mishaps in the banking systems where hackers have attempted successful transfer of money from one bank account to another without letting the bank and the owner of the account even know about it until the loss is made. Fintech has contributed a lot to the banking industry in the form of Smart Chip technology. ATM cards now come with the Smart Chip technology, and this has helped in reducing the financial mishaps. Smart ATM cards come with EMV technology embedded in the chip and require a unique password for each transaction. Without the code which you receive on your mobile phone, no one would be able to transfer funds via your credit card, even if they have the rest of the details. This has secured the banking system immensely.

Fintech has been the reason behind innovation in the banking sector. Iris scanners and biometric sensors have been developed by fintech companies, and these two technologies have improved the ATM business a lot. Other benefits include the facility of banking without having to carry your debit card and having to remember your pin. 

The Automated Clearing House (ACH) is another contribution of fintech to the banking sector and has imparted efficacy to all the interbank electronic payments that take place around the country. The electronic payment may include salaries, insurance premiums, bill payments, and mortgages, etc. 

In a nutshell, fintech has been transforming the entire banking industry from a zonal and branch-specific service to the online facility at your fingertips in the form of mobile applications. This gives rise to an online banking system that could be used from anywhere around the world, which was not previously possible. Omnichannel banking is one example. As a result of online banking and the arrival of fintech applications, more than 9100 zonal branches were closed in the UK by the end of 2016.

Evolution of Fintech in the Banking Industry (Last Decade):

FinTech has sparked significant innovation in the banking and finance industry in the UK. As a result, we have been able to see billion-dollar startups in the insurance and crypto space in the UK. From the arrival of AI-based open banking platform to Bitcoin, we can see the growing involvement and significant contribution of fintech in the financial sector. Most importantly, it has been encouraging innovation, which is a significant factor in the growth of retail banking operations as well as the economy, not only in the UK but around the world. Let’s look at how fintech started disrupting and thereby innovating the banking sector. 

·     In 1966, Barclaycard (the first credit card in the UK) was launched.

·     In 1997, the Nationwide Building Society in the UK introduced inter-banking service for the first time.

·     In 1998, PayPal was launched in the UK. It was initially called Confinity.

·     In 2011, Google introduced Google Wallet in the UK.

According to a study by  Arneris, Barberis & Ross, the key periods in the timeline of fintech are:

Fintech 2.0 (1967-2008) Digitization of retail banking:

This was the time period before the Global Financial Crisis in 2008. It was the era of digitization of the retail banking and its interactions with the outsiders and costumers.

Fintech 3.0 (2008-Current) is about startups

As the global financial crisis in 2008 turned into a general economic crisis, the masses developed trust issues towards the traditional retail banking system in the UK and around the world. This was because banks had gone bankrupt, and many financial institutions had laid off their professionals, which shifted the mindset of the people and gave birth to the Fintech 3.0 era. This era was marked by the birth of new players in the financial game, along with the already existing banks. 

Bitcoin appeared in 2009 and revolutionized the world of fintech. From literally less than a dollar worth to more than $19,000 US in 2017, Bitcoin paved the way to crypto boom unseen before in the history of any asset in such a small time interval. The 2017 crypto boom inspired investors and individuals to speculate in Bitcoin and make big money. 2018 was not a good year for crypto, but the assets are still considered worth investing with a large market cap of more than 100 billion dollars.

It is, however, a reality that without the mass production and usage of smartphones, fintech would not have achieved where it stands right now. A large number of people who use PayPal, Stripe, and GooglePay are smartphone users. This is because it is very convenient and easy to access the internet and banking apps via smartphone. This was the reason Apple introduced ApplePay in 2014.

Fintech in Emerging Markets

It is the extensive use of smartphones that have paved the way for Fintech 3.5. According to the statistics, India and China have the highest number of smartphone users in the world, and this is the reason the countries with the highest fintech usage are also India (52%) and China (69%). India, China, and other developing countries never had the time and resources to grow like the Western world, so these countries had to rely on new solutions. Let’s take the example of China, where the average fintech adoption is 46%, and the average fintech penetration is over the global 33%.

Fintech Today

With the advancement in financial technology, these fintech firms and startups have started claiming their own position in the banking market, which has, up to some extent, shrunk the user base of the retail banks as evident from the vast user base of the fintech companies like PayPal. A strict competition could be a cut-throat one, so it is more desirable for both retail banks and fintech companies to partner and maximize revenue. 

On the one hand, we have seen this in the form of investment or insurance taken from banks by the fintech startups. On the other hand, banks have been investing in these fintech startups to leverage new technologies in the banking space and improve the system. 

Who are the leading players in the fintech banking space? 

Both banks and fintech startups have their pluses and shortcomings. A partnership between the two might be interesting, which will bring forward the most efficient systems for consumers. Let’s talk about the problems with banks and fintechs and then elucidate what could possibly come up if fintechs and banks partner together. 

Challenges for Fintechs:

Fintech startups face a number of issues such as:

Regulatory Issues for Fintech Companies-If you are a Fintech firm or startup, you have to be able to deal with regulation every day. It becomes the norm. Fintech startups are under increasing pressure to address the regulations. For example, when Bitcoin ATM was launched in the UK, one of the cofounders of the ATM was called by the senate to address how the machine facilitates money laundering. 

Competing with Huge Financial Brands-it is, however, not very easy to be a successful fintech startup because of alternatives in the market. The competition is very tough when it comes to claiming the market against big financial powerhouses such as Citi, Goldman Sach, or PayPal. 

Cost-Effective Marketing to Acquire Customers-Customer acquisition is one of the main issues startups have to focus on. The method of acquiring customers depends on if the fintech company is offering B2B or B2C services. In addition, customer acquisition through different marketing strategies require investment. A fintech company has to spend on social media marketing, Google Ads, the company’s website, and content creation. 

Problems with Banks:

Banks also face a number of issues such as:

Rising Competition from Fintech & Non-Traditional Players-As a result of rapid expansion in the fintech services and innovation in the banking sector, the retail banks have started upgrading their offerings too and have been providing the customers with a better experience. In addition, as a result of innovative fintech startups in the space, customers are now able to compare two service providers and chose the best of them.

Lack of Personalization-It is an open secret that the majority of the banks pay little still operate on the traditional model and rarely focus on innovation. On the other hand, fintech startups have capitalized on the technological advancement and have been able to provide instant and amazing services to customers as a result of which, banks have lost a significant portion of its customers who now prefer to use services offered by the fintech firms.

Lack of Security Measures That Don't Interfere with Customer Experience-With the advancement in technology, and the arrival of open bank and online transactions, the frequency of data breaches and hacks have intensified immensely. Every second person in the United States is at risk of getting hacked. The situation is not different in the UK too. This has made risk management the first priority of these financial institutions. To manage risks, banks have put in place various layers of authentication, but these strategies are resource-intensive and have deteriorated customer experience. 

What happens if Banks and Fintechs partner?

If retail banks and fintechs partner together, they could put an end to the vulnerabilities in both the banking sector and fintech space. They could actually give rise to amazing services such as:

Safe and secure transactions-Banks keep important information about their users in their data bank. If banks partner with fintech startups and firms, they could use the latest technology of these companies and startups and still maintain the transaction authenticating authority to make sure the money transfer goes smooth. 

Joint Investment-Partnerships between Fintechs and banks could give rise to innovation and technological advancement in the banking and retail sectors for mutual growth.

Venture in alternate businesses-Banks in partnership with fintechs would be able to build the confidence of the customers and businesses. This will bring both banks and fintech companies under one umbrella and will maximize their revenue. This will also bring down the cost of operations for both banks and fintechs, and consumers, as a result, would also be able to pay less for the services due to system efficacy.

Transaction at ease-A partnership between banks and fintechs could impart efficacy to the banking system. For example, the latest technology could help us save on transaction time, money, and effort. This will lead to a high transaction volume, which will also benefit banks and fintechs.

Regulatory support and central bank incentives-Regulations in many ways can hamper the growth of fintech companies. Many governments have been supportive towards fintech startups by relaxing regulations to enhance the growth and promotion of technological innovation. Both banks and fintech startups could leverage from such support if they collaborate with each other.

Big FinTech players in the game:

Revolut- Bank with a Mobile App & Debit Card:

Revolut is one of the famous fintech companies in the UK and has been providing excellent services. You can send your money across the border without any hidden fee, by using the services offered by Revolut. Revolute works with more than 130 currencies and helps you exchange currency at the real exchange rate without any hidden fee, unlike bad money exchange platforms that offer the worst exchange rate. Revolute provides a number of services such as:

·     Revolut facilitates the purchase, sell, exchange, and hold of cryptocyrrencies.

·     You can exchange Bitcoin, Ethereum, or Litecoin with more than 25 different fiat currencies at the best rates.

·     Revolut can help you save money. This could be done by using the recurring payment to your savings.

·     Revolute also gives the option to track your spending via payment notifications. The company also provides you simple analytics to help you stick to a budget.

·     Revolut provides the options to set up direct debits and recurring payments.

Recept Bank – Fintech UK riser

·     Receipt Bank is another leading fintech company in the UK and helps you save time by uploading invoices precisely into your account. They make use of OCR technology.

·     Automatically analyze invoices and calculate the precise amount of VAT to claim. It saves VAT.

·     Reminds you to upload invoices and receipts right away and not at the end of the month. It saves you tax. 

·     It comes with applications for your laptop or PC, mobile (Android and IOS), and also now with an app for Apple Watch.

·     Smooth integration with Xero, which has reduced the claiming expenses a lot.

·     It uses Dropbox and uploads your invoices and receipts directly into your account. This helps Receipts bank download the data for analysis with ease. 

Cleo – Fintech UK new kid on the block

·     Celo was launched in 2016 and has grown exponentially. With a user base of more than 90,000, Celo helps its users to have a more positive and more transparent relationship with their budgeting.

·     Celo analyzes the transaction of your bank account by using artificial intelligence. According to experts, it helps financial management better.

·     It comes with a mobile phone application that is easy to use.

·     Celo provides bank-level security with an ￡85,000 pledge.

·     Celo is best for those who are not mostly engaged with their money.

What is the future of the fintech retail banking industry?

Fintech firms and startups have been growing at fast rate. A number of companies have been valued at more than a billion dollars. As a result, the rate of disruption and innovation in the financial industry has accelerated immensely. OFX is one fintech company changing the concept of moving money. 

It is a war to win customer satisfaction. Imagine how small fintech startups are competing big banks and claiming a big portion of the market. From using mobile technology to AI and ML software, the purpose is to give rise to seamless and smooth customer experience. 

This does not really mean that banks will die. However, the pace at which the fintech companies are coming up with innovative ways to solve pain-points in the market definitely shows the insane progress and a promising future. Fintech companies like PayPal and AliPay have been dominating over the cross border money transactions with billions of users.

Glen Frost- Founder FinTech Summit & FinTech Awards-is optimist about the future of fintech. According to him, fintech offers a better user experience, focus on solving problems, lower prices, and smooth use. These companies are nimble and resonate with problems instantly as compared to banks. As a result, the value of global investment in fintech startups and companies grew by to $128bn by the end of last year and is expected to reach over $300bn by 2022. The financial service sector reported that the shift in retail banking from retail banks to fintech companies was the most significant disruption by the fintech companies. This is because consumers constantly look for cheap and quick ways to manage funds transfers on the go.

This article was originally published on FinTeXec by Ronal Shah