Innovation has transformed the financial services industry in the last twenty years. Technology has changed everything. Traditional banking models are being left behind with the rise of financial technology (fintech). The term fintech refers to software and other modern technologies used by businesses that provide automated and improved financial services.
Fintech companies are a result of the last few decades where consumers were frustrated with banking. First, in the 1990s, homes began having the internet, which allowed banks to have websites for customers to check their balances, download monthly statements, and use personal finance software like Intuit. Then in the 2000s, smartphones became popular, and with that, the rise of banking apps to check balances and even make transfers between accounts. Finally, open banking started expanding in the 2010s and is still unfolding today. Open banking is one secure way to give customers access to their financial information.
The rise of fintechs and their success comes from some of the stumbling blocks of traditional banking. First, many banking institutions are working with outdated or legacy systems. Legacy systems are not programmed to keep up with modern standards. The cost and time required to update these systems are daunting to many banks.
Second, government regulations and rules are changing, and banks have to evaluate how they are meeting these new standards. This evaluation leads many banks to be open to fintech opportunities.
Third, consumers’ preferences are changing. Social media and e-commerce applications are responsive and in real-time. Consumers demand that same experience with banking and payments.
As a payment hub, fintechs act as intermediaries between merchants and banks. In this role, they have three main characteristics in their business model:
They are focusing on one single product or service and doing it well.
They have a clear focus on solving their customers’ problems.
They are using modern technology.
Fintech innovation is changing customers’ experience and expectations by focusing on client-centered and interactive banking and financial services. Banks are now rethinking their roles and how they interact with fintechs, and the results are more favorable.
Banks are now open to fintech companies handling the underwriting and risk of accepting merchants for payment processing. In this era of rapid transformation, both consumer and corporate customers want something different. Services above and beyond traditional product offerings are in demand, and customers are happy to change banks to have these options.
Savvy merchants and business owners are moving towards fintechs and away from traditional banking for their payment processing needs. To read more about fintechs and centralized data see Fintech: Centralized Payment Data for Merchants.