Fintech, like so many technological industries, tends to focus on startups intent on disrupting the status quo with new ideas. While this has historically driven innovation and progress, banks are not always at the forefront of this dynamic. Regardless of their wealth and capability, banks have been slow to innovate and embrace disruptive fintech so far.

Banks can still get into the fintech game. In fact, now is an excellent time to make that move.

Banks are Falling Behind Disruptive New Players

Fintech is not a new concept, despite the jazzy moniker. In a sense, “financial technology” has been around as long as the cash register. However, the difference between then and now is the sheer number of tech startups that have entered the game in the last five years.

With the onset of contactless payment and mobile wallet technology, more and more upstart fintech projects have entered the fray. They’ve pushed fintech to the forefront of the financial sector. The point at which fintech became a “niche” industry is precisely the same as the point at which banks began to lose their edge.

According to Tipalti, the global financial industry is expected to be worth US$26.5 trillion in 2022, with compound annual growth of 6%. The 48 leading fintech unicorns are now worth over $187 billion. That is slightly more than 1% of the global financial industry. If banks do not keep pace, they stand to be viewed as increasingly irrelevant.

What’s Driving This Movement?

There’s no coordinated force that pushing fintech startups to the top. Rather, it’s a natural process fueled by the need for greater innovation in payments. To break it down further, there are three core forces we can point to:

Technology

Once upon a time, financial services were offered strictly through institutional players like banks. As technology levels the playing field across all sectors, newcomers and off-market innovators are no longer barred from entry. These upstarts run complex virtual operations independent of the establishment. They can do so exceptionally cheaply as well.

To illustrate this, UK-based Revolut boasts approximately 1.5 million customers without any customer-facing infrastructure.

Customers

To put it bluntly, banks lost face through the 2008 Financial Crisis and its subsequent complications and scandals. As a result, customers began seeking alternative sources of financial planning, investment, and management. Enter mobile banking apps and other fintech software.

This technology encourages consumers to assume control over their own financial management by providing greater clarity and improved scrutiny of their personal details. Once, a person would have had to enter a banking branch to withdraw funds, apply for loans, or dispute charges. Now, all of these can be easily managed from the palm of their hands.

Regulation

Post-2008 regulations increased oversight for US banks to the tune of $70 billion per year.To comply with regulations, banks were forced to staff entire divisions whose sole purpose is ensuring the other departments follow governmental guidelines and best practices. Of course, banks shifted those expenses to the public, which in turn sought alternative methods for accessing, saving, and exporting funds. Fintech startups were happy to step into that gap.

Due to these three factors, it would appear that fintech startups are out to disrupt incumbent banks and practices. However, banks are far from dead and are fully capable of diversifying their tactics and products to meet and exceed this push for innovation.

Will they do it, though? This is the pertinent question.

Fintech 2.0 Arrives

If banks aim to remain relevant in the face of fintech disruption, they’d better get started sooner rather than later.

Recent studies have shown that over 60% of fintech startups target the retail banking sector, with 10% shifting their focus to large corporate entities. Of these, the payments sector is the most popular and most lucrative to sink their teeth into.

Innovation is being driven on the front end by startups with dynamic customer-facing services. Again, there are three points we can highlight here:

Improved Service

Traditional banks loop customers in by providing services with scalable costs and fees. Since specialized tech companies can’t compete with this established and well-regulated platform, they target customer service and referral-based acquisitions. Earning trust through improved customer service is a core practice for nearly all fintech companies.

Improved Branding

Fintech companies understand their products and services, inside and out. This includes their interface and branding. Simply put, it’s the point of the experience they promote.

By making their products bright, interactive, and exponentially more user-friendly on the front end, fintech startups succeed at making their products more visually appealing to consumers at large.

Cheaper Prices

The beauty of virtual operations lies in their flexibility and lack of overhead. This enables startups to provide services at a much lower rate than traditional deposit gathering institutions. It also supplies a kind of “rebel cool” appeal, in contrast to the stodgy image of legacy institutions.

Fintech disruption is a good thing. It drives innovation and makes banking safer and more convenient for merchants. If your institution would like to get into the game of fintech disruption (better service, better branding, and cheaper prices), you’re on the right track.

It can be complicated, though. Instead of building in-house platforms for functions like fraud prevention and chargeback management, it may be best to outsource these functions to the experts.