The future of FinTech – a portmanteau of “finance” and “technology” – and traditional banks has become a talking point as experts debate whether the newest form of banking can topple traditional banking practices.
Earlier this month, Stripe, an online payment processing platform for internet businesses, became the most valuable startup in the United States.
After a successful round of Series G funding, Stripe raised US$600 million with a valuation of US$95 billion. The future of FinTech – a portmanteau of “finance” and “technology” – and traditional banks has become a talking point as experts debate whether the newest form of banking can topple traditional banking practices.
What is FinTech?
FinTech refers to businesses that integrate modern technology with banking in order to improve and automate financial services and processes, but the concept of integrating technology with banking isn’t a new one.
Technology has long been part of the financial world, especially since the introduction of credit cards, ATMs and e-trading. Online banking has existed for well over two decades, but the innovations offered by modern technology have given rise to FinTechs such as Venmo, CashApp and Alipay.
FinTech’s threat to traditional banking
According to a study conducted by Finder.com, two-thirds of customers in the United Kingdom intend to switch to digital banking. The data further indicates that many traditional banks in the UK reported a net loss in customers while banks that offer online-only services, such as Starling Bank and Monzo, reported net gains.
Technical Lead and Financial Consultant Adam Garcia, the chief executive officer and owner of The Stock Dork, told TMS that Fintech poses a threat to banks.
“This is mainly because these new technologies are offering financial services online which is exactly what customers want these days,” Garcia says. “The innovation and automation that comes with FinTech have made the lives of customers easier, which means there is a high probability consumers may shift from conventional banking systems to FinTech institutions.”
While FinTech does pose a credible threat to traditional banking, banks can also use FinTech to their advantage by incorporating new technologies and enhancing their services to meet new customer expectations. FinTech has raised the bar of customer expectations, which has convinced banks to invest and update their business models.
Traditional banks and online integration
As many countries continue down the trajectory of a cashless society, traditional banks have begun to adopt more convenient ways for customers to access and use their digital currency.
In 2011, a P2P money transfer service called clearXchange was launched. Founded by JPMorgan Chase & Co., Wells Fargo & Company and The Bank of America Corporation, clearXchange was established to build a faster payment method in the US.
Unlike popular services such as PayPal and Square, clearXchange did not need funds to be transferred into a separate account to use the service. Rather, clearXchange connected with existing bank accounts within the three initial banks that developed the service.
The service, which eventually adopted the name Zelle, has been adopted by over 100 financial institutions as means to quickly transfer money. While still owned and operated by traditional banks, Zelle represents a unique combination of FinTech advancements and banking power.
In 2020, Zelle reportedly transferred US$307 billion, a significant increase from the US$187 billion in 2019. When compared to Zelle’s competitors, the money transferred through Zelle was more than Square (US$109 billion) and Venmo (US$159 billion) combined.
Fintech in China
The effects of FinTech have made a significant impact on the Chinese market. In 2019, Professor Xavier Vives of the Instituto de Estudios Superiores de la Empresa (IESE) Business School prepared a paper regarding the rising FinTech industry in China for an Organization for Economic Cooperation and Development (OECD) competition committee roundtable.
Currently, the financial activities and payments of the FinTech sector account for 16% of China’s gross domestic product (GDP). Companies such as Alibaba Group and Tencent Holdings Ltd. currently account for 95% of the US$5.5 trillion Chinese mobile payments sector.
According to Professor Vives, “the total value of e-money transactions in China exceeds that of Visa and Mastercard combined worldwide.”
Despite the incredible amount of control Tencent and Alibaba exercise over the Chinese mobile payments sector, the companies are not replacements for traditional bank accounts. Customers are still required to have bank accounts offered by financial institutions in order to use their services.
While Stripe’s massive valuation is an impressive feat, the product is still dependent on traditional banks. Like Venmo and Alipay, customers and businesses alike will still be required to have a bank account.
While digital services offered by traditional banks are largely important, the future of banking may be determined by the further advancements of FinTech.
“The new US$95 billion valuation has led Stripe to raise a US$600 million funding which the company has great plans of utilizing for its future growth,” Garcia says. “The valuation will help to further innovate fintech processes and grow the global payments and treasury network.”
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