Throughout the history of human civilization, the finance sector and the institutions that oversee it have had countless opportunities to evolve and adapt. Having said that, the financial industry and those same financial institutions have a tendency to maintain power and ultimately emerge victorious.
However, within the past few years, this well-established, centuries-old system has come under assault from new technology advancements as well as paradigm-shifting new theories and practices. Modern methods of asset management, insurance, and payment have begun to transform our society.
And most of these adjustments have a startup or two at the outset.
The Ideal Circumstance
It is quite remarkable that fintech (financial technology) companies have been able to break into the financial industry at all, let alone revolutionize it. In actuality, everything can be attributed to the ideal storm of events that made it possible for them to infiltrate the system, where their inherent advantages have been able to emerge and win over customers.
One reason is that consumers were more than prepared to start transferring their financial practices to their mobile devices and the internet has technology reached a tipping point. This made it possible for businesses to offer financial services even if they didn’t have a physical office.
Furthermore, even the most unaware individuals were ultimately made aware of the long-standing flaws in our financial institutions by the 2008 Financial Crisis. This implied that one could place the same level of trust in a new company as they had in the bank they had done business with for their entire life. Fintech businesses no longer face trust issues, if only because consumers no longer have faith in traditional financial institutions.
The startups also profited from banks and other financial incumbents’ tardiness in responding. Due to the belief that bureaucracy and regulations would prohibit these fintech startups from taking significant risks, traditional finance companies had low expectations for them. It wasn’t until these new businesses began blitzkrieging their market that they recognized they were mistaken.
Over time, an increasing number of individuals have come to understand the advantages of these new financial models and practices; more skilled individuals are founding or joining fintech businesses; and an increasing number of conventional financial notions are being challenged.
PWC’s 2016 Report almost predicts the demise of established financial service companies due to the rise of fintech startups, which makes sense.
Two Significant Disruptors
Several fintech companies have been in the financial industry for a while and have established themselves as major participants.
For instance, LearnVest has made financial advising services accessible to anyone. Previously, only the wealthiest could afford these services, but thanks to LearnVest, even those with modest incomes may improve their ability to save money and use it for more worthwhile endeavors.
Lending Club, a peer-to-peer marketplace that facilitated loans totaling about $10 billion, is the company that has accomplished the most in the lending space.
Conversely, Robinhood Financial has made stock market investment accessible to a wider audience by offering commission-free brokerage services that enable anyone to participate in the market.
AngelList connects entrepreneurs with venture capitalists and investors directly, providing them with the resources they need to move forward. The banks, who typically participate in these kinds of procedures, are conspicuously absent from this.
Not to be overlooked are bitcoin and the blockchain phenomena, which have the potential to be revolutionary ideas that drastically alter our current state of affairs. It’s crucial to remember that a large number of global startups are primarily facilitating blockchain.
The Prospects
For fintech companies and the finance industry overall, the future is complicated.
First and foremost, it is important to note that the scope of these financial startups is now extremely constrained. For instance, while $9 billion in loans from Lending Club may seem like a lot, it is not when you realize that the US has over $885 million in total credit card debt.
Once traditional finance players determine that the startups are intruding too much into their domain, they will undoubtedly respond more forcefully. Already, they are acquiring startups whose established procedures and APIs can enhance their internal operations. Simply said, other major firms are following the lead set by startups. An financial firm with decades of experience, Charles Schwab, launched its own Schwab Intelligent Portfolio after waiting to see how internet brokerages operated.
All of these promising fintech companies have not yet encountered a financial crisis or a market slump, despite the warnings of numerous finance experts. Many of them most certainly won’t be prepared to handle something like that.
Having said that, there is no denying that financial businesses will contribute to a brighter future. Firstly, they are forcing the major companies to reconsider long-standing practices and policies that have become increasingly inhospitable to consumers. Additionally, they support innovative global corporate practices.
A fantastic example from recently is Gumtree Connect, which is enabling online communication between service providers and clients as it enters the African service industry (first in South Africa). Together with Assembly Payments, another fintech business, they will help service providers and clients steer clear of fraud and reputation issues in a developing sector.
(An upbeat) Final Word
The global financial system will undoubtedly find a way to restore (what they perceive to be) equilibrium, but it’s likely that the equilibrium will be more favorable to consumers as a result of fintech companies disclosing a large portion of this system.
And it’s a positive thing.
