The financial technology industry, also known as “fintech”, is rapidly expanding across the globe. In the second quarter of 2017 alone, fintech companies raised nearly $5.2 billion and there are currently 26 fintech companies valued at $1 billion or more.
The rise of fintech is creating serious problems for the traditional financial industry. These tech-savvy companies are better equipped to handle consumers’ demands for 24/7 control over their finances. In addition, they offer lower fees and higher savings account interest rates compared to big banks.
In a world where big banks don’t want to fund small businesses and continue charging customers outrageous fees, the fintech industry is uniquely positioned to challenge traditional financial institutions’ business practices.
How Fintech is Transforming Finance
Online-Only Banks
Most major banks and credit unions offer online services to their customers, but there has been a recent uptick in the number of online-only banks such as Ally and GoBank. Online-only banks typically partner with ATM providers to give their customers fee-free access to thousands of ATMs around the country. And, since they have lower operating costs compared to traditional banks, they’re able to offer higher interest rates on savings accounts and lower fees for things like overdrafts.
You can even eliminate banking fees altogether with Chime and enjoy the same benefits other banks’ customers have. While many customers remain wary of online banks due to security concerns, the pros of switching to an online bank arguably outweigh the cons. Online-only banks have as good, if not better, security measures in place. They also offer more opportunities for customers to save/make money on their deposits.
Amazon Financial Services
Amazon has dominated the e-commerce market for years, and the company has recently ventured into the grocery industry when it purchased Whole Foods. They enjoy incredible customer satisfaction ratings, and their popularity among American consumers has motivated Jeff Bezos and his colleagues to further expand Amazon’s offerings into other industries, such as finance.
They already offer members Prime Visa Rewards credit card with jaw-dropping good rewards. Customers get 5% cash-back on Amazon purchases if they’re Prime members. They also get 2% back for restaurant, gas station, and drugstore purchases, and 1% on everything else. These perks alone make it harder for other credit card offers to compete with Amazon.
Then there’s Amazon Web Services, which currently offers business owners and entrepreneurs a variety of options including cloud computing, data analytics, online security platforms, disaster recovery strategies, and other high-tech services. AWS is helping businesses decrease their operating costs. And, Amazon also offers loans to merchants who sell in the Amazon marketplace. Over $3 billion has been loaned out so far.
Amazon has huge advantages over traditional banking institutions when it comes to offering these financial services. They have deep pockets that help them roll out new financial services. Their high levels of customer and merchant satisfaction also help too. Finally, they offer top-of-the-line technological developments that leave their traditional banking competitors in the dust.
As if the Amazon credit card, AWS, and merchant loans weren’t enough, Amazon also purchased domains related to cryptocurrency. This suggests that the company may be moving into yet another high-tech, financially lucrative industry in the near future. Until traditional banks and other financial institutions pick up the pace, Amazon will likely remain a tremendous competitor.
Robo-Advisors
Robo-advising companies like Betterment and Wealthfront are exploding in popularity right now because their low-fee investment accounts and high-tech market algorithms offer consumers easier access to the world of investing. These platforms are challenging traditional human advisors who tend to charge higher fees for investment account management.
Whereas investing was once viewed as an activity only wealthy folks could participate in, Betterment and Wealthfront’s lack of minimum balance requirements and low fees allow everyday workers to start investing and saving for retirement. People no longer need to save up to $1,000 just to get their foot in the door. Robo-advising companies have opened floodgates for even low-income workers to start making their money work for them in interest-accruing investment accounts.
Online Financial Advisors
In addition to investment accounts, the tech industry has also spurred the growth of online financial advising companies like LearnVest. LearnVest offers a free app for registered users. Users can track their finances, budget on-the-go, and access certified financial planners 24/7.
Online financial advisors have vastly lower operating costs than brick-and-mortar financial institutions. Physical banks aren’t leaving the scene anytime soon. But, the proliferation of online-only financial services is forcing these big players to become more efficient and affordable.
Fintech likely won’t drive traditional financial companies out of business. Nevertheless, it forces traditional companies to develop new ways to convince customers to bank and invest with them. Customers want to get the best returns on their investments. Until big banks ramp up their technological developments, implement tighter online security measures, and reduce fees for consumers, fintech will continue to dominate the industry.