How Fintech & Digital Structural Change Is Pressuring Traditional Banks

FinTech’s are innovative, clever companies are changing the face of the traditional financial services industry. This is most prevalent in the UK which is expected to produce more FinTech’s than New York and tech-hub San Francisco, producing companies from payday loans direct lenders to AI advisors and online-only banking accounts, like Monzo.   

Reports and studies on the US Fintech market have found that these companies are “transforming” the US financial sector. Consumers report that they like these companies because of their convenience, security, simplicity, transparency and personalisation. This could suggest that US consumers feel that they do not currently see these features in more traditional financial services or banking institutions, who could be struggling to keep up. 

FinTech Is De-Mystifying Consumer’s Credit Score

4 in 10 Americans claim that they are in the dark about how their credit score is calculated. A traditional credit score, which has been a longstanding measure for reliability and eligibility for a loan was a tight knit secret for banks. Consumers know they evaluate their historical finances, including:

  • Credit card use
  • Auto loans or car payments
  • Mortgage payments
  • Frequency and velocity of inquiries for credit
  • Reports and actions, such as bankruptcy or court actions. 

However, if a consumer was previously denied credit, they were often unsure as to where they had specifically gone wrong because a bank would not disclose the information. Today, FinTech’s do things a little differently, assessing alternative credit data to decide whether an applicant is someone reliable to lend to. This data includes: 

  • Rental payments
  • Any assets – length of ownership etc.
  • Utility payments
  • Full file public records
  • Consumer permissioned data

Data shows that this is actually more accurate at measuring someone’s creditworthiness and has supplemented the traditional metrics, meaning those who were refused credit in the past, now have access because of fintech. Moreover, they are more willing to explain the process and provide transparent assessments on a credit score, pressuring banks to provide the same helpful service. As mentioned in the opening of this article, consumers value the transparency and simplicity of the service that fintech’s are able to provide. In the UK markets, similar use of alternative data for calculating credit score is also developing. UK and US financiers calculate credit score differently, but companies like Monzo Bank have 55,000 new people sign up every week, perhaps preferring their modern take on banking. 

For traditional banks, this means they are losing out on business, whilst innovative, adaptive companies are reaching a new audience as well as their existing one. To cope and survive in the world of online loans and alternative banking solutions, traditional banks are going to have to make their approvals process more inclusive of alternative data. 

Personalised Customer Service

Some might associate customer service with seeing a friendly face at their local banking branch. However, in our hectic lives in which we value convenience and immediacy over almost anything else, the landscape of ‘personalised customer service’ has radically changed and Fintech’s are at the head of the charge. In the UK, it’s expected that 71% of customers will use banking or money apps by 2024, estimating the percentage people who make visits to a physical branch will drop to 55% of consumers.

Online banking apps, for example, are now able to provide AI recommendations and financial help. This is particularly valuable to users as some apps allow you to enter your financial goals, i.e. how much you want to save in a year, and AI technology will suggest tips to help you achieve your goals, like a friend’s guiding help. 

Traditional banks are struggling to keep up with this and are under pressure to upgrade their software, taking a mobile first approach to appeal to consumers. 

Reshaping Banking 

Fintech’s are the inventors of peer to peer lending and are proving improved access to credit and the loans customers need, this means they have access to a greater market. This has attracted investors, flooding the industry and start ups with the capital they need to lend. In turn, this means that fintech lenders are more likely to approve a customer and be able to offer them higher lending amounts, especially if they have a prime credit score. 

Traditional banks are known for having stricter requirements, as we established above. They are more risk averse and a little tight fisted when it comes to lending money out. To ensure they are able to keep their customers, especially in the baby boomer generation who are more likely to stay loyal to the institution they know, they may have to lift their lending limits. This means they could offer better incentives and lower rates on bigger loans. 

In the future, the market could see traditional banks partner with fintech’s. It’s expected that a lot of traditional banks will try to partner with fintech’s. This is because, despite their downturn, they still own a lot of the market and possess so much capital. Regulators and economists believe this is a stable move, ensuring that money is quite evenly distributed and companies are capitalised in the event of an economic downturn or another recession. However, there are those whose who are adapting, such as Goldman Sachs, who have built the digital consumer bank Marcus to edge into the Fintech market. 

Author: Yash Hirani

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