Transformative Role of FinTech in Finance
In today’s rapidly changing banking environment, FinTech has emerged as a revolutionary technology that challenges traditional banking mechanisms with its innovations aiming to increase privacy, safety, and user-friendliness.
Technology can assist firms in developing and launching new products, integrating with other software systems, and utilising consumer data to generate products that cater to consumers. There has been a recent surge in the usage of financial technology, such as crowdfunding or Peer to Peer Lending (P2P Lending), leading to a decline in the number of bank customers as banks are seen as obsolete and unnecessary. One argument for the abolition of banks is that crowdfunding allows for the collection of funds from a large number of people, which can then be used to fund a project or enterprise. In contrast, typical banking involves a bank lending money to a single person or corporation. For instance, GoFundMe allows people worldwide to make small donations for specific causes, avoiding the need for relying on a large sum from a single individual and making fundraising easier. Another reason for the removal of banks is that financial technology enables transactions without the need for banks. For example, Bitcoin, a digital currency, can be used to purchase products online, eliminating the requirement for bank involvement and rendering banks redundant.
Crowdfunding: Redefining Financing
This presents a more convenient way of making transactions, saving consumers time and money. While financial technology has numerous benefits, certain drawbacks may lead to the decline in bank customers being a temporary phenomenon. Crowdfunding, for instance, can be risky as the funds raised may not be sufficient to finance the intended project, or they might be used fraudulently. Additionally, crowdfunding websites may charge a commission fee, reducing the total funds raised. Moreover, financial technology might be confusing for users unfamiliar with it, causing them to prefer a more traditional banking system they are comfortable with.
An alternative to the banking system is Marketplace Lenders (MPLs).
“MPLs are online platforms that enable investors to lend to retail and commercial borrowers.”
Deloitte
Unlike banks, MPLs do not accept deposits or lend money, resulting in lower risk on their balance sheets. They generate revenue by charging fees and commissions to borrowers and lenders. MPLs use cutting-edge technology to efficiently handle consumer acquisition, approval, and servicing in a low-touch regulatory environment. In contrast, most banks’ operating models involve legacy IT expenses, significant regulatory overheads, and a mature collections and recoveries division, leading to higher bank costs. Consequently, these lenders are providing customers with loans without the hassle of dealing with banks. This can help people avoid high interest rates and allow consumers with poor credit to obtain loans. However, there are hazards, such as the risk of borrowers defaulting and lenders losing their money, or the collapse of the app or the firm going bankrupt, causing users to lose their revenue.
Overall, it is uncertain whether the elimination of banks will be a temporary or permanent phenomenon due to banks investing in FinTech and the associated risks. The future of FinTech is highly dependent on circumstances and potential developments. Despite the rise of financial technology, FinTech companies are unlikely to completely replace traditional banks, as consumers trust banks more to keep their money safe and protected compared to startups, but only time will tell.
Written by Tanmay Tosawar
Produced by Madhav Bhimjiyani