Synopsis: Fintech organizations have revolutionized the way financial services are used, making them faster, easier, and more convenient compared to the conventional banking system. Through the implementation of BNPL and embedded finance, individuals can have instant access to credit whenever they require it.
Not long ago, banking meant standing in queues, filling out stacks of paperwork, and waiting days, sometimes weeks, to hear back on a loan application. Today, that world feels like a distant memory. The financial landscape has undergone a shift, driven by the rise of fintech companies that have fundamentally reimagined how people interact with money.
It is impossible not to note the following statistics. Today, the fintech industry has gained immense popularity worldwide; for instance, the EMEA region registered an almost threefold growth in the number of fintech firms from 2018 to 2021. During the initial period of the coronavirus pandemic, mobile banking saw an increase of 20-50%. The rate of growth has not slowed down ever since. The modern consumer wants the financial services industry to deliver the same level of convenience as other businesses, such as taxis or movies.
When conventional banks used to enjoy exclusive access to the client information of their customers, the advent of cloud computing and big data technology rendered their competitive advantage obsolete. Fintech companies took over the space with better operational efficiency, improved product design, and enhanced customer experience. Here is how they succeeded.
Customer Experience
The conventional banks operated according to the needs of the bank rather than those of the consumer. Setting up an account meant having to physically go to the bank. It could take weeks for any disputes to be settled. Customer service was, and still is, a complex process characterized by automated hold messages and branch meetings. Fintechs have inverted the above scenario. Being virtual means that the customers have access to their services at any time of the day from anywhere using just their smartphones. The user-friendly interface, prompt communication, and prioritization of user experience make these platforms stand out. This is one of the major reasons why people, especially the younger generations, are preferring fintech apps over traditional banks.
Speed
The speed of transactions is perhaps one of the most obvious differences between fintechs and traditional banks. While an application for a bank loan could take days of filling out forms, conducting credit checks, and manually verifying the application, fintech firms employ artificial intelligence and automation to decide within a matter of minutes. Everything works fast. Payments happen immediately, account verification is done automatically, and what used to be a week-long process of onboarding can now be completed in less than ten minutes. This is not a mere luxury but a requirement in today’s market environment.
BNPL
BNPL isn’t just another form of payment, it is but the tip of the iceberg of a much more disruptive trend known as embedded finance. Embedded finance refers to financial services that no longer require customers to visit a bank, instead being integrated directly into consumer-facing platforms such as Shopify checkout, Uber app, or Amazon. The consumer is not required to visit a bank branch at all, credit facilities are now available to the consumer in the same instant the need arises. This is precisely what poses the strategic threat to traditional banks today. It isn’t that fintechs created a superior loan product for consumers, they eliminated the entire banking infrastructure from the process. BNPL is the manifestation of this trend in consumer lending. And here are some numbers that illustrate just how quickly consumers have come to adopt this product. The total value of the global BNPL market stood at $334 billion in 2024, and it is forecast to reach $687 billion by 2028. Already, traditional banks have seen their income potential cut by anywhere between $8–10 billion annually through the adoption of BNPL products, not due to any lack of capacity on the part of the banks to provide installment-based loans, but due to the fact that they were not there when consumers wanted them.
Technology
The core of the fintech benefit is technology itself. While traditional banking institutions have been working using old technology, which has been functioning for decades, fintech firms operate using cloud-native technology from the start. Such an approach is crucial because of the inability of banks to incorporate any innovations in their services. On the contrary, fintech firms use advanced technologies such as artificial intelligence, machine learning, big data analysis, and even blockchain technology. What makes fintechs even more competitive is their flat organizational structures. Such a structure enables firms to experiment, change directions if necessary, and rebuild things if needed.
Regulation
Traditionally, regulatory standards have created a barrier to entry around conventional banks, which makes entry into the market by new competitors hard. Banks are expected to follow stringent guidelines set by the national or central government to secure consumers and ensure their stability. While regulations are good since they create protection, they are known to cause delays. Fintechs, in some cases, will operate under relaxed regulation regimes compared to those governing conventional banks. This has been able to facilitate the rapid growth of thousands of fintechs as they can quickly create and test products that would take many years to become approved by banks’ regulatory bodies. Although this provides an advantage for fintechs, the downside is that the more successful fintech firms become, the greater the regulatory scrutiny imposed upon them.
Also read: Over 8% Interest on RBI Floating Rate Savings Bonds – Should You Choose Them Over FDs?
Credit Risk
The traditional banks use conventional methods like credit score, credit history, and collateral as the basis for evaluating credit risks. The problem with this method is that it fails to include millions of individuals who are creditworthy yet do not have enough financial documentation to prove their eligibility. This development has made financial services accessible to underbanked demographics, such as young adults with little to no credit history, freelancers with fluctuating incomes, and microbusinesses that don’t meet the lending criteria set by traditional institutions. Moreover, fintech companies are better at handling credit risks due to their flexible approach. The late payment rate for BNPL loans stands at less than 2%, whereas the credit cards have a default rate is rising.
Conclusion
Fintech is not just an example of technology, it represents the gaps in demand that have gone unfulfilled. Banks, which are encumbered by their technology and cumbersome regulations, failed to provide what their clients wanted for decades, which is fast service, clear transparency, and high quality. Fintech companies filled the gaps created by traditional banking. This does not mean that banks have lost their edge in the market. They retain certain qualities that make their products competitive, the size, trust, and close cooperation with customers. However, the competition from fintech has now become inevitable and constant. It will determine whether banks can adapt to the new environment and survive. This competitive environment has made banks adopt and better themselves.
Written by Shrikara
