FinTech’s growing impact on the traditional banking industry

The niche market of FinTech companies has experienced a huge spike in interest lately, as banks and non-traditional financial institutes go all-in, in order to stay ahead of the digital transformation. Let's have a look at how this innovation scene will rapidly influence our daily banking interactions.

Disrupting the traditional financial industry

The number of start-ups aiming to disrupt the traditional financial industry rose spectacularly in recent years. Last July, Time [1] estimated the venture investment made in these FinTech companies at $12.4 billion in 2014 (up from $3 billion in 2013, according to Forbes [2]).
These nimble start-ups often offer niche solutions, aimed at delivering a much higher value than traditional banks, in a very specific banking proposition. They manage to wow underwhelmed, traditional bank-customers with high tech features such as the use of biometrics (such as facial recognition) for authentication, instead of traditional tokens.
From personal banking to equity financing: all activities of the banking industry are impacted.

Innovation reveals a deeper issue

These gimmicks might seem trivial at first, but they reveal a much deeper consequence, related to the use of technology within the banking business model.
For example, an alternative lending platform can survive with a much lower cost structure due to its virtual nature (vs. bricks) and the use of automated technology rather than manual manpower to determine creditworthiness. The use of big data and advanced algorithms means they can allow riskier loans and thus offer higher interest rates to depositors [3].

Fintech overview
FinTech Companies – Source: Venture Scanner [4]

Non-financial stakeholders are growing

These new players have obviously attracted the interest of traditional banks, but also of traditional corporate investors. Google Ventures being the most active, with Intel, eBay and American Express firmly in the top 10.

Google ventures
FinTech Ventures – Source: CB Insights [5]

Banks will reinvent themselves in order to survive

Francisco Gonzalez, CEO of BBVA (possibly the most digitally evolved bank amongst traditional players) stated only last year that up to half of the world’s banks will disappear through the changing dynamics of the financial industry.
He estimates that BBVA will become a software company and that the competition of FinTech companies combined with the entry of a number of big computer companies will have dramatic consequences for banks that have failed to adjust to the digital reality in the financial industry.
The five coming years will surely determine which of the traditional banks will be able to make that leap towards financial transformation. Fascinating times ahead!

[1] Time, Banks Are Right To Be Afraid of the FinTech Boom, July 2015 (Link)
[2] & [3] Forbes, Investments Quadruple: Top Trends To Watch, July 2015 (Link)
[4] Venture Scanner, Where are FinTech innovations happening, June 2015
[5] CB Insights Google, Intel and Other Tech Companies Attack Fin Tech as Corporate Interest in Space Jumps 176%, May 2015 (Link)