Fintech isn’t disrupting banking, it’s healthy competition

12 Dec 2017

Will fintech destroy banks? Image: Africa Studio/Shutterstock

Fintech is definitely a game-changer but, according to eShopWorld’s Thomas Nyholm, it won’t destroy banking.

One of the biggest debates in the financial tech industry right now is around this buzzword – disruption – and whether or not fintech is making the banks shake in their boots.

I’ve worked in payments and fraud for more than eight years, from online gaming sites to stock-trading companies, and I must share my unpopular opinion: I don’t believe fintech is disrupting the financial industry. Why? Well, firstly, there is such a thing as innovation and that’s exactly what these start-ups are doing.

Future Human

When you think about it, nothing has fundamentally changed since fintechs have become more popular. We still need physical banks because most of us still carry physical money and most fintechs are owned by banks anyway. If it was truly disrupting, banks would be collapsing.

The positives of fintech

There are many positives to fintechs: they’re more accessible than traditional banks, much more convenient, less expensive and faster. But I disagree that this means they are being disruptive. They are simply creating healthy competition.

For example, say a big retailer has been selling products for many years at a high mark-up, then suddenly a new retailer that stocks the exact same products opens next door, except much cheaper. What will happen? Will the first shop close? No – they will adapt, they will change their model and they will compete for business.

Financial institutions are moving in that direction. They’re being pushed by fintech companies and are keeping up with the flow. In fact, many major banks have entire departments dedicated to innovations and developments now, and are either acquiring fintechs or investing heavily.

Fintech start-ups have opened up the entire market, for better or for worse. They are popping up because they go after high-risk, non-regulated segments of the market, which banks won’t touch. This is a good thing, though it does raise issues of fraud and, over time, fintechs that make enough money will need to be regulated regardless.

Big banks are often stuck in their ways and refuse to work with one another, which allows fintech start-ups such as Sweden’s Swish to dominate peer-to-peer transfers in Scandinavia, for example.

Giropay in Germany is another example of how banks can work together in one payment system – however, there is a long way to go before this is a global standard.

In terms of e-commerce, one of the major disruptions to both the retail and financial sector has been Amazon. It has forced retailers to be competitive, and banks to enable more digital payments.

In response, there has been a wave of competition, which is not a bad thing. Retailers who sell online with localised payments for their shoppers are part of the true digital economy.

Open an account in under 10 minutes

I think the closest thing to a disruption of the traditional financial sector is the growing popularity of mobile banks. Germany’s N26 allows customers to open an account in under 10 minutes just by showing a passport – compare that to the speed of opening an account in Ireland and it’s a game-changer.

With that said, I do have concerns about anti-fraud measures when a customer isn’t present, and believe the industry needs more regulation around opening accounts. This cannot be done retroactively after a collapse.

Fintech has become very popular thanks to social media and the need to oversee your finances. One day soon, your bank will be your phone; it’s already happening in cashless societies such as China and Sweden where mobile and peer-to-peer payments have made cash obsolete.

America is an interesting anomaly in the fintech space; although they have moved to Google/Apple/Android Pay, they are still a ‘card-present’ society. In fact, many places still accept cheques. The irony is that US companies created fintech, so they’re driving change, but are slow to take it up. It’s a case of American payments versus the rest of the world.

The future of fintech

As for the future, I hope that cheap, reliable payments such as real-time bank transfers will become the norm. They have next to no fees because they’re executed by the customer.

This is a win-win for online retailers who want to offer flexible payment options but are suffering multiple credit card chargebacks, which lead to not only a loss of money and products, but also a chargeback fee and the potential to be flagged as a chargeback scheme.

In an ideal world, if a customer wants to pay with stones, retailers will have the capability to accept stones. At eShopWorld, we try to cater to everyone, and help retailers sell cross-border because it can be difficult to find payment-method solutions when you don’t have a local presence.

Fintech has made it cheaper to bank, though Ireland is a bit behind when it comes to bank fees. Banks in countries such as Australia are doing it right – low or no account fees, no transaction fees and they’ve just removed ATM fees, and are in the process of enabling same-day transfers regardless of financial institution. In fact, Scandinavia was doing this years ago.

The financial industry is so big, so how can fintech really take a considerable bite? Change is needed but fintech cannot disrupt it on its own. What fintech offers is non-traditional but it is not recreating the wheel – it’s just a spin-off because fintech works in conjunction with banks, not against it.

Competition makes it cheaper for the end user, and that is the most important thing in all of this.

By Thomas Nyholm

Thomas Nyholm is a frauds and payments analyst at eShopWorld.