Fintech vs. traditional banking: Who has the advantage?

by Jovi Overo, Head of BaaS, Unlimit

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The banking and financial services sector has been thoroughly transformed by technology over the past decade. Previously slow to adapt and adopt new technologies, financial organisations have been so heavily disrupted by fintech upstarts that they are now investing in everything from AI to blockchain in a bid to remain competitive and improve results.

When considering the rise of challenger banks and their popularity, we have to look at one thing: user experience (UX).

UX is king

The user experience dominates the way that modern fintechs operate. It is one of the fundamental reasons they have grown so quickly and become popular. The general premise of their UX is to be accessible and transparent, so the design focus is placed on an intuitive interface that makes navigation feel remarkably easy and natural.

Adaptable, flexible and dynamic

A study by Kearney in 2018 found that the majority of 16-38-year-olds prefer their bank for the flexibility that it offers, including account compatibility and general ease of use in setting up payments. However, when you look at older age groups in the US and, the harder it is for users to see any advantages to challengers at all.

In the UK, for example, adaptability has been key to unlocking user acquisition and retention for both traditional and challenger banks. Finder found that, within a year, the number of users of a digital bank grew by 14%, reaching 23%, with these qualities being key to this growth.

Trust and a firm grip over aspects like mortgages, insurance and loans assure traditional banks a commanding position for the time being.

Traditional banks win on trust

When considering what advantages still lie with the traditional banks, public trust is one metric in which they remain ahead of their fintech rivals, even when surveying challenger bank users. Financial products such as mortgages, insurance and loans are still dominated by the legacy players, and the general public still prefers to deal with things like their salary, bills and larger transactions through them.

Going traditional: The challenges

For some time, financial institutions have struggled with keeping up-to-date core and legacy systems. According to a study by the Financial Conduct Authority (FCA), less than 50% of banks upgrade these in time. When looking at the US, a staggering 43% of banks are still running using COBOL (Common Business Oriented Language), a programming language first introduced in 1959.

It is these legacy systems that are holding back traditional banks. But digital transformation isn’t easy. Along with incurring a substantial price tag, replacing these legacy systems places a growing fiscal and regulatory challenge for more established names. Banks in the US spend anywhere from $2.7 billion (Bancorp US) to $16 billion (Bank of America) to make these changes.

So, most traditional banks that have evolved have operated a hybrid system: legacy in the back, digital up front. The problem is that this doesn’t work well in comparison to their digitally native competitors.

The challengers: Revolution or evolution?

One of the catalysts behind these kinds of questions taking centre stage and the increased spending on IT originates from Fintech challengers.

In the U.K., this was an untapped market that major banks had not yet entered. In the aftermath of the 2008/9 financial crisis, fintech had a wider remit to innovate.

So, what did these challengers have going for them that traditional players didn’t? Well, the first major advantage was that it was easier and cheaper for them to maintain a dynamic system for quick payments.

Challengers: Rapid, dynamic digital payments

Fintech challengers could easily leverage cloud, mobile and even blockchain to maximise security and optimise logistics while bypassing the challenges that established names have to deal with. The online payments market is a good example. Fintech companies were capable of offering users a more intuitive, highly accessible banking solution and payment method, something those larger counterparts couldn’t.

Looking at other regions, such as Latin America and Asia, we see the distinct advantage of challengers when confronted with the circumstances of these regions. When we consider these factors, fintechs seem less like evolution or revolution, and more like an entirely different game and it’s this ability to outperform by reinventing that has given them the competitive advantage to outmanoeuvre traditional banks.

Jovi Overo, Managing Director of BaaS, Unlimit

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