The Growing Relationship Between Banks and Fintech Startups

by Emily on October 20, 2019

in Articles

Introduction

     Imagine a world without banks. A few decades ago, a lack of banks would present a disaster for the world, as there would be no possible way to keep funds secure. However, the truth of this has diminished today, with alternatives to banks growing by the day. Out of these alternatives, one stands above the rest as the future of finance: fintech.

What is Fintech?

     Financial-tech (fintech) is simply the merging of the finance & tech industries. As technology evolves, new standards come into place and the finance sector is no exception. 

     While the industry has only recently picked up steam when it comes to mainstream use, fintech technology has been around for quite a while; services such as PayPal count as fintech, as fintech is just a digital platform in which money can be stored, withdrawn, transferred, etc. 

     In essence, a fintech service acts the same way as a bank, but instead of focusing on physical locations, they focus on digital presence. While this may seem strange, remember that we constantly carry our phones with us and have access to the Internet 99% of the time. It’s easier for a client to quickly do what he needs to do online than deal with visiting a bank.

     For example, I could go deposit my check at a physical bank, or I can simply send in a picture of my check and have it deposited automatically. See which one is more convenient?

     This isn’t to say fintech companies don’t suffer from their issues. First off, security will remain a concern for fintech platforms as new threats pop up. Also, the privacy of fintech users has come into question plenty of times, such as the time Venmo leaked millions of people’s transaction logs. 

     However, these only represent the struggle of adopting new-ish tech. Plus, banks aren’t the most secure institutions secure either. However, banks and fintech–though they seem to be natural rivals–work better together; partnering with each other will be key to continued success.

An Unnatural Partnership

     While fintech startups suffer from security and privacy issues, banks suffer from a different beast: adaptation. 

     Many banks are slow to adapt to shifting industry standards, including the technical standards being merged into the finance industry. As such, the banks that fail to adapt will become irrelevant. But…they can prevent this by working closely with fintech startups.

      See, fintechs and banks play into each other’s strengths and weaknesses: fintechs are quicker to adopt new standards, more secure, more convenient, while banks are more stable and experienced in the industry.

     For both, survival counts on aiding each other in their weaknesses. Banks can help fintech startups gain exposure by endorsing the platform (such as Capital One with Zelle). On the flip side, fintech startups prove useful to banks by helping them transition to the growing industry. All in all, a partnership between the two may seem strange, but the benefits outweigh the small list of cons that may show up.

Conclusion

     The fintech industry is experiencing somewhat of a boom and shows no signs of stopping. While this is great for us, the clients, banks have reason to be scared, as fintechs have the potential to throw traditional banks into a world of irrelevancy. 

     However, with partnerships between the two entities becoming more prominent, the future doesn’t have to be so bleak for banks. Fintech is guaranteed a spot in the financial industry, as it’s a natural step up from traditional banking, but banks don’t have to die out as some might tell you. Fintech comes with its share of security vulnerabilities. Though through proper traffic encryption with a VPN and using strong passwords can stump out a majority of the threats, the fintech ecosystem is far from mature.

No doubt many banks will fail to adapt, but the world would be lost without at least a few major banks still around. For those hoping for the extinction of banks, this next decade will not be for you.

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