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Fintech: Reformer or Revolutionary?

By Celeste Arenas | March 13, 2017

The accelerating impact of technology in banking begs the question: will fintech overthrow traditional finance as we know it? The short answer is no. Instead of replacing banks, fintech is improving them with better outcomes for investors, customers and businesses of all shapes and sizes. 

Innovators have described the role of fintech to “make financial services compelling again” for the industry, injecting competitive and collaborative elements that provoke lenders to “stop cost cutting downward spirals” and “start creating powerful visions for the future.” 

As traditional lenders underwent a plummet in consumer confidence and overhaul of stricter regulations since the 2008 crisis, fintech providers have grown exponentially in viability, investment and demand as an alternative source of capital. This is markedly illustrated in 2015, where multi-billion dollar IPO’s from Paypal, Square, WorldPay and First Data stand in contrast to a report in the same year showing only 20% of traditional lenders were “somewhat prepared for the digital age.” 

Fintech has proven that without “regulators, legacy IT systems, branch networks or the need to protect existing businesses,” borrowers and lenders can access better deals, better services and lower costs. This is crucial for 80% of American small businesses that are denied small loans from traditional lenders. Personal investors likewise have an unprecedented opportunity engage in the share market with smaller contributions. Creating access points for smaller amounts of capital has proven as successful for local economic growth in the United States as for emerging markets

Larger lenders comparatively do not engage in smaller scale banking due to high costs and the associated probability of risk. Yet fintech has overcome these barriers with better methods for risk assessment.  

Through basic and advanced analytics, fintech innovators have maximized the value of interconnected markets through greater data and information. This not only reduces the internal risk of borrowing and lending to potential customers, it also provides better risk management of external markets and geopolitical factors worldwide. 

By allowing borrowers to match savers directly and obliging the lender to bear the risk of default, fintech has avoided the greatest internal risk that traditional lenders rely on: the heavy borrowing that leads to leverage and mismatched securities. 

These innovations have exponentially increased the opportunities for capital but have not ended the world of traditional finance as we know it. The role of fintech is to diversify, rather than disrupt, existing markets as outlined by the innovators themselves. Fintech startups are yet to resemble traditional lenders in size and scope, and more than half aim solely to improve the services and profitability for larger institutions. 

Finance innovation has had a better and more effective impact on banking than the regulations designed to thwart banking oligopolies. It continues to be underestimated as one of the core mechanisms for restoring consumer confidence and providing capital to underserved markets since the 2008 financial crisis. Moreover, it has proven what companies can achieve with minimal regulations and no taxpayer funded bailouts for going bust.