What is the Difference Between Fintech and Banks?
Traditional bank definition typically refers to established financial institutions operating within a physical branch network. In turn, a fintech company employs innovative digital solutions to enhance financial transactions and services.
There are some common characteristics of a traditional bank and a fintech company. Apart from being related to finances, they both offer:
- savings accounts
- loans
- payment processes
Neither traditional banks nor fintech firms are entirely safe from fraudulence or regulatory compliances. Still, they have the same aim – to ensure the safety of their clients’ data.
The major difference between fintech and banks is that the latter mainly focuses on managing risks, while the former puts key effort into managing the client experience. So, when comparing a financial technology company vs bank, we’ll quickly notice their wholly different views on processes and procedures.
Aspect | Traditional Banks | Fintech Companies |
Approach | Rely on physical branches and legacy systems | Prioritize digitalization and innovation |
Regulations | Comply with strict regulatory standards | Enjoy regulatory flexibility |
Customers | Target consumers with proven credit records | Cater to tech-savvy audiences |
Let’s dig deeper into the business models of banks and fintech.
Approaches
Banks with physical branches and fintech companies differ significantly in their approaches.
Traditional banks
- Physical Presence: The traditional banking sector has developed a network of brick-and-mortar branches that require F2F interactions and identity verifications.
- Legacy Systems: Outdated legacy systems restrict banks from rapid digitalization and might fail to meet modern clients’ needs.
Fintech companies
- Client-Centric Focus: Prioritize enhancing the client experience through accessibility, personalization, and functionality.
- 24/7 Services: Offer round-the-clock online financial services accessible via mobile devices and computers, allowing users to manage finances independently.
- Advanced Technology: Use cutting-edge technologies such as big data, cloud computing, AI, and ML to innovate and provide new financial solutions, including crowdfunding, personal finance apps, and P2P insurance platforms.
- Agility: Are not constrained by legacy infrastructure, enabling quicker adaptation and integration of new technologies and services.
Regulations
In fintech vs bank discussions, the regulatory landscape is another major point that differentiates them.
Traditional banks
- Strict Regulatory Standards: Must comply with stringent legal obligations, requirements, restrictions, and guidelines.
- Client Protection: These regulations help protect clients’ data and investments, ensuring transparency between financial institutions and their clients.
- Cost of Compliance: Compliance can be expensive but is essential for maintaining control and stability in the financial system.
Fintech companies
- Regulatory Flexibility: The lack of a single regulator allows agility and adaptability in integrating new services and solutions.
- Easier Integration: Fintech companies can more easily introduce innovative products without the need to follow rigorous guidelines.
- Compliance Requirements: Fintech firms adhere to specific regulatory requirements such as Know Your Customer (KYC), Anti-Money Laundering (AML), Anti-Money Laundering Directives (AMLD), and eIDAS to prevent financial crimes.
Customers
Understanding the differences in customer targeting between traditional banks and fintech companies highlights their unique approaches and advantages.
Traditional banks
- Target Audience: One of the key traditional bank characteristics is targeting consumers with proven track records and robust credit ratings.
- Credit Record: A decent credit record is essential for credit application approval.
- Client Reliability: They prefer reliable clients who can manage debt and other financial situations and require proof of this capability.
- Experience and Trust: Years of experience typically lend banks more credibility and trust.
Fintech companies
- Target Audience: Tech-savvy audiences, including millennials and Gen Z, who prefer customized, mobile, and digitized services.
- Customer-Oriented Approach: Focus on meeting the demands of a tech-savvy clientele through personalized experiences.
- Credit Accessibility: Provide credit cards to people with poor financial histories or credit ratings, focusing on improving their scores.
In summary, traditional banks prioritize managing risks, and fintech companies prioritize enhancing the client experience. While conventional banks are constrained by slow processes and reliance on legacy infrastructure, fintech companies offer multiple business benefits:
- Higher customer satisfaction through intuitive interfaces and personalized services
- Cost savings and improved operational efficiency with automation
- Rapid product development with agile methodologies
- Expanded reach through financial inclusion of unbanked and underserved demographics.
Fintech vs Traditional Banks: Can They Work Together?
Instead of viewing fintech vs traditional banks as competitors, let’s look at them from a collaboration perspective. Such alliances allow both parties to decrease capital expenses for business activities and extend their customer base.
For instance, British banking services company HSBC partnered with Tradeshift – a fintech company specializing in supply chain payments. This way, HSBC’s clients can access Tradeshift’s platform to manage their transactions, which results in a win-win situation.
There are at least four fintech and bank collaboration models, ranging in financial and brand commitment: the channel, the supplier, the satellite, and the merger.
Combining flexible solutions with decades of experience could enhance financial services. Fintech and banking can cooperate to reap mutual benefits and work for the common goal – provide society with favorable solutions.
By collaborating with an established player in the industry, fintech companies can:
- obtain knowledge about financial regulations and banking licenses that might be too cumbersome or costly for them to get
- offer their white label services to more influential banking institutions
Similarly, banks can use cooperation with the fintech firms to ensure competitive advantages. Since fintech has experience developing digital solutions to improve services, its investment gives banks exclusive rights to use created applications, software and licenses. Plus, banks can control the development process and service strategies of fintech firms, protecting their core businesses.
Read about neobanks as the future of banking in our blog.
Can Fintech Replace Traditional Banking?
The fintech market is rapidly growing, from $294.74 billion in 2023 to an estimated $1,152.06 billion by 2032. Fintech seems unstoppable: along with banking innovations, it brings new solutions and opportunities of high accessibility and cost-effectiveness. Moreover, recent scientific research confirms that financial technologies can quickly respond to challenges in critical situations.
For traditional banks, global financial crises highlighted the importance of digital transformation. Established in the pre-internet age, their business models don’t adapt well to the rapidly developing digital society. Changes in consumer behavior, like a growing preference for digital payments, form expectations of financial services that challenge traditional banking. So, whatever a conventional bank perceives as a risk, fintech regards it as an opportunity to upgrade or create.
No matter how progressive fintech is, it can’t fully replace establishments that have existed for centuries. And being much longer in the game, traditional banks have a well-proven reputation, permanent regulatory framework, and valuable expertise in the service industry. Fintech companies may look or even act like banks, and still, they aren’t set up like them.
To sum up, banks and fintech are confidently shifting from a competitive to a much more collaborative ecosystem, where they can combine the best of both potentials.
Current Trends and Future Predictions in the Fintech Industry
Fintech is set for substantial growth, fueled by technological innovation and consumer demand for user-centric, mobile-first financial solutions. With a strong focus on AI, cloud computing, blockchain, and open banking, fintech companies transform finances, offering more secure, efficient, and personalized services. Let’s detail the trends and predictions from the recent fintech market report.
Key Current Trends in the Fintech Industry
- Adoption of AI and Machine Learning (ML). AI and ML technologies increasingly detect and prevent fraud, analyze customer behavior, and personalize financial services. AI-powered chatbots and virtual assistants enhance user satisfaction and engagement with real-time support.
Growth of Cloud Computing. Cloud computing enables fintech companies to scale their services on demand, manage costs effectively, and avoid significant upfront investments in infrastructure. Cloud technology’s flexibility allows fintech firms to develop, deploy, and update their solutions quickly, fostering innovation in financial services.
Blockchain Technology. Blockchain provides a secure, immutable transaction ledger, reducing fraud and ensuring transparency. This technology is particularly beneficial for financial transactions and regulatory compliance. It allows for real-time auditing that enhances stakeholder trust.
Rise of Open Banking. APIs facilitate collaboration between fintech companies and traditional financial institutions, allowing for the sharing of data and services. This integration enables fintech firms to leverage banks’ data and infrastructure to offer innovative, value-added services that enhance customer experience.
Increasing Demand for Digital Payments. There is an accelerated shift to digital and contactless payment methods, which fintech companies meet through advanced payment processing solutions. The proliferation of digital wallets and mobile payment options continues to drive the adoption of fintech solutions.
Future Predictions for the FinTech Industry
- Expansion in Emerging Markets. The Asia Pacific region is expected to grow significantly, driven by high mobile penetration and the need for accessible financial services in underserved areas. Fintech solutions will continue to expand globally, bridging the gap in financial services access, particularly in Africa and South America.
- Enhanced Cybersecurity Measures. With the rise in digital transactions, fintech companies will invest heavily in advanced cybersecurity technologies to protect financial data and build customer trust.
- RegTech Development. The development of regulatory technology (RegTech) solutions will help financial institutions comply with complex regulations more efficiently, reducing the burden of manual compliance.
- Sustainable and Ethical FinTech. There will be an increasing emphasis on environmental, social, and governance (ESG) factors. Fintech companies are expected to develop products that promote sustainability and ethical financial practices.
- Personalized Financial Services. Using big data and analytics will allow fintech companies to offer highly personalized financial products and services tailored to individual customer needs and preferences.
Integration of voice payments. Voice-activated payment systems are anticipated to gain prominence, with consumers increasingly utilizing virtual assistants like Alexa and Google Assistant to make transactions.
Fintech vs Banks: How Inoxoft Can Help
In the ongoing discourse of fintech vs banks, companies introducing agile and innovative financial solutions reshape the industry. Inoxoft helps our clients digitize banking services and leverage trading success with custom fintech software development. Our solutions enhance user experience, increase efficiency, and boost profitability for financial institutions.
We maintain open and reliable partnerships, continually upgrading our expertise to the latest technologies in software development. Inoxoft is a team of 100+ certified experts with comprehensive knowledge in:
- Flutter App Development
- Python (Django)
- .NET Development
- Node.js
- React.js Outsourcing
- React Native App Development
- Custom iOS App Development
- Custom Android Application Development
We offer high-level fintech web development, combining professional expertise with attractive time-money ratios and flexible cooperation models to suit any project. Let’s review some success stories of our clients.
A Digital Solution for Primary Capital Markets
Our client, a UK-based FinTech company, needed to digitize deal execution in primary capital markets to address inefficiencies and high costs. Inoxoft developed an industry-first digital solution using Flutter, Python (Django), and ReactJS. It included an admin portal, web app, and mobile app for underwriters, issuers, and investors.
This secure platform provided real-time access to critical information, streamlined workflows, reduced operational risks, and created cost efficiencies. Our client significantly boosted productivity and enhanced stakeholder transparency.
1C+ Custom Business Software: Aggregated Reports
Our client, operating in the US fintech sector, was challenged to extract aggregated reports from the complex data-storing system of 1C accounting software. To address this, Inoxoft integrated 1C with a WMS (Warehouse Management Solution), enabling users to extract data as aggregated reports.
This integration allowed two-way data exchange, enhancing dynamic data management and streamlining operational processes. Thus, it improved efficiency and decision-making for businesses utilizing 1C accounting software.
Integrating Online Payment Services with CBS
Our client, a US fintech company, aimed to simplify finance transaction processes and enhance user experience. They were challenged to integrate online payment services with business software. Utilizing web development expertise, Inoxoft adopted ‘PayPal-like’ online payment services customized to meet businesses’ requirements. It enabled one-off, recurring, and subscription payments.
The solution allowed payments to be processed flawlessly and quickly worldwide without service charges. It also improved user experience, secured transactions, enhanced finance tracking, and significantly reduced transaction costs.
Trading Automatization Platform
Our client, a group of UK-based traders, faced the challenge of automating manual currency data analysis, price monitoring, and deal arrangement to improve efficiency and trading profitability on major stock exchanges. Inoxoft developed a web application using Python (Django), Celery, EC2, ElastiCache (Redis), FIX 4.4, Pandas, PostgreSQL, RabbitMQ, and other technologies.
This solution automated manual currency trading processes for UK-based traders, reducing order generation time from 1 minute 30 seconds to 30 seconds. It also enabled real-time data analysis and seamless communication between traders and brokers. As a result, our client achieved improved efficiency, reduced operational risks, and enhanced competitiveness in the currency trading market.
Contact us to get the most out of fintech potential.
