Why Fintech is a Genuine Alternative to the Traditional Banking System

4 Minutes Read

What is Fintech?

The banking system survived a disastrous financial crisis, but is it at risk from ‘fintech’? Fintech is an umbrella term for the new technologies being developed as an alternative to traditional banking and payment systems. An example of this is the ‘crowdfunding’ model which demonstrated how these new technologies might work. These new firms aren’t held back by the big corporate structure and restrictive practices of the traditional banking sector.

Why is it an alternative to traditional banking?

Fintech companies provide services that aren’t offered by the well-known banks. Fintech companies insist that their offerings complement the services offered by the banks and don’t seek to outdo them. They are aiming their services at clients who they perceive aren’t served well by the big banks.

A real solution for small businesses

A client group that tends to have a tough time getting their needs met by the traditional banking system are small business owners. Small businesses often can’t get access to the funding they need because the large banks know that they won’t make much profit from small business loans, so they tend to avoid issuing credit to these firms. High cost overheads and complicated systems mean that the larger banks aren’t as responsive as they could be to the needs of small business owners. Small businesses usually have more particular issues, and tend to be more reliant on capital for particular needs.

This is where the fintech firms come in. They don’t have expensive branches to run, so they can focus on specific niches of the financial sector, such as online lending or online payment systems. Fintech firms have better systems for credit scoring, which analyse essential data about potential borrowers, so they can make better decisions about who they lend to. The traditional bank credit scoring system is not foolproof by far and sometimes is not comprehensive enough to make a responsible decision.

The fintech firms are combining capital and technological advances to offer comprehensive services to small businesses, which they see as a market that is being wilfully ignored by the large banks.

The future of banking

There is a growing role for Fintech companies in financial services. There are a lot of opportunities to offer services to the small to medium enterprises that tend to get turned down for capital by the banks. There are more entrepreneurs today who need access to responsive banking and payment services to start up and run a successful business.

Fintech companies are currently looking at ways to bring completely automated loan and capital applications to small businesses as  an attractive proposition for owners who often have little time to make appointments at a bank and go through a lengthy credit application process. If a small business owner can cut out the middleman (the bank), they will no doubt choose to go down this route.

Fintech companies don’t need the huge infrastructure of the large banks to be able to offer their products to a niche but sizeable market. Demands for alternatives to the big banks will continue to grow as customers are more sophisticated and require more flexibility.