The banking world has always evolved, but change has sometimes been slow and predictable. The financial ecosystem has never been shaken so profoundly and abruptly until fintech startups entered the picture.
The fintech boom is in full swing. In 2018 alone, Fintechs amassed $111.8 billion worth of global investment in 2,196 deals. According to the folks at Fortunly, there are 39 fintech unicorns in the industry, most of which are based in China and the United States, with a combined valuation of $147.37 billion.
Backed by generous, confident, patient investors, fintechs are empowered to reinvent the financial services landscape and to fix what they see as fundamentally broken in the banking system.
Let us explore how fintechs have managed to disrupt the status quo and why they threaten to snatch the industry away from the established players that have ruled the banking world as we can remember.
Innovate Now, Make Money Later
Fintechs are able to grow meteorically in valuation and clout because they are driven by innovation, not the bottom line. Profitability and sustainability are important long-term objectives, of course, but the desire to make things simpler, more efficient, and more affordable is what motivates fintech founders to burn the midnight oil.
Thanks to venture capitalists who continue to take a big gamble on them, fintech firms can capitalize on the latest technologies, develop practical solutions, and polish their business models without being encumbered by the burden of generating tons of revenue right away.
As a result, VC-backed fintechs have enjoyed large gains in mass adoption. They eliminate unnecessary fees and significantly lower the price of financial services through automation and mobile capabilities. Fintechs put a premium on customer service, a laser focus that makes them a good match for 21st-century consumers and their demands.
Some fintechs provide previously non-existent services while others offer existing services in efficient, consumer-friendly new ways. They all share a single goal: to address pervasively unmet needs of consumers.
The Millennial Factor
Fintechs have won over millennials, the most influential group among today’s consumers. Traditional banks are partly at fault, for they notoriously underserved this demographic for a long time.
Unlike members of other generations, millennials were exposed to 9/11, the Afghan war, and the invasion of Iraq during their formative years. They survived the Great Recession of 2008. American millennials also deal with a collective student loan debt pile of over $1 trillion.
Millennials have been stressed and tested, and banks did little to help.
Fintechs understand the millennial mentality, and they have designed solutions with it in mind. That is why millennials are more likely to bank with non-banks than their parents and grandparents. Actually, many of them believe that they can live an existence without traditional financial institutions.
Losing millennials to competitors, old-school bankers have been driven to change. They have acknowledged the new realities by adopting the technologies their hipper rivals use or collaborating with tech startups themselves.
Some experts predict that fintech startups may suffer the same fate dotcoms faced two decades ago. The excessive valuations and unprofitable business models do look familiar. But even if most of today’s fintechs go bust eventually, the disruption they caused cannot be undone.