What are the differences between Banks and FinTechs?
How changing regulations over time have allowed for the emergence of FinTechs to compete with Banks in the financial industry.
Banks have been around for hundreds of years but changing regulations have ushered in a new era for banking and the financial industry.
OVERVIEW OF TRADITIONAL BANKS
Banks have been around for hundreds of years. They started off as a safe place for people to store their money, and expanded into offering services like loans, mortgages and credit cards. They’ve also traditionally had a network of branches across the country to make it easier for people to use their services.
The business model of a bank, at its core, is relatively simple: pay a lower interest rate to the person keeping their money in their bank (in a savings account) than what they charge to a borrower (for a mortgage). The difference is their profit.
Given its importance to the economy and people’s everyday lives, those who operate in the banking sector have to follow a strict set of rules and regulations. This is to ensure that people, and their money, are protected at all times.
Regulations began changing over the past few years and have ushered in a new era for banking and the financial industry as a whole, creating a new breed of Financial Technology companies – FinTechs.
THE EMERGENCE OF FINTECHS
In some ways the banking industry has evolved more over the past 5 years than in the previous 50, and the way we manage our finances is changing too. New regulations were brought into to encourage competition and we are now seeing an influx of new players emerging on to the scene to challenge well-established players. The likes of Monzo and Starling have challenged the traditional High-Street Banks such as Barclays and Lloyds by offering a better user-experience and digital product to cater for the younger, more technology driven, generation.
The business model of FinTechs, also sometimes referred to as NeoBanks, Challenger Banks, InsurTechs, PropTechs and so on, focussing a free version of their product before charging a subscription fee for premium features.
They start out with simple elements of banking services, focusing heavily on maximum efficiency and speed, while using the latest technology to offer the highest level of security. For example the opening of an account, which traditionally used to take days, can now be done within a few minutes.
The majority of FinTech tend to be branchless to save on costs, but partner with everyday stores, such as the Post Office, that acts as a bridge between digital innovation and traditional banking methods.
THE DIFFERENCE BETWEEN BANKS AND FINTECHS
In essence, changing regulations have allowed for the emergence of companies that are able to offer similar services to those of a Bank without having to be called or regulated as a Bank. These companies tend to operate under what is known as an ‘e-Money License’. Under such a license companies are not allowed to loan out the money other customers deposit in their platform, like a traditional bank would do, but instead are required to keep all customer funds in a segregated account with strict rules on who can access it and why. Therefore, in the unlikely event of insolvency, an e-money institution would be able to return ALL funds to their customers as long as they were segregated appropriately.
Banks on the other hand ARE allowed to loan out the money you hold in their platform. It is the reason they pay you interest on the funds you hold in their accounts. It is to encourage you to hold larger amounts and keep them in the account for longer. In the unlikely event of insolvency for a Bank, your money is protected by the Financial Services Compensation Scheme (FSCS) which would reimburse you for up to £85,000 per person, per institution.
With the industry rapidly evolving it can at times be hard to keep up-to-date. When you look back at the state of the industry 5 years ago to where we are today, it is hard not to be inspired by the amazing products that have been built in such a short space of time. It’s sometimes hard to imagine how the financial industry will look 5 years from now, but here at sync. we are looking forward to being part of the next wave of innovation and disruption.
Let’s make a difference.
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