In the
financial business, we have seen the rise of fintechs and challenger banks in
recent years. Fintechs and challenger banks are upending the traditional
banking industry by providing new, customer-centric services that are
transforming how consumers handle their finances.
In this article,
we will look at the continuous rise of fintechs and challenger banks, as well
as the reasons for their popularity.
What Is the Difference between Fintechs and Challenger Banks?
Fintechs and
challenger banks are examples of digital banks that provide banking services
via mobile apps or websites. These banks only function online and have no
physical branches. They provide a variety of financial services such as
deposits, loans, savings, and investments.
Fintechs and
challenger banks vary primarily in that fintechs are technology firms that
provide financial services, whereas challenger banks are regulated banks that
operate exclusively online.
Why Are Fintechs and Challenger Banks Gaining Popularity?
Convenience
One of the
primary reasons why fintechs and challenger banks are gaining popularity is
their ease of use. Customers must visit a typical bank to open an account,
deposit or withdraw money, apply for a loan, or seek any other service.
Customers may perform all of these things from the comfort of their own homes
with fintechs and challenger banks, utilizing their mobile phones or PCs.
Reduced fees
and charges
When compared
to traditional banks, fintechs and challenger banks have cheaper fees and
levies. Some of these digital banks, for example, provide free transactions,
free ATM withdrawals, and no account maintenance costs. Customers can now
manage their funds more affordably.
Services
that are tailored to the individual
Fintechs and
challenger banks provide individualized services that are tailored to
individual consumers’ needs. They analyze consumer data using technology and
provide tailored services, such as budgeting tools, financial counseling, and
investment possibilities.
Services
that are more timely and efficient
In comparison
to traditional banks, digital banks provide speedier and more efficient
services. Customers can open an account, ask for a loan, or seek any other
service from fintechs and challenger banks in minutes. This saves time and
makes things easier for customers.
Services
that are cutting-edge
Fintechs and
challenger banks provide unique services that traditional banks do not. Some
digital banks, for example, provide virtual cards that can be used for online
transactions without revealing the customer’s actual card details. Others, for
example, provide cryptocurrency trading, robo-advisory services, and
peer-to-peer financing.
Fintechs and
Challenger Banks Continue to Rise
Fintechs and
challenger banks are projected to grow in the coming years. According to
Business Insider Intelligence, digital banks will have over 75 million
subscribers in the United States alone by 2023. This indicates a 25% growth
over the current user base.
Here are some
of the reasons why the emergence of fintechs and challenger banks is projected
to continue:
Customer
interest
Customers are
increasingly demanding financial services that are more convenient, efficient,
and personalized. Traditional banks have been sluggish to incorporate
technology, which has reduced their competitiveness. Fintechs and challenger
banks have taken advantage of this need by providing innovative and
customer-focused services.
Reduce
regulatory hurdles
One of the most
difficult hurdles for fintechs and challenger banks has been regulatory
barriers. Many countries, however, are increasingly enacting fintech-friendly
legislation that make it simpler for digital banks to function. The United
Kingdom, for example, has implemented a regulatory sandbox that allows fintechs
to test their products and services in a regulated setting.
Boosted
investment
Venture
capitalists, private equity firms, and other investors have boosted their
investments in fintechs and challenger banks. This investment enables digital
banks to innovate and provide new services while also expanding their reach
into new markets.
Collaboration
with traditional banks
Fintechs and
challenger banks are increasingly collaborating with traditional banks to reach
a broader audience. JP Morgan, for example, has teamed with digital bank Roar
Money to provide its workers with mobile banking services. This relationship
enables traditional banks to provide innovative services, while digital banks
benefit from traditional banks’ established customer base and infrastructure.
Consumer
behavior modification
Consumer
behavior is rapidly changing as a result of technology improvements and
digitization. This is visible in how individuals shop, communicate, and obtain
information. Consumers are increasingly embracing digital platforms to handle
their finances, and fintechs and challenger banks are well placed to capitalize
on this trend.
How Fintechs and Challenger Banks Are Growing and Disrupting Legacy Banks in Underserved and Unbanked Markets
The financial
services landscape is undergoing a transformational shift as fintechs and
challenger banks are challenging the status quo and reshaping the way people
access financial services, particularly in underserved and unbanked segments of
the population. These innovative and agile players are leveraging technology to
offer customer-centric solutions that are more convenient, accessible, and
affordable compared to traditional legacy banks. As a result, these companies are gaining traction and are poised to overtake legacy banks
in serving the underserved and unbanked markets.
Underserved and
unbanked populations have historically faced barriers in accessing financial
services due to factors, such as lack of credit history, limited access to
physical bank branches, high fees, and stringent documentation requirements.
This has resulted in a significant portion of the global population being
excluded from the formal banking system, limiting their ability to save,
invest, and access credit. However, fintechs are
leveraging technological advancements to bridge this gap and serve these
segments of the population in innovative ways.
One of the most
relevant ways in which fintechs and challenger banks are challenging the status
quo is through their digital-first approach. These players are leveraging
technology to provide user-friendly and intuitive digital platforms that are
accessible via smartphones or other devices. This enables customers to open
accounts, conduct transactions, and access a wide range of financial products
and services without the need for physical bank branches. This digital-first
approach is particularly appealing to underserved and unbanked populations who
may not have easy access to brick-and-mortar banks or may feel intimidated by
traditional banking processes.
Moreover,
fintechs are adopting data-driven underwriting models that
leverage alternative data sources such as transaction history, social media
behavior, and utility bill payments to assess creditworthiness. This allows
them to extend credit to individuals who may not have a formal credit history
but have demonstrated financial responsibility in other ways. This is a
significant departure from legacy banks that typically rely on traditional
credit scoring models that may exclude individuals without a well-established
credit history. By leveraging alternative data sources, fintechs are able to provide credit to underserved and unbanked populations,
enabling them to access credit and build a credit profile.
Furthermore, these companies are rethinking the traditional fee structures
that have long been associated with legacy banks. They are offering lower fees
or even no fees for basic banking services, such as account maintenance, ATM
withdrawals, and international remittances. This is in contrast to traditional
banks that often impose high fees, which can be a deterrent for underserved and
unbanked populations who may have limited financial resources. By offering more
affordable and transparent fee structures, fintechs and challenger banks are making financial services more accessible and affordable for these populations.
Another area of
disruption is in remittances and cross-border transactions. Legacy banks have
traditionally charged high fees and provided slow and cumbersome processes for
remittances and cross-border transactions. Challenger banks, on
the other hand, are leveraging technology to provide faster, cheaper, and more
convenient options for these transactions. They are using blockchain
technology, digital wallets, and other innovative solutions to streamline the
process and reduce costs. This is particularly beneficial for underserved and
unbanked populations who rely on remittances as a lifeline for their families
and communities.
Additionally,
fintechs and challenger banks are offering innovative savings and investment
products that cater to the needs of underserved and unbanked populations. They
are leveraging micro-savings, micro-investment, and round-up features to
encourage savings and investments among individuals who may have limited
financial resources. These platforms often have lower investment thresholds,
simplified investment options, and user-friendly interfaces that make it easier
for underserved and unbanked populations to start saving and investing. This
helps them build a savings habit, accumulate wealth, and participate in the
formal financial system.
Furthermore,
these groundbreaking companies are also addressing financial literacy and
education gaps among underserved and unbanked populations. They are providing
educational resources, tools, and guidance to help individuals understand basic
financial concepts, make informed financial decisions, and improve their
financial well-being. This empowers these populations with the knowledge and
skills to manage their finances effectively and make the most of the financial
products and services offered by fintechs.
The success of
fintechs and challenger banks in serving underserved and unbanked populations
is evident in their rapid growth and adoption but their rise is not without
challenges. They face regulatory hurdles, competition from traditional banks,
and the need to establish trust and credibility among consumers. However, these
players are increasingly partnering with established financial institutions,
leveraging their expertise, and complying with regulations to build a strong
foundation for growth.
Conclusion
The growth of
fintechs and challenger banks is upending the traditional banking industry and
altering how consumers handle their finances. Customers are drawn to digital
banks because they provide convenience, lower fees, tailored services, faster
and more efficient services, and innovative services.
Customer
demand, decreased regulatory obstacles, increasing investment, collaboration
with incumbent banks, and changing consumer behavior are all likely to fuel the
continued expansion of fintechs and challenger banks. As more individuals use
digital banking, traditional institutions must embrace technology and adapt to
the changing landscape in order to remain competitive.
This article was written by Finance Magnates Staff at www.financemagnates.com.
