Are the Fintech Sector’s Days Numbered?

Fintech is all about innovation, disruption and transformation. It is undoubtedly impacting and reshaping the way financial institutions around the world operate. In the UK, the sector is currently worth £7bn and employs around 60,000 people, its importance cannot be denied. But as the lines between fintech and traditional banking become increasingly blurred, the sector may one day soon disappear altogether.

As the founder of my own fintech company, I want to take you through why I believe this is the case using one of the world’s leading fintech hubs as an example, the UK.

How it all began

The fintech revolution was born out of the financial crisis in 2008. Trust in traditional banks was severely damaged and newer, more transparent systems were the order of the day. This was a huge opportunity window for entrepreneurs. Previous finance sector employees who had lost their jobs in the crash teamed up with IT whizzes and the fintech sector was born.

As startups, fintech companies had the potential to build and deploy new technologies quickly and easily. As a result, today a third of global banks see fintech companies as collaborators and a quarter see them as acquisition targets. Just recently Barclays announced that it is planning on opening the largest fintech accelerator of its kind in Europe. It will house more than 500 workspaces for startups in London.

As financial service providers outsource their R&D to fintechs and acquire them once they have perfected the business model, the two industries which were once supposed to be in direct competition with one another, are gradually merging.

Promoting safe innovation and competition

It’s important that new fintech players, once they’ve undergone growth, don’t repeat the same mistakes that have been made in the past. For this reason, regulation is key.

The UK financial regulator has been very successful in building into its governance a mandate to promote innovation and competition, as well as the traditional mandates of financial stability and consumer protection.

In particular, the government regulatory sandbox has caught worldwide attention. This initiative allows business to test innovative products, services and business models in a live environment enabling companies to know their product is safe and fully functional before they enter the market. Once out of the sandbox, fintech companies are held accountable by the Financial Conduct Authority (FCA), the same body that regulates the financial services industry.

The global economy has learnt its lesson: the future of the financial services industry comes from closer collaboration even at the regulatory level.

The rise of challenger banks

With digital banking on the rise, it was inevitable that new digital banking challengers appear on the horizon to provide an entirely portable experience that is available 24/7/365. The key selling points of challenger banks lie in two main areas: superior services and better deals.

Monzo, formerly known as Mondo, made history with the fastest crowdfunding campaign ever back in 2016 – raising a million pounds in just 96 seconds. In addition, Atom Bank is one of the only digital-first challenger banks based outside of London and Starling Bank received its licence from the Bank of England to start its own challenger bank last summer.

With the Bank of England introducing a quicker and simpler two-step approved process to get an official ‘bank’ status, as well as lowering the capital needed to achieve this, it’s now easier than ever for new startups to become FCA approved. As a result, what were once fintech companies are in fact easily turning into modern-day banks making a good use of technology. There is no doubt the direction of travel that the financial service industry will take will continue this way.

What will happen to Peer-to- Peer lending?

Peer-to- peer lending works on the principle of connecting two parties in need. On the TWINO platform for example, we connect people who are looking for money with investors willing to lend it, via a digital marketplace.

Like many other areas of fintech, peer-to- peer lending is increasingly being integrated with other platforms and payment mechanisms and, as with the wider fintech sector, closer collaboration with the traditional banking sector seems like a logical next step.

Fintech’s worldwide ambition

The ability to scale remains a challenge for fintech start-ups. Most of today’s successful fintech companies focus on delivering a bespoke, standalone offering that isn’t delivered through a physical footprint, but requires adaptation to a complex set of regulations that are unique across nations and regions.

In order for challenger banks to operate internationally there is a need for internationally ratified agreements and legislation allowing them to do so. Closer alignment at this level will facilitate this international development and it may well be that a partnership with a traditional bank is the way forward to achieve this. Here is where the real revolution is likely to come.

So, as the fintech sector continues to develop, it will by definition, begin to write its own death warrant. The lines between it and the legacy financial service providers will become so blurred soon that the term fintech will no longer be relevant.

Written by Armands Broks, Founder and CEO, TWINO