What Banks Need to Know About Fintech Growth
Banks are generally not organizations known to move quickly with the times. Their procedures and regulations make it difficult for them to adopt new trends or change direction.
Before the advent of fintech, this wasn’t a problem – banks didn’t have to change because clients really had no other alternative. But now fintech is providing a viable alternative, often offered at a lower cost and at a faster speed.
Fintech can do this because it has the expertise when it comes to new technologies such as blockchain and because it is basically starting from scratch – compared to banks, which are mired in centuries of ritual processes. It comes up with new ways of doing things that focus more on providing a better customer experience.
To understand this better, this infographic explores everything you need to know about the growth of fintech, followed by a comparison of traditional banking transactions and fintech banking transactions.
The Traditional Way
Let us say that you want to buy a pair of shoes online. You visit a store pay for your transaction using your card. Now, while the money is no longer available to you, it is also not available to the merchant until the bank clears the transaction and pays it out.
This might not be a big deal for consumers, but it is important. The transaction has to go through the normal authorization channels, and this takes time, so the merchant has to wait. This has an impact on the store’s ability to buy new stock, which is not ideal, and can have dire consequences for low-margin retailers.
Where customers can see the real impact of this transaction process is in their bank charges. Banks need to run highly secure server farms and employ staff to ensure that all transactions are secure. That affects charges because the infrastructure of the bank must be maintained.
The Fintech Way
Let’s say you are using Bitcoin to pay for a product. You sign into your account, start the transaction, and transmit it to the system. The transaction is queued up for verification. Depending on how busy the network is, it should take about ten minutes to verify the transaction.
Hold on, didn’t I just say that fintech solutions were faster? That’s where the big difference comes in. The transaction goes through as soon as it is verified. Your account decreases by however many Bitcoins while the merchant’s account increases, and they can use those funds straight away.
That’s a big plus for merchants like Expedia and Microsoft and allows them to offer better promo rates, but it’s also beneficial for smaller retailers – stores selling gifts, flowers, and even food are seeing the advantages of using cryptocurrencies. Ultimately, we all benefit from faster transaction speeds.
The benefits don’t stop there, though. Bitcoin and other cryptocurrencies run on blockchain software. The major difference between blockchain tech and standard tech is that the blockchain is a distributed ledger.
What that means to non-techies is that the information is spread out over all the different computers within the network. You don’t need to have a single server farm because the computers within the network store and process that data for you.
So, unlike a traditional financial institution, fintechs do not need to have a specific infrastructure in place to process transactions, which reduces costs significantly. It also reduces the network’s downtime. Even if half of the computers go down, the network will still function.
This is one reason that the World Economic Forum has been paying special attention to blockchain technology. It could be a way to bring affordable banking to countries where the infrastructure will not support traditional banking.
The next aspect that is worth taking note of is that the system is a lot more secure than a traditional server farm. Transactions within the chain cannot be erased and cannot be changed unless you can do so on each computer in the network simultaneously.
Transactions are heavily encrypted, and no transaction is added until it has been verified. That verification must be confirmed by several of the nodes within the network before any transaction actually becomes part of the permanent record.
This, and the unchangeable nature of data, make this system a lot more secure than many others that the banks currently use.