Alternative Finances

The Fight For Financial Fiefdom

FinTech startups are escalating the fight for territory in the financial services sector. Once reliant on traditional banks for services such as deposit holding and access to services such as customer checks, FinTechs are beginning to obtain proprietary licensing and gaining independence from old-school banks.

The FinTech sector is in the midst of a maelstrom that’s bringing sea changes in the way that people manage their finances and investments. Traditional banks are shutting down brick-and-mortar branches in attempts to reallocate resources.

Because many customers still rely on the old-school service models, banks’ resources are stretched thin, and they’re struggling to provide services, digital and traditional, while also competing with their sleeker online competitors. Of course, even the FinTechs themselves rely on partner banks to perform certain functions, like providing access to financial systems or holding deposits, but this may be changing.

Historically, FinTech companies’ reliance on banks has persisted because acquiring the necessary licenses to provide their own banking services has been costly; multiple licenses in different states are often required. But some FinTechs are finding that the initial high-cost outlays are worth the trouble, allowing them to reap financial and strategic independence in the long run. TransferWise, according to The Wall Street Journal, is seeking its own licensing in the U.S. and cutting ties with banking partners. So, too, are U.K. digital-only bank Monzo and Germany’s N26.

In addition to lower costs that come from nixing bank fees, independently licensed FinTechs will enjoy the ability to perform proprietary customer checks rather than using a third party, which could speed up transactions and transfers. More products can also be offered to the end customer, such as overdraft protection and savings accounts.

Third parties may also add an unnecessary level of complexity, while ceding control. TransferWise, for example, partnered with Raphaels Bank in the U.K., knowing that it had been fined for noncompliance, in order to have access to Faster Payments. Having their own licenses gives FinTechs control of their own compliance.

According to Business Insider, independence from traditional banks may increase competition in the financial services industry as companies differentiate their product offerings. This emerging trend is not likely to abate, either, because regulators are launching services to help FinTechs obtain their own licensing; the U.K.’s Innovation Hub is one example.

Some of the key areas to watch include traditional retail banks who are being challenged by online-only players with lower fixed costs; traditional lenders versus P2P marketplaces that appeal to the unbanked; and traditional asset managers versus robo-advisers, which don’t provide the same standard of advising as an exclusive asset manager.

While startups may be nimble, many old-school banks are still supported by the brick-and-mortar-loving population, many of whom aren’t ready to jump on the digital boat just yet. But if recent trends are any indication, this population may be shrinking. Still, as the space grows increasingly competitive, in the end, the consumer should emerge victorious from this exciting battle for financial fiefdom between the fierce startups and the traditional powerhouses.


Featured PYMNTS Study: 

With eyes on lowering costs to improving cash flow, 85 percent of U.S. firms plan to make real-time payments integral to their operations within three years. However, some firms still feel technical barriers stand in the way. In the January 2020 Making Real-Time Payments A Reality Study, PYMNTS surveyed more than 500 financial executives to examine what it will take to channel RTP interest into real-world adoption. Here’s what we learned.

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