Ask a member of the Gen Z or millennial generation what a traditional bank does, and they might tell you about an app on their smartphone before even thinking of the brick-and-mortar branch downtown.
Smartphones and digitalization have brought the bank to the customer, wherever they happen to be. With the advent of embedded finance, the traditional bank is gradually disappearing from the equation as businesses become a one-stop-shop for shopping, banking, and finance.
In this article, we’ll delve into the differences and nuances of fintech vs. banks and how embedded finance goes beyond traditional banking services to bring value to a variety of industries.
Fintech vs. Banks: A Brief History
Once upon a time, traditional banks were the only place to open a checking or savings account, get a loan, exchange currency, or apply for a debit or credit card. A customer would have to visit a bank branch in person, fill out forms, and even meet face-to-face with a bank representative. But technology and mobile banking have changed all that.
Fintech (a combination of the words finance and technology) emerged with the birth of the internet in the late 1990s. New technology was applied to backend banking systems to digitize information and processes.
With the advent of the smartphone and the Fourth Industrial Revolution, the modern consumer was introduced to the speed and convenience of shopping and paying through application programming interfaces (APIs) or apps.
Fintech startups identified gaps in the marketplace where they could jump in and offer more convenient and streamlined services better suited to modern consumers. Startups with innovative technology and access to big data offered platforms and solutions for banking, personal financing, wealth management, and payments. Meanwhile, cryptocurrencies (like bitcoin) that run on blockchain technology continue to disrupt banking and payments.
As time has progressed, clear differences have emerged between the two powerhouses of traditional banking and finance. And now there is yet another layer. Embedded finance, also called banking-as-a-service (BaaS), allows non-fintech businesses to offer their own banking services as a way to create additional revenue streams, improve the customer experience, and strengthen client relationships.
Fintech vs. Banks: What’s the Difference?
When it comes to fintech vs. banks, the most distinguishing difference is how they respond to the market. Traditional banks are older, rigid institutions with bureaucracy, legacy infrastructure, and regulations. Fintechs, on the other hand, are new and innovative. These smaller operations are designed to be nimble and responsive. Here’s a closer look at some of the ways traditional banks and fintechs differ.
Both traditional banks and fintechs offer banking and borrower services, but their business models are very different. Traditional banks used to require your physical presence to open accounts or get a loan. Many still do so that they can verify your identity. But fintechs work virtually, applying financial technology through convenient mobile apps or an API.
Conventional wisdom might suggest that traditional banks have the upper hand over fintechs regarding security. After all, they’re highly regulated by the central banks and there are safeguards in place to protect assets.
However, since the pandemic, which forced many people to do business remotely, security concerns with digital banking have been somewhat assuaged. A recent study shows that consumers across generations (with the exception of baby boomers) prefer digital banking tools. Another survey from Chase found that consumers consider digital banking a safe and easy way to manage their finances.
It’s also worth noting that companies can overcome risk concerns by using payment gateways that are compliant with regulations set forth by the Payment Card Industry Security Standards Council. This way, a business can ensure both merchant and consumer data is securely handled for credit card transactions.
Both banks and fintech companies have tremendous growth potential, but the direction and velocity of that growth are still unknown.
The fintech industry shows an annual growth rate of nearly 25% and is one of the fastest-growing sectors. A recent study of 205 business leaders at large corporations found that 90% of non-financial companies already offering their own embedded financial services said they had seen a great impact on their bottom line. Eighty-five percent of those said that embedded finance had a significant impact on customer retention.
But traditional banks are still the big kids on the block. They have adapted to digital transformation and the threat of fintech by incorporating features like mobile payments, digital security, P2P lending, and crowdfunding.
Future growth for fintech vs. banks will likely be determined by how they partner and collaborate to better serve customers and communities. Banks have the advantage of huge deposits and a solid regulatory system while fintechs have the advantage of increasingly prominent technologies such as artificial intelligence and machine learning. The two entities together could build a robust, responsive financial services industry.
How Fintech Disrupted Banking and Finance
The rapid rise of fintech occurred because customers valued speed and convenience over perceived risk. A study from McKinsey reports that digital banking consumers want more options — more than 70% want multi-channel interactions and 25% want fully digitally-enabled private banking services.
Fintech has also emerged triumphant because it reaches the unbanked. According to data from the World Bank, two billion people worldwide don’t have a bank account but they do have access to a smartphone.
Today’s millennials could fall into the unbanked category. One study found that many millennials prefer mobile wallets from non-banks and don’t use traditional bank accounts. Without traditional banking habits, it’s more difficult to build up a good credit score and qualify for loans. However, millennials can do business with online and peer-to-peer lenders, which is fueling the fintech industry.
Why Should Businesses Embrace Embedded Finance?
Embedded finance is the next wave in fintech. It allows non-financial companies to offer their own banking services so that customers can shop, bank, and borrow all at the same source. In turn, this deepens customer relationships and retention.
A new study from Juniper Research found that the embedded finance market is expected to grow from $43 billion in 2021 to over $138 billion. That growing market represents an enormous opportunity for companies to build their customer base, improve customer experience, and increase engagement and lifetime value.
Here are some embedded finance solutions along with familiar companies that use them:
- Bank accounts: Some e-commerce platforms, such as Shopify, offer small business owners a separate bank account instead of using their personal checking and savings accounts.
- In-app payment processing: This service allows customers to pay for something without having to leave an app. In the Grubhub customer app, consumers can order and pay all at the same place.
- Branded debit, credit, prepaid, and gift cards: Companies issue white label cards with reward programs that feature their logo or symbol to generate new lines of revenue and distinguish their brand and business. The Starbucks Rewards Program is an example.
- International payments: Companies can use payment gateways in different countries or regions, so business owners can do business globally. Amazon's platform has the ability to process international payments.
- Integrated lending at point-of-purchase transactions: Companies can offer financing options to customers when they pay for an item. For instance, Buy now, Pay later is offered on the Walmart retail platform.
- Insurance: In the case of insurance, the purchaser can both buy an item and insure it all with the same provider. This creates a circular financial ecosystem for a company and its customers. Tesla, the electric car manufacturer, offers car insurance in some states with auto purchases.
Embedded finance brings the customer closer. There’s no longer any need to involve a bank to complete payments, leverage credit, or issue a loan with embedded finance, and this often means reduced costs for both the customer and the vendor.
The Future of Banking
The rise of fintech and the emergence of embedded finance is increasing the pressure on big banks to adopt fintech’s business models and even partner with them. Long-term partnerships that combine innovation (fintech) and support and familiarity (banks) would be a win-win for e-commerce and retail banking communities.
For businesses that are considering a foray into the fintech ecosystem, it’s clear from customer adoption rates that when it comes to fintech vs. banks, the former is paving the path toward the future.
Competitive businesses will increasingly turn to embedded finance solutions providers to expand revenue streams and provide a better customer experience. Let Alviere guide your business through the embedded finance journey.