Long reads

Where the fintech evolution goes next

Laust Bertelsen

Laust Bertelsen

CEO, Banking Circle

Technology has played a part in financial services for much longer than many people realise. As the Payments Association explains, the utilisation of technology to enable financial transactions began way back in the 19th century. Early fintech saw electronic fund transfers being made via telegraphs and Morse code – not advanced by today’s standards, but an exciting leap forward in 1866 when the new transatlantic cable allowed funds to be transferred over much larger distances.

This is an excerpt from Future of Payments 2023. 

The next big step in fintech occurred from the 1960s, as finance began to digitalise and eventually went online in the 1990s. However, perhaps the biggest leap forward came swiftly on the heels of the 2008 financial crisis, when regulation was amended to enable a new type of provider to enter the financial landscape. New entrants, including Banking Circle which launched in 2015, didn’t have the same legacy infrastructure slowing them down, so were free to innovate, to stir up the industry and deliver exciting solutions.

They were able to respond to the growing list of pain points and frustrations faced by businesses and consumers transacting in an increasingly global online marketplace. Throughout the latest phase of the fintech evolution, from 2008 to now, we have seen rapid and exciting change. Financial inclusion has increased drastically, and even the smallest businesses can now trade internationally without incurring the high costs and long delays of the past.

Blurring the fintech/bank lines

How fintechs relate to banks is a significant portion of how they have evolved. Entering the market to challenge banks’ offering, then shifting to provide complementary solutions before being able to compete successfully alongside, blurring the lines between what is a bank and what is a fintech. The next stage will see banks and fintechs working together even more closely. Recent research from Finastra and East and Partners revealed that three in four global banks plan to connect with an average of three fintechs in the next 12-18 months. 73% of the European banks surveyed said they want to plug into a platform of integrated fintech solutions, while only 5% plan to build capabilities in-house.

Changing regulation and open banking have allowed the lines between banks and fintechs to become even harder to distinguish, with the growth of embedded finance and banking-as-a-service being two key examples. Companies don’t even need to be a specialist fintech business to offer financial
services today – as long as they have a partner that can deliver that expertise. Fintechs are now able to offer traditional financial services, including loans and debit cards.

The average consumer would be forgiven for having a hard time accurately distinguishing between a bank and a fintech in 2023.

Fintech challenges today

Despite their success and expansion over the years, fintechs still face numerous challenges on their journey to providing the best possible financial services for businesses and consumers. Fintechs’ merchant customers are shifting online, meaning digital payment methods are essential and must be accessible to all customers. Recent Banking Circle research amongst merchants in the UK, Germany and the Netherlands found that just 34% of SME merchants still use a physical outlet for sales. 49% use online marketplaces, 46% their own website and 39% harness social media as their sales channel.

The result is fintechs need the ability to offer payment options that work seamlessly with each of these platforms, so they can stay ahead of the competition. Recognising the global marketplace in which so many merchants now operate is critical. According to the recent Banking Circle research, of the four biggest pain points merchants experienced with their Payment Services Provider (PSPs), two relate directly to cross-border payments: speed of settlements (29.5%) and FX facilities (27.5%).

Banking the non-banks

What fintechs really want is the ability to offer banking services without being a bank – and without having to deal with all the regulatory and investment requirements that go along with that title. They want their customers to see them as their bank, so they need their own Bank Identifier Code (BIC) to simplify cross-border payments and they want to provide instant settlement, direct debits, credit and clearing.

Realising fintech ambitions

Those fintechs offering access to a suite of solutions and added-value propositions in one place will be an attractive option for merchants. Keeping multiple solutions under one roof simplifies integration as well as payments themselves. The more solutions a fintech provides to its customers, the more payments those customers will send to that fintech. The challenge is, however, that no non-bank fintech can single-handedly build and maintain a broad enough suite of solutions to remain competitive.

Fintechs were built to meet a specific need and to meet it better than a traditional bank can. They were not built with the capacity to design, engineer, launch, run and continually update and upgrade a vast array of financial services solutions.

The only way for fintechs to offer their customers a wide enough range of propositions is in partnership with expert external partners like Banking Circle. The financial ecosystem contains almost limitless broad and niche financial solutions ready and waiting for fintechs to pick and mix. Choosing the right partner with the right solutions means fintechs can offer market leading solutions underpinned by fit-for-purpose tech and supported by the relevant regulatory expertise.

Tomorrow’s history

As we move forward, customer expectations will continue to rise and fintechs will need to innovate more quickly to meet changing needs if they are to remain competitive and retain customers. Embracing new technology is essential in future-proofing the fintech offering, with machine learning and artificial intelligence playing increasingly important roles in all areas – from tailored Buy Now Pay Later offers within the payment journey to advanced fraud detection and decision-making processes.

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