Sectors that run the global economy have continued to evolve over the years but technological innovation has taken us even further. With the commercialization of more sophisticated technology, the financial sector has seen incredible growth and transformation.

After the introduction of PayPal, the first officially recognized Fintech institution, the advent of financial innovation has taken off, leading to the emergence of even more innovative offerings. Crowdfunding platforms, like GoFundMe, Kickstarter, and Patreon, Blockchain, cryptocurrencies, trading apps, mobile payments, etc. are only some of the examples of the solutions that have come out of this development.

What Is Fintech?

Before moving on to any comparisons or discussion, let’s briefly address what Fintech is. Fintech, as the name implies, is a combination of finance and technology. The core framework involves using technological innovations like modern software, algorithms, and artificial intelligence to digitize finance, enhancing the potential of the overall financial industry.

Instead of relying on the traditional financial banking systems, Fintech hopes to take the industry further by making it accessible and consumer-friendly.

Market Potential

The best part is that Fintech is both advanced and popular. Fintech granted 38% of all the loans in the US in 2018, and 66.7% of bankers believe Fintech will impact wallets and mobile payments globally. Additionally, global mobile payment revenue grew from $550 billion in 2015 to $1,390 billion by 2020. It is projected to grow to an impressive $4,600 billion by 2025, putting its 10-year growth rate at 836.3%! Needless to say, this sector has incredible potential.

Based on the statistics shared above, Fintech presents incredible growth potential and opportunities for the industry. However, despite its remarkable success, Fintech has received extensive oppositions globally from the banking sector and market regulators hoping to appease the status quo.

From the heavy regulations against cryptocurrencies in several states of the US and across Europe to the limitations on crowdfunding, Fintech continues to face several obstacles. The major obstacles for Fintech come from the traditional banking sector and financial sector.

Traditional Sectors and Fintech

Traditional banking has evolved on a need-only basis over the past century and has generally been averse to extensive transformation. The core argument against change is to keep the industry secure. However, the financial crash of 2008 and the recent debacle of the GameStop stock has made it obvious that our financial sector is far from secure.

The 2008 market crash, in particular, revealed several drawbacks in financial regulations and inefficiencies within banking frameworks. Fintech emerged after this crash to provide technologically advanced and secure solutions to consumers. It aimed to fill the gaps in the market and make financial markets more accessible.

The success of the Fintech business model has led to apprehension among traditional bankers due to the perceived threat it poses to their institutions. Fintech receives criticism for its fluidity, which has always been a fundamental value for its operations. The discussion then comes down to the core differences between traditional banking and Fintech.

Difference Between Traditional Banking and Fintech

Fintech and traditional banking and finance are principally the same but different in action. Below are some of the most prominent differences between the two.

1.     Structure

A major difference between the two is structural. While traditional banking and finance sectors rely on physical structures and offices to offer their services, Fintech is entirely digital. All Fintech services can be accessed online through a mobile phone or computer. The consumer only needs is the device and a working internet connection.

2.     Target Audience

Traditional banking and finance target people from all strata of society. They are open to everyone and offer a diverse set of financial solutions. In contrast, Fintech was designed to fill the gaps within the financial market.

Therefore, Fintech is targeted at consumers looking to fulfill those gaps. People in desperate need of funding without the burden of loans and associated interests turn to crowdfunding platforms. Similarly, consumers wanting to explore money markets without the hassle of extensive paperwork, brokers, etc., look to cryptocurrencies and trading apps to achieve their goals.

3.     Potential

While traditional banking reached maturity several years ago and is unlikely to bring about drastic transformation with the same framework, Fintech is just getting started. Blockchain, mobile payments, crowdfunding, and trading apps have barely been explored and still have much more to offer. Additionally, Fintech’s digital model can very well be the next step in global money markets.

Without the shackles of physical structures, Fintech can revolutionize the global financial and money markets, given a healthy environment to grow in.

4.     Flexibility

Traditional banking and financial sectors are stringent in terms of rules and regulations. Opening accounts, making deposits, withdrawing money, and applying for loans is usually a lengthy process full of red tape. It is not only inefficient but also a hassle to go through.

Fintech is comparatively far less complicated. Due to reliance on the digital space, the industry has simplified security checks and minimizes risk through quick record evaluation. It offers an efficient and effective channel of financial solutions to consumers.

Regulations Inhibiting Fintech Growth

Fintech has taken the whole world by storm and grown tremendously over the past decade. However, market regulators across the globe are reluctant about creating a favorable environment for Fintech to properly grow in.

The common arguments offered against Fintech are the uncertainty and risk involved. However, these arguments are unconvincing and a mere guise to support regulations favoring the traditional setup. Below are some examples of how regulatory practices are behind the inhibition of innovation within this sector:

1.     Cryptocurrency Regulations Within US States and Country Bans

While the federal government in the USA does not have any regulations inhibiting Fintech growth, there are individual state laws that complicate the process through compliance requirements. Accessibility and efficiency are at the heart of the Fintech model, and by adding unnecessary compliance regulations, regulators make it difficult for Fintech to give consumers its core offering.

Additionally, cryptocurrency has been banned in several countries, like Turkey, India, Bangladesh, Denmark, Ecuador, etc. This further acts as an obstacle to its growth and development.

2.     Restrictions Around Asset Trading and Payments

The US and Europe both restricted Fintech’s access by heavily regulating the laws around payment acceptance. Europe does not recognize cryptocurrency as a legitimate source of payment for businesses. It has prevented cryptocurrency from gaining ground in the market by refusing to offer businesses the same financial protections it does when they work with banks.

In contrast, US regulations allow only registered brokers to handle crypto securities, adding a layer of unnecessary complexity to the system.

3.     Anti-Money Laundering Compliance

Despite Fintech not having the structure or framework of a typical financial institution, market regulators are hoping to apply the AML compliance regulations to their transactions. The AML compliance is heavily restrictive and better suited to governing the nature of trading happening in financial institutions rather than the routine trading offered by Fintech.

This regulation is aimed at discouraging Fintech’s entry into money markets because it poses a threat to the traditional bankers unwilling to evolve with the times. This unwillingness is influential and has resulted in slow regulatory change over the past few years.

4.     Lack of Licensing

The ideal way to encourage growth will be to introduce business licenses to mitigate financial risks preventing regulators from allowing more access to Fintech companies. However, thus far, no actions have been made to achieve a formal licensing procedure that would remove the need for excess regulations.

Future Outlook

The future of Fintech is bright. The sector has incredible developmental potential, and most of us can only imagine the level of opportunities it has to offer to the financial market and industry. However, one of the major steps needed for Fintech to properly explore this potential is deregulation.

Instead of banning Fintech, market regulators need to start working with technology to introduce policies to create a secure but efficient financial industry. It is important especially because the core frameworks within Fintech can assist governments in their attempts to achieve the economic well-being of their citizens. Fintech:

• Is accessible to all.
• Allows financial support without adding financial burden.
• Removes elitism and allows people of all backgrounds to get involved in the money market.
• Simplifies reach across state and country borders.
• Efficient, effective, and futuristic.

Fintech growth presents a promising and prosperous future for people and governments and the right policy structures can help it realize its potential.

Conclusion

To sum up, Fintech is the financial innovation revolutionizing the industry and taking it a step further. Regulatory restrictions against Fintech exceedingly favor traditional banking and current market regulators are unwilling to study and create an environment needed for healthy market growth and development for Fintech.

The opportunities Fintech offers have the potential to change the economic landscape for the better. This change needs support rather than restrictions to allow it to improve upon existing inefficiencies within the banking and financial sectors.