“Banking is necessary, banks are not,” Bill Gates said as early as 1994, long before the existence of Internet banking. The Microsoft founder would turn out to be right with this verbal provocation.
For years the internet has turned classic business models of the economy on its head: Streaming services such as Spotify or Netflix, Share Economy opportunities such as AirBnb or Car Sharing, Blockchains and Bitcoins or financial services such as LaterPay or Paypal.
The latter two are examples of so-called FinTechs. This is a collective term for technologically developed financial innovations that enable new financial instruments and services.
FinTechs are mostly start-ups that aim to take a market share from the established banking industry with innovative ideas. For example, consumers are able to invest money, borrow, pay or seek financial advice directly through the Internet, without using a middleman.
Fintechs optimise digital processes
Through strong customer orientation, lean company structures and optimised digital processes, FinTechs such as Kreditech or Laterpay, with innovative and attractive offers for private customers, are successfully attacking established business models of banks or insurance companies. As The Economist predicted in 2012, ‘This is a time of huge opportunity in finance, as long as you are something other than a bank.’
While the traditional banking and insurance industry is heavily regulated by the state, there are no similar requirements for the digital FinTech offerings. Since these don’t fall under classic definitions, most start-ups don’t need a banking or insurance license, and therefore have no need to comply with the related capital requirements. According to the PwC Global FinTech Report, by the year 2020 more than 20% of the global banking business could be handled by FinTechs.
PSD2: Serious changes for payment transactions
From 13 January, the Directive on Payment Services, an EU Directive on the regulation of payment services and payment service providers throughout the European Union (EU) and the European Economic Area (EEA), will enter into force. The aim of the Directive is to increase Europe-wide competition and participation in the payments sector, including by non-banks, and to create a level playing field by harmonising consumer protection and the rights and obligations of providers and users of payment services. Brussels wants to make European payments safer, more convenient and cheaper. The market is to be opened for third-party suppliers, so-called FinTechs, and is to enable new business models. Experts expect a price war for financial services, which will create a difficult situation for the banks.
Others see a positive impact of FinTechs, as they help banks simplify their operations. Many financial institutions are therefore seeking new partnerships to benefit from this new, disruptive technology.