Accessing our money has never been easier. We can go online, use our smartphones, or walk into a branch. We can be miles from home and still manage our finances with the tap of a finger or the click of a mouse. But are all these options equal?
For example, are fintechs the same as banks?
Fintechs are technology companies that offer financial services. Banks are financial institutions that offer financial products and services using technology.
Licensing
The first major difference between fintech companies and banks is the way they are regulated by authorities.
While the two may offer similar services, operating as a financial institution requires a banking license. Providing banking services as a fintech does not.
The Way Banks Are Regulated
Banking licenses allow an organization to operate as a financial institution within a specified jurisdiction. It authorizes the entity to accept deposits, loan funds, and process payments within a centralized banking system.
Because financial institutions are a foundational component of a country’s economy, they are highly regulated to minimize bank failures leading to economic collapse.
What constitutes a bank depends on the country’s legal system. Countries like the United States and Canada share financial services jurisdiction with their states and provinces.
Regulatory agencies ensure that banks maintain sufficient operating capital and cash reserves to operate and comply with all laws.
In the US, financial institutions granted state and national licenses must comply with federal and state laws. State-licensed banks must comply with state regulations and cannot offer services outside the state borders.
Are Fintechs Licensed?
It’s common for fintech companies to partner with fully licensed banks and offer checking and savings accounts, overdrafts, bank cards, and other products on behalf of the partner bank.
For example, when a customer has an account with fintech, his bank details for direct deposits will be from and by the partner bank. Also, bank cards will be issued by the partner bank.
Only recently have some of the fintech companies been granted full banking licenses.
For example, the fintech Revolut has launched Revolut Bank under a full banking license from the Bank of Lithuania and the European Central Bank. Varo Money acquired its full banking license in the US in 2020 and became the first US fintech to earn a national banking license.
Lending
Many consumers look to fintechs for loans. Their application processes are online with a fast approval response. Fintechs have simplified the loan process through technology. The companies deploy machine learning and artificial intelligence to evaluate borrowers’ creditworthiness.
Some fintechs specialize in microloans and small business loans that are more difficult to receive through traditional banking channels. Regardless of the loan size, banks must go through the same process, which is usually a minimum of 30 days.
If you need a loan to carry you through to the next payday, asking for a $1,000 loan from a bank will take too long. Homeowners may be able to get a home-equity line of credit from a traditional bank, but that can also take weeks to process.
Small businesses often have difficulty getting loans from financial institutions. They are often seen as a higher risk for default and may not need the same level of funding as a larger business. Since banks make money on a loan’s interest, the larger the loan, the greater the profit.
Some fintechs are offering a Buy Now, Pay Later (BNPL) loan service to online merchants. When consumers checkout at an eCommerce site, they are given the option to spread payment over three or six months. If they choose the option, they have received a loan that requires repayment much like a store credit card.
Payments
Fintechs allow people to send and receive funds from peers without going through a bank.
Suppose a group of friends needs to divide a check after going out to dinner. With a peer-to-peer fintech system, one person can pay for the meal, and the others can send immediate payment through an application such as Zelle or Venmo.
The process doesn’t incur bank fees and happens in realtime. Without fintechs, people would need to write a check or withdraw cash to cover the cost of the meal.
Money Transfers
For people working in one country with family living in another, sending money is costly.
Wire transfer companies charge a percentage of the transfer amount, and financial institutions can attach a $15 to $30 fee. For those without a banking relationship, the cost could double.
Fintechs that offer money transfers do not require a banking relationship and charge lower fees. Because they use technology to move the transactions forward, they can meet customer expectations while remaining profitable.
Personal Finance
People often viewed bankers as financial advisors, helping them control their spending and plan investments.
Many fintechs offer the same service through AI technology. Take Mint (by Intuit). The fintech aggregates an individual’s financial information into a comprehensive view of a person’s finance.
Fintechs use APIs to extract information from different financial services companies. They then convert the data into a standard format that allows users to view information through reports and graphics.
Banking
Although banks offer more than depository services, most people view that as their primary responsibility. Financial institutions are to secure a person’s money and allow access when requested. This fundamental trust relationship is essential for a healthy economy. That’s why financial institutions are so heavily regulated.
Most fintechs that offer checking and savings accounts do it through a partnering institution that is licensed in the jurisdiction. For example, Monzo uses Sutton Bank in the US for its depository accounts. These relationships enable fintechs to use the latest technologies to deliver banking services online and with mobile apps.
Insurance
Fintechs that operate in the insurance market are referred to as insurtechs rather than fintechs, even though jurisdictions like the US group them under financial services. Insurance companies may be considered financial services organizations they do not fall under the same regulatory agencies.
However, most insurtechs partner with licensed insurance carriers to deliver online services with faster onboarding and claim processing solutions.
As with banking, the capital reserves and compliance requirements make it difficult for many technology companies to become licensed. Instead, they serve as the customer-facing solution that enables consumers to compare policies and apply online.
Investment
More investment firms are turning to fintech solutions to provide investment advice to clients.
With AI applications, fintech-based investment systems can make recommendations based on past behavior. The technology can determine an acceptable level of risk and suggest instruments that meet your expectations.
For some solutions, trading and brokerage fees are significantly reduced because technology delivers the solution at substantial savings. More investment firms are looking to fintech as a path to increased profitability.
Technology
Fintechs and financial institutions use technology to deliver financial services. However, fintechs are technology first in focus. They evaluate the landscape to determine how to best use technology to improve the customer experience. They are not hampered by existing technologies that no longer work with current solutions.
Banks have to weigh the cost of technology against the customer experience and regulatory requirements. As more regulatory agencies take aim at the fintech sector, their ability to pivot may become constrained. But, consumers will continue to expect fast and convenient financial services.