How are FinTech startups disrupting traditional banking and financial services?  

How are FinTech startups disrupting traditional banking and financial services?  

FinTech startups are revolutionising the financial landscape by leveraging technology to challenge traditional banking and financial service providers. Through innovation in areas such as digital payments, lending, wealth management and Blockchain technology, they are offering convenient, cost-effective and customer-centric solutions. In this month’s Editor’s Question, we ask: How are FinTech start-ups disrupting traditional banking and financial services?  

These startups prioritise agility, customer experience and accessibility, often operating with lower overheads and embracing data-driven decision-making. As a result, they are swiftly gaining market share and reshaping the industry, compelling traditional banks to adapt or risk obsolescence. This introduction highlights the transformative impact of FinTech startups and sets the stage for a deeper exploration of their disruptive influence in financial services. 

Jorge Lesmes, Banking Director at NTT DATA UK&I: 

Jorge Lesmes, Banking Director at NTT DATA UK&I

“With Singapore, Turkey, Spain and China – to name just a few – already exploring the use of central bank digital currencies (CBDCs), it is unsurprising to see the Bank of England announce that it is exploring the benefits of digital currencies again. The UK has had a CBDC taskforce in place since April 2021 and as banks and government bodies look to adapt to an increasingly digital economy, CBDCs offer an opportunity to leverage the benefits of crypto with less inherent risk.  

“The key hurdle for the Bank of England to overcome is gaining public acceptance of a new digital currency as some members of the public have understandable fears over cash being phased out entirely. However, the current plans are to maintain digital and physical currencies in tandem. Furthermore, for banking customers, digital currencies could offer them increased freedom in the way they use their money.  

“Dubbed ‘Britcoin’, a new digital pound could be held in a digital wallet on their smartphone without the need for an online banking app, allowing them to use the digital currency in the same way as cash. There are projects that are supporting the development of a British CBDC too – for example, ongoing research between UCL, NTT DATA and Petras is looking to better understand the devices and infrastructure required to maintain a CBDC. Either way, it is good to see the UK approach digital currencies with the right caution and it will be important for the government to demonstrate how easy it will be to use a digital currency ahead of 2030, in order to dispel any fears and encourage widespread adoption, once the Bank of England formally introduces a digital currency for the UK.” 

Ruwani Hewa, Product and Propositions Director at Nuapay, an EML Payments Business  

Ruwani Hewa, Product and Propositions Director at Nuapay, an EML Payments Business 

FinTech firms are revolutionising traditional payment methods with solutions like real-time payments and mobile wallets resulting in faster, more convenient and cost-effective transactions.  

Embedded finance is a pivotal component of payments’ ongoing transformation, and its revenue is forecasted to surge to nearly US$230 billion by 2025. Embedded finance integrates financial services seamlessly into non-financial customer journeys, leveraging banking and payments as a service and open banking.   

The true potential of embedded finance and open banking combined has yet to be fully harnessed. An example of this untapped potential can be seen in the inconvenience homeowners face when making payments to tradespeople for services like boiler repair, as these professionals often do not carry portable Point of Sale (POS) devices. Imagine how much easier this would be if an open banking payment was embedded here at the point of need, so the tradesperson could send a payment request link via SMS or email so the customer could make an instant and secure payment. This is the kind of customer experience-focused disruption that FinTechs are enabling today.   

Another area where FinTechs are delivering significant disruption is within the recurring payments space. Recently, the Joint Regulatory Oversight Committee (JROC) launched two working groups to delve into variable recurring payments (VRPs). This initiative, a component of a larger programme, aims to drive the next phase of open banking in the UK. The establishment of working groups for VRP development is promising, but the urgent need for clear timelines and industry standards remains.  

Our research indicates that more than three-quarters of payment service providers (PSPs) and independent software vendors (ISVs) plan to integrate VRPs or Request to Pay (RtP) into their offerings in the future and that 57% are frustrated by the lack of progress on this front. To ensure the benefits of VRPs and RtPs are accessible to all UK consumers and businesses, the development of standardised frameworks is crucial.   

However, FinTechs are innovating around these challenges. This year, Nuapay launched its open banking-powered direct debit solution, Authenticated Mandates, which enables merchants to reap the rewards of more efficient and user-friendly recurring payments while VRP standards are being developed.  

Unlike traditional recurring payment sign-up processes, Authenticated Mandates eliminate the need for manual data entry of the customer’s bank details, enabling merchants to reduce administrative costs and provide a fast, frictionless and error-free sign-up process. Although this has been instrumental in helping businesses like Their Perfect Gift implement Authenticated Mandates and see tangible benefits, there’s still work to be done to make non-sweeping VRPs more accessible.  

Kirk Donohoe, Chief Product Officer, Mangopay 

Kirk Donohoe, Chief Product Officer, Mangopay 

In the past decade, the financial sector has witnessed a seismic shift with the rise of FinTech startups. These innovative companies have been challenging the conventional practices of traditional banking and financial services. Their disruptive technologies, combined with evolving consumer demands, have reshaped the industry in profound ways. 

FinTechs’ agility has allowed for faster innovation to meet changing customer needs. They have significantly reduced operational costs and made financial services more accessible to a broader audience. This includes offering cheaper and faster ways to move money abroad and PIaaS (Payment-Infrastructure-as-a-Service), which is providing a more flexible and scalable way to accept payments and run operations from end-to-end. Furthermore, the introduction of embedded finance like wallet-as-a-service is helping businesses offer built in financial services within their platforms. 

Even with the digitisation of such services, there is now an even greater need for more efficient, accessible and customer-centric financial solutions that provide personalised customer experiences to foster stronger customer loyalty and trust. FinTech can play a crucial role in bridging this gap between traditional banking services and building an ecosystem that can shift with changing economic times.  

FinTechs have an opportunity to replace inefficient and costly traditional banking solutions to cut down expenditures and inefficient processes that directly impact their bottom line. For example, AI based products that improve decision making and automate manual tasks to cut down overhead costs have also seen rapid adoption. 

To achieve a future of greater personalisation and accessible financial products, collaboration between traditional banks and FinTech must continue. If legacy financial institutions want to enhance their service offerings and remain competitive in the digital era, they must adapt and embrace the changes brought by technological advancements and shifting consumer expectations. 

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