The Emergence of Fintech Companies
When the first fintech companies emerged back in 2015, many were those who believed that they were going to take over traditional banks. Fintech companies leveraged technology at a more intense and faster pace than traditional banks at the given time. However, customers were in need of ensured financial institutions examples. They were not willing to trust their money to banks that were not heavily regulated. This was the reason main banks remained the first choice of banking customers. In this article, we will discuss how traditional banking competition has evolved with the development of technology and the disruption of fintech.
Regulators’ Pressure on Neobanks in the US and UK Result in Decreased Profitability
During the last 5 years, regulators put pressure on fintech banks and neobanks in the US and UK to comply with a wide range of regulations such as PSD2, an element that decreased their expected profitability between 2016-2018. This pressure put on neobanks, has helped banks retain a part of their market share. An indicative example is Revolut. According to the company’s statements “The London-headquartered firm recorded a £32.8 million ($40.3 million) net loss on revenues of £58.2 million for 2018. That was more than double the £14.8 million loss it posted a year earlier, while revenue climbed 354%.” (Ryan Browne, 2019) Revolut attributes the rise in costs to card scheme charges and user acquisition. If we observe how Revolut launched its platform in 2015 we may easily identify that the company offered a pre-paid card and app that let users spend abroad without paying high foreign exchange fees.
As a result, low costs and interest rates for users killed the company’s profitability. However, during the last two years, the revenues of the company increased at a very high rate since the company is expanding to new global markets through ensuring crowdfunding and corporate venture capital from public and private investors. It will be interesting to see how Revolut will alter its strategy to remain competitive in the future and increase its financial results.
From Banking Competition to Business Models of Collaboration
Today, competition between fintech and Banks is becoming more of a partnership between fintech and the banking industry. Large banks responded to the emergence of fintech players and made a reality their digital transformation, by shifting toward automation technology implementations (Such as AI and ML). They are currently trying to enhance their offered customer experience by building omnichannel alternatives for their customers, in the new embedded finance landscape. They are seeking opportunities to collaborate and partner with fintechs that they see as being complementary and able to involve in their business models. Recognizing the power and speed dynamism that a young embedded finance business can bring coupled with a partnership with us will lead to the outsized benefit for the market as a whole.
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