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Fintechs and banks

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Fintechs and banks

Fintechs and banks have been in a real state of tension with each other for several years now.

In some places there is even speculation as to whether the new financial service providers will replace the banks in the medium term. It should be noted, however, that many of the Fintechs come from the banks themselves or are financed by them, so that this could merely be a new form of distribution or customer relationship.

The fact is that more than 400 such companies are already active in Germany and their number is rising significantly. In many cases, these are start-ups based on sophisticated technology that reflect individual aspects of the financial world or, in some cases, serve them better than any bank. As things stand today, however, Fintechs and banks exist side by side and only a few analysts see the new “players” as a disruptive force that could destroy the banks.

However, the quote from Microsoft founder Bill Gates, who once stated: “Banking is necessary, banks are not” and thus pointed out the dispensability of the classic banks, is exciting.


Fintechs and banks - a short and a long story

If you want to understand the tension between Fintechs and banks, you should first take a look at the emergence of unequal competitors.

At Fintechs, the story is explained quite quickly and should be at the end of this paragraph. Banks, on the other hand, can look back on a long and eventful history. In Germany it requires according to §39 of the credit system law (KWG) a banking license, in order to appear at all as a bank. The name “bank” comes from the Langobard word “banco” and originally meant the table at which money changers sat.

The world’s first banks were founded in antiquity. At that time the question of Fintechs and banks was still thousands of years away and especially in Athens but also in ancient Egypt the banks served the purpose of financing ships or granting mortgages. There were already cashless transactions or grain was used as a means of payment and even then there was criticism of too high interest rates.

Banking experienced its first heyday in Florence in the 13th century. From the 14th century onwards, Florentine banks maintained branches in all European metropolises and other companies gradually entered the market. The oldest existing bank is Banca Monte dei Paschi di Siena, whose history can be traced back to 1472.

Today, banks are regarded as indispensable and ensure the smooth processing of almost all financial transactions. In this country almost everyone has a bank account and transactions are increasingly carried out cashlessly and thus via bank accounts. On closer inspection, different areas within the banks can be distinguished.

There is talk of private customer business or corporate customers, there is investment banking or credit and almost all large banks combine a whole range of services under one roof. This is also one of the biggest differences between Fintechs and banks, as the new financial start-ups follow the “unbundling” principle and only offer some of the classic banking services.

What are Fintechs anyway?

Fintechs stands for the English term “financial technology”.

Strictly speaking, this is a collective term used to describe a whole range of inventions, innovations and services. The common link is recourse to technology, which is why Fintechs and banks are mentioned.

Comparable developments and terminology can also be found in the insurance industry, where InsurTechs is mixing up the market or we are talking about PayTechs for payment transactions and WealthTechs in asset management. The latter two already take over some services that were previously reserved for banks and can therefore be identified as competitors.

Fintechs can be found both in the end customer area and in the relationship between companies and now cover almost every area of traditional banking. The obtaining of a banking licence is often avoided, as this is associated with high requirements, especially in Germany, and represents an enormous hurdle for market entry.

The relationship between Fintechs and banks is still clearly defined in favour of the banks and the new companies have a market share of less than one percent. However, it is particularly young customers with an affinity for technology who have recognised the signs of the times and can act as multipliers. In other words, the Fintech and banking sectors can develop a dynamic in favour of the Fintech and individual banking sectors can increasingly be handled digitally.

The importance of Fintechs is also underlined by the steadily increasing volume of investments. Between 2008 and 2015, investments increased by as much as 2,200 percent and already amounted to 22 billion US dollars worldwide in 2015.

In the financial metropolis of London alone, 40 percent of the workforce is employed in the financial and technology services sector. Other strongholds of the industry are Amsterdam, Stockholm, Sydney and Singapore.

These locations are characterised by a willingness to invest and a belief in the future of Fintech. Germany is also involved in the market and offers the second largest market in Europe.

What do Fintechs and banks offer?

But what does all this mean in concrete terms?

With which services are Fintechs successful and how do end customers feel this? To answer this question, a comparison between Fintechs and banks in the fields that are increasingly occupied by the new companies is worthwhile. Even classic banking and the management of current accounts is now possible at Fintechs.

The added value can consist, among other things, in the fact that Fintechs not only provides account data, but also evaluates what money is spent on. With a corresponding app, it is possible to differentiate according to sector and those who prefer cashless shopping can get an overview of how much money is needed for food, clothing, travel, etc. The app also provides an overview of how much money is spent on the purchase of goods and services.

Another way to be successful with Fintechs is cashless payment.

The payment service provider Paypal can also be called Fintech and enables worldwide payment by click. Paypal exists since 1998 and was part of Ebay for a long time. As an independent company, it has long outperformed its former parent company in value.

Further Fintechs offer financial analyses, comparisons between different possibilities to invest money or are in the range of the ETF (exchange-traded funds) on the way. The moreover one consumer credits are obtained or the Fintechs appear as asset managers. The list of the possibilities could be arbitrarily extended, whereby particularly the Crowdfunding and Crowdinvesting deserves mention, because it concerns here proven means of the investment of funds for final customers.

The moreover one the differences between Fintechs and banks reveal themselves particularly if it concerns the problem-free and transparent investment of money. There are often real worlds between the two forms of provider, both in terms of returns and in terms of the complete transaction.

Investing money with Fintechs and banks

If you want to experience the difference between Fintechs and banks, you can do so especially in the area of investment.

This is where the classic banks are losing more and more of their clientele, which is simply due to the fact that savings books, fixed-term deposits and the like hardly promise any returns. For the sake of fairness, it should be mentioned that even local banks and savings banks now offer opportunities to participate in the stock markets, but this is much easier and, above all, cheaper to have through the use of relevant Fintechs.

The classic investment products of banks have always had fixed interest rates. We are talking about a savings book or the somewhat more modern but inflexible form of fixed-term deposit over several years or permanently available overnight money. The principle is always the same: the end customer borrows money to the bank at a fixed interest rate and receives it back at the end of the term or once a year with interest.

So far, so good, but unfortunately the interest rates are currently below one percent and thus mostly below the inflation rate. Formulated differently, one loses by the investment of funds with banks at least in the form of firmly invested capital real at fortune. In addition costs come for the administration and each quantity fees , which go additionally into the money.

Who would like to invest money in shares or share funds, can do this naturally also with the banks, but also here clearly higher transaction costs threaten than with a Fintech, which specialized in this. The moreover one meanwhile numerous forms of the investment of funds exist, which are simply not offered by banks.


What distinguishes Fintechs and banks

Anyone who wants to sense the difference between Fintechs and banks particularly clearly can do so above all in the areas of crowdfunding and crowdinvesting. Here the complete principle and approach differs from that of a bank – for both sides.

Crowdfunding and crowd investing are relatively new instruments for financing companies, projects or business ideas. In principle, it is also possible to finance private projects or social projects, so that not even a return is necessarily offered. The variety of crowd services is enormous, so that everyone can find what they are looking for.

The same also applies to the expected interest rates, which are often in the double-digit percentage range, which naturally requires a higher willingness to take risks. Fintechs and banks differ in the fact that the relationship between the companies to be financed and the investors is direct and is only mediated via Fintech or the corresponding platform. Banks do not appear, so there are no additional costs.

If you compare Fintechs with banks, you will also find that the information you get from crowd investing or crowdfunding is first-hand. A company that wants to raise money in this way has to convince through arguments and can score points above all through transparency.

A characteristic feature is the direct interaction with potential or actual investors and the regular reporting on the state of affairs. This is also done via digital channels and in real time, so that every investor can see exactly what his capital is working for and how successful it is.

Of course, the offers in the area of crowdfunding and crowdinvesting are carefully checked in advance. It is therefore difficult to get access to fraudulent companies or invest in non-transparent business models that do not promise profits due to the high security and good reputation of most providers.

Of course there is a risk, but this is clearly stated and communicated in advance. Furthermore, it is usually possible to inquire directly with the companies and to get individual facts and plans explained. By the way, the return on each investment is fixed in advance and is paid out on a fixed date.

The same applies to the term, which is clearly specified for crowd investments. In other words, the capital invested cannot be deducted beforehand because this procedure would deprive the financed company of its business basis.

How to decide between banks and Fintechs?

So how can you decide between banks and Fintechs when it comes to investing your own money?

This question can be answered quickly and easily. If you want 100 percent security, including deposit protection, you can opt for a fixed-term deposit with the bank. The disadvantage consists in the guaranteed money loss by interest, which lies below the inflation rate. The advantage lies in the fact that also no more is lost and a total loss is impossible. The money is safe, brings however no or even a negative net yield.

With Fintechs in the form of Crowdinvesting and Crowdfunding the range is clearly higher. There are risks, but they can be minimized thanks to the wealth of information available. There is also a more direct interaction between the investor and the company. One always knows where one’s money is and for what purpose it is used, which can also have the advantage of supporting social or environmentally friendly purposes.

In the case of banks, it is often unclear what they are investing in and many banks have been shown to be active in arms sales or other controversial areas.

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