Articles, Finance

Businesses Move Away from Traditional Banks in Favor of Fintech Options

Written By: Valuewalk
Reviewed by: Mike Reyes
Last Updated November 1, 2023
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Fintech is currently the biggest competitor of banks, and it’s winning the battle. While the traditional banking industry grew by an average of 2.7% between 2016 and 2021, fintech grew by 25% per year.

That’s down to the fact that fintech companies understand most things that banks are struggling with, including networks, distribution, decentralization, information, and customer experience.

To no surprise, Gartner predicts that 80% of traditional financial firms will either go bust or be rendered irrelevant by 2030. And fintech is poised to be the biggest beneficiary.

What Is Fintech?

Fintech is short for financial technology. It refers to modern and innovative technology that seeks to provide businesses with automated and improved financial services.

A good example of how fintech is changing the workplace is with the growth of business checking apps. These services make it easier for entrepreneurs to create and use business checking accounts with only a few clicks from their computers or phones. This is a sharp contrast to traditional banking where a simple thing like opening a business checking account is riddled with lots of steps, requirements and paperwork.

Besides, brick-and-mortar banks don’t often lend to small- and medium-sized businesses (SMBs). That’s precisely why businesses are moving away from traditional banks in favor of fintech. The latter makes access to capital and credit a lot easier.

What Is The Difference Between Fintech And Banks?

Both fintech and banks work as financial intermediaries. However, fintech describes any modern technology that’s used to automate and improve the delivery of financial services. Banks, on the other hand, are financial institutions that are licensed to make loans and accept deposits.

For centuries, banks have been the sole medium for financial transactions and activities. Unfortunately, they’ve also been too slow to react to the modern fast-paced world that requires financial transactions to complete instantly and with utmost convenience, especially for businesses and entrepreneurs.

And that’s where fintech has thrived. It brings streamlined financial services to people’s fingertips. Companies like Hatch enable small business owners to open online checking accounts in under 7 steps. You can confirm your account balance, send checks, make payments, pay employees etc. from one simple-to-use dashboard.

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How Fintech is Edging Out Traditional Banks

First, a few numbers for perspective.

  • Fintech has a 64% adoption rate whereas only one in five customers would rather visit a brick-and-mortar bank.
  • There are over 10,605 fintech startups in the U.S. alone compared to 5,177 banks and savings institutions.
  • 77% of people use fintech platforms to make payments from their smartphones.
  • 88% of traditional banks feel that they’re being outpaced by fintech firms.
  • 82% of traditional banks are planning to collaborate with fintech companies within 3 to 5 years in order to remain competitive.
  • Fintech has a growth rate of 25%, compared to traditional banking which is growing at 2.7%.

It’s clear that fintech is gaining ground as traditional banks lose. Driving the shift from traditional banks to fintech are SMBs. And here are the reasons for this movement:

Need For Modern Systems

The banking system has mostly remained unchanged over the years. It is typically old, sluggish and inhibitive for small- and medium-sized businesses. As the world grows faster by the day, people are forced to look for a substitute that can fulfil their needs. In the case of banking, that substitute is fintech.

Changes In Customer Priorities

The modern business owner is no longer interested in queueing in banking halls, writing paper checks or walking around with paper cash. They prefer fintech, which enables them to make and receive payments via smartphones and computers. It’s not only convenient, but it’s time-saving as well.

Granted, banks are introducing web and mobile-based banking services. But their platforms are no match for fintech in terms of user experience.

Similar Services

Fintech firms offer virtually the same services as traditional banks, and that gives customers the option to choose either. For example, Hatch allows business owners to open checking accounts, make payments, receive payments, write electronic checks, etc.Meanwhile, traditional banks are still struggling to package their services in ways that can enhance customer experience.

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Way Of Operation

Although fintech and banks are financial institutions, they differ greatly in the way they operate. Traditional banks are still hung up on person-to-person service delivery. Fintech, on the other hand, works virtually. You don’t need to visit a physical location for you to be served.

As a result, fintech offers a more convenient way of doing business. Rather than spending your precious time visiting a bank, you can complete your financial transactions on a smartphone or computer. This takes a few clicks regardless of what you’re doing – opening an account, checking your balance, making payments etc. You can then dedicate the rest of your time to growing your business.

Fees And APY

Because they don’t have physical locations like traditional banks do, fintech firms can operate with extremely low costs. They often transfer these cost-saving benefits to customers by charging low or zero fees and offering higher APY than traditional banks.

An excellent example is Hatch, which doesn’t impose any NSF fees at all, which can be a large expense for small businesses. Oftentimes you’ll also earn APY on your checking account.

The Final Word

Judging from current trends, the future of banking will be shaped by fintech more than traditional banks. In fact, a good number of Fintech firms are already offering fully-fledged financial services that were typically reserved for banks.

The best part – at least as far as entrepreneurship – is that you can access these services more conveniently and at a cheaper cost than if you go with a traditional bank.

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