Fintech represents a disruptive challenge to the traditional banking sector. Whereas banks rely on an outdated business model centering on traditional depositors and physical bank branches, Fintech is able to operate with much lower overheads while tapping nontraditional sources of capital.
Fintech’s Capital Sources vs. Traditional Banks
A bank uses the deposits of everyday citizens as the source for their loan originations. Fintech on the other hand leverages nontraditional sources of loan capital: these could be hedge funds, trust funds or even the cash reserves of large institutions. An insurance company could contract with a Fintech startup to monetize its cash reserves by lending it out to the Fintech’s borrowers.
Fintech – Less Regulation Compared to Traditional Banks
Because traditional banks use their depositors’ money as a source for their loans, they are regulated by the FDIC as well as the Community Reinvestment Act. The former insures all deposits up to $50,000, while the latter bans discriminatory lending. Fintech is able to evade these regulations because they do not rely on traditional depositors for their lending funds. As a result, Fintech is able to employ sophisticated algorithms to pinpoint who to lend money to. This helps to minimize defaults, which helps a fintech achieve reliable monthly revenue.
Fintech is Virtual vs. Brick and Mortar Banks
Banks haven’t changed that much in the last hundred years. Banks still exist as basically physical buildings which operate from 9 AM to 5 PM Monday to Friday, sometimes with weekend hours. Fintech instead opts to leverage the global network of connected smart phones for their “branches”. This has the benefit of allowing them to operate 24/7 without the brick and mortar requirements of banks. Each branch of a bank has costs associated with it, like rent and labor, the price of which ultimately take away from a healthy bottom line.
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