Fintech vs traditional finance: who will win the U.S. market?

The U.S.’s financial services industry is expected to grow even more the preceding years, along with the rest of the world’s, and it’s been recovering well from the COVID-19 pandemic.The employment rates in the industry are very low, less than 3%, making it very competitive. Nonetheless, a more skilled and developed workforce is always needed. Among the top players in the american market, and globally also are: Berkshire Hathaway Inc, Visa Inc., JPMorgan Chase & Co., Mastercard Incorporated, Bank of America Corporation, Wells Fargo & Company.

The traditional financial sector faces a lot of challenges lately. Even though the majority of the population is still transacting with the traditional methods, the technological advancements and new competitors that arise from this technological revolution, make traditionally strong players rethink their strategy. In addition, as an industry that relies heavily on technology to handle sensitive material and interact with its customers, it’s going to be vital that financial services companies keep their technology updated and protect themselves from cyberattacks.

Over the past decade, the traditional finance sector has been disrupted by newly founded and revolutionary financial start-ups, which with their out-of-the-box ideas and innovative technology changed the financial landscape once and for all. In the beginning, the financial institutions saw these new players with great skepticism and competitiveness. Though their relationship is still difficult and complicated, everyday we see more and more collaborations between fin-tech companies and well-established financial institutions to take place. 

It is very important for the traditional players to understand that the inclusion of new technology can be deployed to add value and create superior customer experiences. In order for them to survive in this highly competitive market it is crucial to keep up with these fast paced companies and be more flexible. On the other hand, the fin-tech companies have to create more realistic benchmarks and to align with practical and real world challenges,as they have the tendency to get carried away by their creativity. There are many cases where fin-tech start-ups did not survive because of their non-practical products and overcomplicated offerings.  

What is fintech?

Fintech is a combination of the words finance and technology, and it’s a broad category made up of companies that apply new technology to financial businesses. The potential of fintech is limitless. Even after the growth of the cashless payments space in recent years, the majority of payment transactions around the world are still done in cash. Many types of companies are under the fintech umbrella, some examples of their offered services are Payment processing, Online and mobile banking, Online lending, Financial software, and Financial services. 

There are also great technologies that have developed at the same time that can revolutionize other sectors as well, apart from financial services, even art. Firstly, blockchain technology is a public ledger that stores transactional data digitally. Digitally validated and given a distinct hash (or identity), each “block” of data is then added to the public ledger. Blockchain has the potential to increase an organization’s efficiency and, over time, its profitability. Big internet companies like Amazon and Salesforce.com are taking a prominent interest in blockchain.

The most popular application of blockchain is cryptocurrencies. Cryptocurrencies were created as a sort of digital currency for usage on the internet and in a world that prioritizes technology. They use blockchain to trace financial transactions between parties. Among the most popular ones are Bitcoin and Ethereum. Over the past few years, though hesitantly, more and more actors of the economy recognize cryptos as a transactional currency. According to the Securities and Exchange Commission (SEC), which regulates securities in the United States, digital assets will be subject to the same regulations as traditional securities.

Last but not least, there are the infamous NFT’s (non-fungible tokens) that aren’t actual cryptocurrencies. It is a unique digital asset with a code written on it. Their value is based on the value of the media that they represent, such as music, art, videos etc. 

Fintech industry segments and trends in the US market. 

The U.S. fintech landscape has a lot of opportunities to discover. Here are some examples from the key industry segments.

  • Payments: Innovation in the payment methods especially now where a significant number of transactions are online. With more transactions moving online every single year, payments companies continue to be among fintech’s largest and fastest-growing businesses. The Swedish company Klarna is a  pioneer of the buy-now-pay-later model, Klarna banked on customers moving away from credit cards, but still wanting a way to pay over time. The company operated in many markets but in the US it has more than 25 million users and partnered with  30 of the top 100 U.S. retail brands.
  • InsurTech: Insurtech is the use of technology innovations designed to make the current insurance model more efficient. InsurTech companies use technology such as data analysis, IoT, and AI, allowing products to be priced more competitively. Though it has gained the interest of investors, nowadays it is difficult to gather financing as the market has saturated and is extremely competitive, especially in the US market. A successful example is Kin insurance which has gathered from 2016 to 2022 is $238.2 million in funds. 
  • Wealthtech: This term comes from the terms wealth and technology and signifies all digital products created to streamline wealth management procedures (e.g. tax planning, wealth protection, estate planning, succession planning, and family governance, wealth structuring and planning). Investors are currently less interested in small scale middle or back office systems due to the variety of established, reliable, and globally recognized wealthtech platforms, but the front office still has plenty of opportunity for new wave wealthtech providers to acquire traction. A renowned wealthtech company is Robinhood that changed the wealth management environment by charging nothing and carrying  no account minimums. Other Robinhood features, such as giving customers a free stock and showing them what their peers were buying had as a result having almost 15.9 million active users in 2022 and $1.81 billion revenue in 2021.

 

  • Regtech: a.k.a. regulatory technology is the use of information technology to enhance regulatory and compliance processes. RegTech is best utilized in highly regulated fields and endeavors including financial services, gaming, and healthcare. According to analytics it is a very prominent sector as there are a lot of challenges to be tackled such as money laundering and fraud prevention. BigID hosts a platform for curating intelligence analytics on sensitive collected data. RegTech Market size was valued at USD 7.74 Billion in 2022 and is projected to reach USD 53.37 Billion by 2030, growing at a CAGR of 23.92% from 2023 to 2030 (Verified Market Research). 
  • Cybersecurity: Globally there is a lot of worry about the sheer volume of cybersecurity incidents, and the enormous amount of data pouring into security operations centers via alerts. There are too many cyber attack cases and not enough security personnel on duty to create an “armor” against those attacks. This explains why automation and machine learning are beginning to receive much more attention and investment. Deals related to cybersecurity are increasing, which is attracting more investors.
  • Blockchain/Cryptocurrencies: Highly fluctuating market with great uncertainty and potential risk. They have gained a lot of interest over the past few years and they are more likely here to stay. In the american market the vast majority of the population is aware of cryptos and more than 16% of the population has invested, traded or used the cryptos and more than half of the adult population claiming that they are very likely to invest in them in the future. Uncertainty behind their value hinders potential investors. Still information about cryptos and their usefulness has to be enhanced. Cryptocurrency prices can be highly volatile, and purchasing them may lead to loss of principal. Among the most popular cryptos are Bitcoin and Ethereum. Some cryptocurrencies are predicted to disappear, especially those without distinct and compelling value propositions. Due to the fact that it will help clean up some of the waste made during the exuberance of a bull market, that could really be pretty beneficial for the market. 

 

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