Though the fintech industry is getting more and more mainstream globally, there is still a learning curve for many people as to what fintech actually is, and a lot of jargon which can be hard to understand if you’re not in the know. In this new series of articles, The Fintech Times plans to breakdown all aspects of fintech to help those interested to learn and understand the industry, making it more accessible for all.
While it’s still fairly new, the fintech market is increasing globally and becoming more and more of a household term, even making it into the Oxford dictionary, defined as “computer programs and other technology used to support or enable banking and financial services.”
The name “fintech” doesn’t have anything to do with fish but is an amalgamation of “financial” and “technology.” Simply put, a fintech company will provide a technological product or service that solves a financial problem for a consumer, with the aim of making financial services more widely accessible. Whether that’s how to send money overseas or how to break into investing, a fintech will identify a gap in the financial sector and provide a solution.
Fintech companies generally operate as start-ups, however, established financial institutions and technology companies have also entered the fintech market to offer their own tools to consumers.
Some areas of fintech include cryptocurrency, investing, lending, insurance (insurtech) and digital banking. In this article, we’re going to focus on the latter and look at banking in the world of fintech.
What is a high street bank?
You’ve probably heard this term before in your everyday life, but a high street bank is a large retail bank offering financial services to individuals and small to medium businesses. These banks will have many branches and office locations and are found in the main shopping areas of towns and cities, hence the term high street bank.
Virtually everyone in the UK will have had some sort of dealing with a high street bank at some point, as they are primarily used for bank accounts, depositing and withdrawing money. Other services they provide include loans, mortgages, credit services and consumer investments, amongst a host of others depending on the bank.
Some of the major high street banks in the UK are HSBC, Barclays, NatWest and Lloyds Banking Group, known as “The Big Four”.
What is a challenger bank?
You may be less familiar with the term challenger bank as they have only recently begun popping up across the UK. These are small, newer retail banks that attempt to directly compete with, or challenge, the longer-established banks in the country.
They generally distinguish themselves from high street banks using modern financial technology practices such as digital/online only operations to avoid the costs involved with traditional, branch-based banking, as well as often offering services that are underserved by high street banks.
For these new companies to be defined as banks they must be authorised by the UK financial regulator, the Prudential Regulation Authority to accept retail deposits.
Examples of challenger banks include Starling Bank, Monzo, and Metro bank; the latter being one of the first challenger banks founded in 2010 and received the first banking license issued by the UK government in 100 years.
Innovations in banking in the UK
With new banks emerging in the UK financial scene, and older traditional banks working to keep up, there has been a wave of innovation when it comes to banking services and how they are accessed/utilised by the public.
One of the main ways and perhaps the most obvious is the improvement of ATMs. This is by no means a new thing in the industry as ATM’s have been around for over 50 years, with the first machine launching in the UK in 1967 outside of a Barclays branch in London.
There are over 70,000 ATM’s, or cash machines, in the UK that offer a variety of services to consumers. They mainly offer cash withdrawals, as was their original primary purpose, however over time they can now perform a wide range of financial transactions including deposits, fund transfers and account queries. The main draw of an ATM is that you can access these services at any time without having to interact with bank staff or needing to visit a branch at all, and have lead the way in the self-service banking culture that is continually rising.
As technology and the banking industry continues to improve, it’s likely we’ll see more innovation in ATM’s. Some machines can onboard new customers, while others have started to offer contactless cash services; the ability to withdraw cash without even inserting your card. Some ATM’s have built-in biometric recognition to help with identification, and “smart ATM’s” are expected to rise to prominence, offering 99% of the services available in branch.
Another major innovation in the banking and finance world is the development of contactless payment systems. As the name suggests, contactless payments are where credit/debit cards, key fobs and even smartphones can make secure payments by waving their card/device over a point of sale terminal, completely negating the need for chip and pin transactions.
Contactless payments were first introduced in the UK in 2007, and while initially slow on the uptake, a third of all card transactions in the UK are now contactless. This doesn’t just apply to debit and debit cards however, with payments being made through mobile wallets such as Apple Pay as well as used for things like Oyster Cards.
This has been particularly useful during the Covid-19 pandemic, as the public have been encouraged to pay via contactless when shopping to reduce the need to touch POS terminals and potentially transmit/pick up the virus. As a result of this, the limit on contactless payments have been increased from £30 to £45 to continue to encourage their use.
The benefit of these transactions is that they are usually much quicker than conventional card purchases, as no PIN verification is required, and transactions are approved faster. However, the downside to this lack of authentication is that fraudulent purchases can be made if your card is lost or stolen. Despite this, fraud using contactless cards remains low, and even without encouragement due to the global crisis, paying via contactless has increasingly become the norm in the UK.
Another major innovation we’ve seen in UK banks is the rise of digital banking apps. In 2019 it was reported that more people in the UK were managing their money through mobile apps than through internet banking. It’s even predicted by the CACI that mobile banking will overtake high street banking in terms of number of users by 2021. This growth is fuelled by increasing adoption by older consumers, rather than just the younger demographics, as well as the convenience of managing your money purely by tapping on your phone.
At least 79% of adults own a smartphone in the UK, making it a no brainer to be able to bank via an app. Apps have also seen increased functionality over time; with many having the ability to deposit cheques and pay off credit cards, offering users an accessible experience that is constantly improving.
This, amongst the other factors mentioned, is leading to what the mainstream media terms “The death of the high street bank”. Less and less consumers are choosing to bank in store and instead are utilising the wide array of options online and on mobile. Many believe the banking industry is facing a turbulent future, and as the fintech sector continues to innovate, the choices available to consumers often surpasses what high street banks can offer.
What is Open Banking
Open banking is a very simple concept and one that came into force in January 2018. Basically, it is a secure way to give authorised third-party providers access to your financial information from your bank, such as spending habits and regular payments, with the aim of helping to understand your financial needs and find new products and services to help customers get a better deal.
Open Banking also forces the UK’s largest banks to be more transparent and share other data; including simple records like branch locations and details about banking products.
These reforms were called for by the Competition and Markets Authority to hopefully bring more competition and innovation to the financial services industry and create better products to help consumers and SME’s manage their money.
Consumers don’t have to share their data and must give their permission to banks that can be withdrawn at any time. Initially, data was accessed via screen scraping, giving the providers “read-only” access to your online banking accounts. However, this was stopped in 2019 as it was deemed too risky and now Application programming interfaces, API’s are used to share the information. Open Banking is as safe as standard online banking, and only start-ups that have been approved by the Financial Services Authority (FSA) are able to use the system.
Some companies that you may want to share your data with could be budgeting and money management apps, lending services or other banks, as well as various fintech companies on the market to consumers. Open Banking is therefore very advantageous to the fintech industry and will likely contribute to its growth in the UK as the data provided will be much easier for start-ups to see and use.