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Over the last couple of years, however, new technological advances and paradigm-shifting new theories and practices have come to threaten this established, centuries-old system. New ways of payment, insurance and asset management have started to change the world we live in.
And at the very beginning of most of these changes stand a startup or two.
The fact that fintech (financial tech) startups have even been able to enter the financial game, let alone change it, is nothing short of a miracle. In fact, it is all due to the perfect storm of circumstances that allowed them to slip their way into the system where their innate advantages have been able to shine and sway users to their side.
For one, the technology came to the tipping point with users more than ready to start taking their financial practices to their mobile devices and the internet. This allowed companies that may not even had a physical office to provide financial services.
In addition to this, the 2008 Financial Crisis finally showed to even the most oblivious people that the financial systems that we have in place were broken for a long, long time. This meant that one could trust a brand new startup as much as they had trusted the bank they did business with their entire lives. Trust is no longer an issue for fintech startups, if for no other reason than simply because users do not trust old financial players either.
The lack of timely response from banks and other financial players also benefited the startups. Old finance companies did not think much of these fintech startups as they thought regulations and red tape would prevent them from doing anything too consequential. They only realized they were wrong when these new companies started blitzkrieg-ing their market.
As time went by, more and more people have been realizing the benefits of these new financial models and practices, more and more talented people have been starting or joining fintech startups and more and more traditional financial concepts have been disrupted.
It is no wonder PWC's 2016 Report all but spells doom and gloom for traditional financial service firms in the face of up-and-coming fintech startups.
A Couple of Big Disruptors
Some of the fintech companies have been around for some time now and they have already become established players in the financial game.
LearnVest has, for example, brought the services of financial advisors to everyone. Whereas these services were traditionally accessible only to the more wealthy, nowadays, with LearnVest, even people who are not making that much money can become better at saving it and doing more with it.
When it comes to lending, there is no company that has done more than Lending Club, a peer-to-peer marketplace that arranged for almost $10 billion in loans.
Robinhood Financial has, on the other hand, brought stock marketing investing to the masses, so to say, providing ordinary people with commission-free brokerage that allows literally anyone to play the market.
AngelList has been allowing startups to get resources needed for the next step by putting them directly in touch with investors and venture capital. One very noticeable absence from this are the banks which are usually involved in such processes.
This is not even mentioning bitcoin and the blockchain phenomenon which has all the makings of a historic concept that can truly transform the world we live in. It is important to keep in mind that blockchain is also mostly being facilitated by numerous startups from around the world.
The future is complex for fintech startups and the world of finances as a whole.
For one, it has to be pointed out that these fintech startups are currently very limited in scope. For example, Lending Club's $9 billion in loans feels like a lot, but it is not considering that the total credit card debt in the US is more than $885.
A more aggressive response will definitely come from established finance players once they decide the startups are encroaching a bit too far into their territory. They are already buying up startups whose APIs and established practices can improve their inner workings. Other big players are simply doing what the startups are doing. Charles Schwab, a decades-old investment company waited to see how online brokerages do it and they started their own Schwab Intelligent Portfolio.
As many finance experts warn, all of these promising fintech companies have yet to experience a market downturn and a financial crisis. It is very likely that many of them will be ill-equipped to deal with an event like that.
That being said, the future will be brighter because of fintech startups, there is no doubt about that. For one, they are making the big players rethink their practices and strategies that have evolved to be less and less consumer-friendly over the centuries. Also, they promote new ways of doing business around the world.
(An Optimistic) Closing Word
The global financial system will probably find a way to bring things back into (what they consider) balance, but the chances are that it will be a more consumer-friendly balance thanks to fintech companies exposing much of this system.
And that is a good thing.
