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The financial services industry (FSI) has changed dramatically over the past decades due to technological developments in telecommunications, information technology, and financial practice. 

Technological advances encouraged innovations to alter several financial products, services, production processes, and organisational structures. The term ‘fintech’ has become popular worldwide in relation to financial services, derived by joining two expressions: financial services and digital technology. 

Banks and financial institutions have a long history of adopting new technologies; however, the use of technology was mainly related to banks’ processes in back-office operations. After the 2008 crisis, intensified regulation led to the creation of new financial service providers. 

Since that time, fintech startups have expanded rapidly, providing financial services to customers in an innovative way. Examples of these innovations included the emergence of cryptocurrencies, digital wallets, crowdfunding, and peer-to-peer lending. Much of the value created by fintech firms seems to be through machine learning technology, big data, cloud computing, and cryptographic methods.

What’s driving fintech’s growth in the FSI sector?

It seems that the emergence and growth of fintech firms in recent years in the financial services industry could be generally attributed to the following drivers:  

1. The advancements in digital technologies

The rapid development of hardware, software, and the growing convergence of information and communication technologies in the last two decades are crucial for the emergence of fintech companies. These developments enable new business models and organisational forms to emerge and disrupt several industries, from travel and entertainment to financial services. 

In addition, emerging digital technologies, from 5G, the Internet of Things, blockchain, artificial intelligence, big data, and substantial developments in data storage and management, are opening up new possibilities to alter the way in which the financial sector is operating.

The exponential rise in digital technology has enabled fintech firms to deliver financial services faster and cost-efficiently while providing more convenient digital banking experiences to their customers than traditional banks.

With the advent of digital wallets, mobile banking, and other financial applications, one can already notice changes occurring in the financial services industry.  Individuals can now use digital wallets to pay bills, purchase physical items or digital content, send money to relatives or friends, pay for parking or taxis, and make denotations.

2. Changing customers’ needs and expectations  

With the advancement of technology, customers’ requirements for the financial services provided by the traditional banking system have changed. Customers have become more autonomous for basic transactions and more demanding of banks’ role for sophisticated ones. 

Furthermore, with the help of new search and social media tools, consumers have become increasingly connected, informed, empowered, and active. Nowadays, consumers are shifting their purchases to online stores, and digital touch points have become essential in the customer journey, affecting both online and offline sales. In addition, the fintech era has brought 24/7 access to financial services instead of being just limited to banking hours.

As some banks worldwide still offer old-fashioned, costly, and cumbersome financial services, fintech firms are taking the opportunity to provide several critical functions of traditional banks, while depending on technology and innovation as a source of competitive advantage. 

Technology by itself is not disruptive, but instead, shifting customer behaviour and demand is the real disruptor. Changing customer needs are considered to be at the core of the digital transformation of the financial services sector.

Recent research conducted across the United Kingdom and Germany has revealed that over 90% of banking customers in the U.K. and over 85% in Germany believe that a strong technology offering is the most important factor when deciding where to bank. 

It is proven that customers value other aspects of fintech services, such as convenience, as most transactions are provided through online platforms without needing to go to a financial institution., Through mobile applications, users can perform several banking functions such as bill payments, checking deposits, account balances, statements, and many other transactions without the need to visit a bank. 

3. The impact of COVID-19

The COVID-19 pandemic arrived suddenly in a world that was unprepared for such an event and impacted the global economy severely. While international markets have become accustomed to economic shocks over the past century, the COVID-19 pandemic crisis was different in one material respect – it stemmed from a global health crisis that quickly became an economic crisis. 

The COVID-19 pandemic underlined the need to accelerate the digitialisation of many aspects of people’s daily activities due to a lack of physical presence at the usual places of business. Millions of people worldwide were forced to work from home due to the spread of coronavirus.

The COVID-19 pandemic forced various business entities to move online when their operations locked down. As a result, customers turned to digital channels to execute their daily transactions, and e-commerce has become more widely accepted by consumers. The COVID-19 pandemic resulted in a mass upgrading of people’s digital knowledge across different age and social groups worldwide.

4. Reduced barriers for market entry 

One of the factors that allowed fintech companies to enter the financial services market is the lower regulation for financial services provided by non-banks. The increased capital requirements and stricter lending conditions that banks faced following the financial crises of 2008 made it hard for small businesses and individuals to secure credit, thus creating an unmet demand for financial services. 

Banks have been busy complying with regulations, while fintech companies were expanding their businesses using technology to provide financial services to customers in an innovative manner at low cost. Moreover, fintech companies can unbundle financial service offerings through innovative technologies because they are less affected by regulatory constraints and are willing to take on more risk than regulated banks. 

The relatively light regulatory requirements enabled fintech firms to adapt to a changing business and technology environment easier than banks. The easing of the regulatory framework for innovative financial service providers appears to have reduced the barriers to market entry for fintech firms. 

Additionally, advances in hardware, software, and cloud infrastructure have made the development of sophisticated fintech platforms possible with small teams, enabling entrants with minimal funding to compete in this space. Thus, traditional financial institutions now compete against their incumbent rivals and a growing number of new financial and non-financial players.

5. Expanding investments in fintech sector over the last decade  

Financial institutions and technology firms seem to be increasing their investments in fintech innovations following the 2008 financial crisis. Worldwide, external funding for fintech developments has been rising quickly in the last few years. 

According to KPMG research, the total amount of deal value grew from $51.2 billion in 2014 to $210.1 billion in 2021. The number of deal counts increased from 1,628 to 5,684 during the same period. 

The venture capital investments in fintech firms worldwide rose from $1.89 billion in 2010 to $115 billion in 2021. Over the last decade, the increasing investment in fintech firms resulted in the growth of these firms’ numbers and activities in the financial services market. The global fintech market is driven by customers’ growing need for e-commerce and mobile banking platforms that offer a more user-friendly environment for conducting financial transactions.

Concluding remarks

Fintech firms are recognised as innovation drivers in the financial services field and are predicted to play a significant role in the financial services industry. Digital transformation and technology advancements enabled numerous fintech firms to address their customers’ needs efficiently and at a low cost. 

It is argued that conventional banks need to keep up with the pace of innovation to stay competitive in the market, as fintech firms appear to be growing faster, generating higher revenue and having high prospects of success. The banking sector’s adoption of advanced technology is now considered a key differentiator against competitors and a critical factor for financial sustainability.