Although Similarities Between Them Seem To Be On The Rise, Here Are Major Differences Between Fintechs And Banks

Financial technology companies, called fintech for short, have become not only popular over the years. They have meandered their way into every sphere of human endeavour providing fast, easy and timely solutions all based on technology. Around the world and in the continent of Africa, for instance, fintech companies have recorded and will continue to hit new milestones. They have successfully amassed millions of users and have found a way to enter into territories that were once considered unbankable and/or abandoned by the traditional financial system.

While the similarities between banks and fintech companies continue to grow, so much that it’s almost hard to differentiate between them in terms of services, there are still a handful of factors that set fintech companies apart from banks.

In recent times fintech startups, especially those of African origin have done so well for themselves, from gaining millions in funding from investors, to recording astronomical growth in their user numbers and operations. Apart from Flutterwave which has been in the news for raising a Series D of $250 million at a valuation of more than $3 billion, and processing $16 million worth of transactions for 900,000 businesses, other fintech startups are also breaking boundaries.

For instance, we have Zanifu, a Kenyan fast-rising fintech focusing on FMCGs that raised $1 million in seed funding this January. Through a number of partnerships with manufacturers and distributors, Zanifu extends credit to businesses that qualify for its financing. Zanifu’s platform ensures seamless ordering, payment, tracking and fulfilment for manufacturers, distributors and retailers and can be described as a one-in-all solution. Retailers can access loans via Zanifu’s loan app after they upload relevant data. After receiving their loans, they have a month to pay back and interest rates are between 3.5 to 5 percent.

OZÉ, another fintech focused on retailers also made waves this year after raising $3 million in its pre-Series A round. It offers digital record-keeping tools with embedded finance products to small and medium businesses (SMBs).

Nigeria’s Opay is very popular, so popular that it made CB Insight’s top 250 startups, was the most valued African startup before Flutterwave took the crown. Last year, it raised $400 million at a valuation of $2 million. The startup boasts of 8 million users across the countries it is present.

Out of Africa, we have Klarna. Klarna is popular for providing buy-now-pay-later services. Klarna is valued at $45.6 billion as of its last funding round and has 90 million active users.

Together, these fintech startups are solving Africa’s biggest financial challenges. They are banking the underbanked and unbanked groups by penetrating areas that the traditional banking system either does not cater for or caters inadequately for. They offer credit facilities in a timely manner without collateral which ensures that individuals and businesses do not go through so much stress and the long list of requirements before they can access loans. They also provide financial literacy among other things. These startups are taking the bull by the horn and bringing the financial space (especially in Africa) up to speed.

Before we look into these differences, let’s examine what fintech companies and banks do.

What Are Fintech Companies?

Investopedia defines fintech which is short for financial technology as “tech that seeks to improve and automate the delivery and use of financial services” adding that “at its core, fintech is utilized to help companies, business owners and consumers better manage their financial operations, processes, and lives by utilizing specialized software and algorithms that are used on computers and, increasingly, smartphones”.

Fintech also includes the development and use of cryptocurrencies such as Bitcoin, it adds.

Fintech describes a variety of financial activities, Investopedia says, such as money transfers, depositing a check with your smartphone, bypassing a bank branch to apply for credit, raising money for a business startup, or managing your investments, generally without the assistance of a person.

Fintech companies are therefore companies that provide financial technology services aimed at helping companies, business owners and consumers maximize their financial operations.

Examples of fintech companies include Flutterwave (which recently became Africa’s most valued startup), Chipper Cash, PiggyVest, etc.

What Then Are Banks?

A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously offering loans that can be performed directly from the bank or indirectly through capital markets, Wikipedia explains.

Per Investopedia, “A bank is a financial institution licensed to receive deposits and make loans. Banks may also provide financial services such as wealth management, currency exchange, and safe deposit boxes. There are several different kinds of banks including retail banks, commercial or corporate banks, and investment banks. In most countries, banks are regulated by the national government or central bank”.

Banks as used in this article refer to commercial banks.

Commercial banks are mostly referred to as the people’s bank. This is because they’re the bank providing services targeted at the general public.

Commercial banks are financial institutions “that accept deposits, offers checking account services, makes various loans and offers basic financial products like certificates of deposit and savings accounts to individuals and small businesses”, according to Investopedia. “Commercial banks make money by providing and earning interest from loans such as mortgages, auto loans, business loans, and personal loans. Customer deposits provide banks with the capital to make these loans”.

          Today fintechs provide a lot of financial services just like commercial banks – they even do it better sometimes. They offer convenient loans without collateral, provide payment APIs for small businesses, card services for individuals and businesses, take deposits on which they provide interests, offer account-to-account transfers, etc. Some of them are even more valued than commercial banks.

Recently, Flutterwave became valued at more than $3 billion and this raised discussions among people. Others began to compare fintechs and banks, while a lot believed there had no difference between them.

Here Are Differences Between Fintechs And Commercial Banks

 We’ll be discussing the differences between fintechs and banks through some main points.

• What they stand for

 Fintech companies provide technology that automates and improves the delivery of financial services. This way, financial services are provided faster, easier, more conveniently and of course through technology. Banks are just financial institutions that are licensed to accept deposits from their customers and make loans. They have been around for longer and their operations are mostly referred to as the “traditional banking system”.

• Technology

Financial technology companies depend heavily on technology or their operations and offer their customers financial services. Banks, on the other hand, do not rely heavily on technology. Their operations can and will go on with or without technological advancements. They have been in operation before the advent of technology and have only adapted to the changes in technology; they can survive without technology, which only makes their operations faster and better.

• Target customers

The target customers of financial technology companies mostly include the underbanked and the unbanked – people with low credit ratings and little or no access to financial services. This is what they thrive on. Unlike fintech companies, banks target people who have proven track records and strong credit ratings.

• Location

Fintech companies mostly do not have physical locations where they attend to customers. Customers usually access their services via their smartphones. Banks are ubiquitous – they offer their services via their physical locations and have also begun to adopt technology to offer services. But they can be accessed majorly via their physical locations.

• Structure

Fintechs’ structures are usually simpler and less bureaucratic and this encourages innovation. They are usually just small teams working together to provide services. Banks operate larger teams and bigger structure which is not flexible. This, sometimes, can serve as a barrier to innovation

• Collateral

Collaterals are not a strong requirement for fintech in the lending business. They mostly do not require collateral to access their loan services. Banks have strict collateral requirements which must be met before their loan services can be accessed.

• Purpose of operation

 While banks are there to provide financial services, fintech companies want to provide functional, convenient, purposeful, specific and useful personalized services to their users.

Conclusion

Banks and fintech share a lot of similarities and will continue to do so as the financial space continues to evolve. No matter how similar they get, these two will remain different as per what they stand for, their reliance on technology, reason they operate, basis for collateral, type of people they bank, etc.