5min read
Published on: Jul 15, 2024
#Financial Markets
Can you call it fintech when your Granny can transfer money from her bank account to yours for a Christmas present? Yes, banking made online is one of the primary use cases of fintech.
However, fintech is much more than online banking services. It includes a whole gamut of financial services such as payments, loans and investments that you can access through technology.
Even though technological advancements have accompanied financial services at every stage, fintech primarily grew during the 21st century.
Nonetheless, 2023 was a difficult year for the fintech services market globally.
As per a KPMG report, 2023 was the weakest year for the sector since 2017 as both investments and deals declined during the past year.
Global investment in fintech sank to a five-year low of $113.7 billion across 4,547 deals in 2023.
The sector reflected a remarkable growth during and after the Coronavirus pandemic, i.e. 2019-21 as the requirement for all online services, including fintech, skyrocketed.
But extremely high interest rates, rising inflation, and falling fintech valuations led to a substantial decline in the industry’s performance in 2023.
2024 has shown no promise so far. Nonetheless, it’s a no-brainer that the growth of fintech cannot be stopped anymore as our reliance on technology is bound to grow.
However, traditional finance (TradFi) continues to remain the foundation of the modern global economy.
In this blog, we will analyse the distinction between TradFi and Fintech and the emerging trends in financial services globally.
While Gen Z might not be exactly able to tell the difference between TradFi and Fintech in practical terms, those of us from an ancient era remember going to a bank or a financial services center for fund transfers, applying for loans or investments.
To understand fintech, it’s important for us to trace its history and its departure from TradFi.
Traditional finance aka TradFi includes conservative methods and institutions to offer financial services.
Financial technology or Fintech includes the use of disruptive technology and data analytics such as the internet, software, and blockchain to offer financial services.
While the former has a history of existing and operating for centuries, the latter has only emerged in the 21st century.
TradFi has facilitated the movement of funds and other assets between different parts of the world for centuries. It has been the primary instrument of global trade, economic boom and asset management for centuries.
However, the movement of assets and people in the current age requires less time and more efficiency. Besides, the immobility associated with TradFi institutions such as banks, exchanges etc. poses additional challenges of time management, cost management and inaccessibility.
This is where fintech comes in.
The introduction of technology has disrupted the conventional ways of the global financial order with the advent of fintech. It specifically addresses the challenges mentioned above such as time management, cost management and inaccessibility.
Often, a lot of us tend to look at fintech only as a branch of traditional finance, but it’s time we changed that perception.
While both TradFi and fintech offer financial services, there are some crucial differences between the two:
Reach: TradFi includes a wide range of financial services such as banking, fund transfers, payments, investments, insurance, loans etc. On the other hand, fintech only includes specific financial services such as payment and trading services that can be offered online. The lack of advanced technology in many parts of the world has made it difficult for fintech to reach a lot of people. On a global scale, TradFi continues to dominate the economy due to its established trust, broader customer base and large capital pool.
Disruption: TradFi is the traditional foundation of the global financial order, relying on well-established financial institutions such as banks, trading exchanges etc. Fintech, on the other hand, disrupts the conventional ways of finance with its innovative use of technology. Now, even highly advanced innovations such as artificial intelligence (AI), machine learning (ML) and large language models (LLMs) are being deployed in fintech services. TradFi finds it difficult to adapt these technologies due to limited scalability, given its huge ecosystem.
Customer Experience: It is easier, faster and more convenient to access fintech services, as compared to TradFi services. TradFi is immobile and since it is run from physical offices, it is often inaccessible on public holidays such as weekends and festivals. Meanwhile, you can access fintech services anytime, anywhere on your internet-enabled digital devices such as smartphones, laptops, tablets etc.
Financial Health: TradFi is dependent on a large and diversified capital pool such as deposits, investment funds etc., making TradFi a healthy and stable financial system. Fintech, on the other hand, is dependent on fundraising from venture capital (VC) firms and other such investors as the industry is full of companies running on loss for years.
Regulation: TradFi is a well-established financial order that is subject to strict regulations put in place by regulatory bodies across different jurisdictions. Fintech is similarly subject to financial regulations. But the trouble with fintech is, it is evolving at such a fast pace that even the regulatory norms find it difficult to keep abreast of the latest technological advancements. A prominent example is cryptocurrency, a radical version of money, which has generated buzz of late due to its controversial regulatory status across different jurisdictions.
Risks: Fintech is primarily a digital services ecosystem, making it more vulnerable to security and privacy risks. Fintech companies therefore deploy the latest technology to safeguard customer funds and data, with cybersecurity being the primary concern. TradFi, on the other hand, has a long history of dealing with such challenges and it has its own robust methods of ensuring data privacy and fund security. However, bad actors are coming up with increasingly defiant ways of manipulation, making it difficult for the financial sector to resist such attacks.
Fintech has introduced a more inclusive approach to finance which can be accessed even by those who couldn't access TradFi services earlier due to different constraints.
This is not to imply that the days of TradFi are over or are going to be.
Trust is the most crucial factor in financial matters. Before taking any financial decision, a lot of customers prefer to meet real people such as bankers, salespersons etc. at banks and offices. This becomes especially critical in cases where a large amount of money is involved.
Once the first few necessary transactions get executed, a customer can then begin dealing with such financial matters online.
Fintech is therefore a complementary component to TradFi but, often, a necessary one.
In many scenarios, fintech is doing away with the need to meet real people even at first. With many fintech services, you can directly open bank accounts, procure loans etc. via digital methods. However, this component of fintech is regulated rather arbitrarily.
So, you cannot escape TradFi either.
In simple words, TradFi and Fintech are so intertwined that one cannot exist without the other. While the former brings along its institutional legacy and operational history of centuries, the latter offers an inclusive approach to finance with its disruptive technological innovations.
To conclude, fintech complements TradFi as online chats complement face-to-face conversations. While the former trumps the tyranny of distance, the latter establishes trust and builds relationships.
This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice.
The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.
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