The world’s financial companies, including banks and the larger credit and debit card players, have been in a position of market power for a long time.  

However, the disruption and digitalisation that’s being supercharged by enhanced customer expectations is changing this dynamic, and fintech is now flourishing.

It’s clear from the rise of digital wallets, open banking, and account-to-account (A2A) payments that consumers and small businesses are becoming more familiar with – and more in favour of – innovative and flexible digital solutions.

Our latest data reveals a quarter (23%) of Liberis customers acknowledge that lengthy and complex application processes with large US banks is a major challenge for small businesses, so there is an obvious gap in the market for technological innovation to fill when it comes to providing more frictionless finance solutions.

But as a new financial services arena emerges, who holds ­­the initiative – banks or fintechs?

Who’s eating who’s lunch? Or is it a shared platter?

Each has its own advantages.

Traditional banks and financial institutions are more established, have a broader reach, and provide a wider range of products and services, retaining a firm grip on things like mortgages and insurance products.

Agile fintech companies, free from dated legacy systems that can often hamper banks, are usually more innovative, faster, and considerably more cost effective.

One of the big benefits brought about by fintech development is the provision of new services that have surpassed some of the restrictions of the payment systems used by traditional banking institutions in settling financial transactions. The first, and most obvious, example of this is in terms of geographical barriers, removing the need to be physically present to carry out transactions.

That said, fintech also has its limitations, including a lack of consistent regulation. Certain fintech services also still rely on users who primarily store their funds with the traditional banks, though some fintechs are offsetting this through the use of virtual accounts, while others – such as Monzo and Revolut – have now issued their own bank accounts.

When it comes to lending, banks have strict collateral requirements for customers applying for a loan, as well as mountains of paperwork to wade through. Fintechs typically employ online straight-through processing, and whilst they still require documents related to checks such as Know Your Business (KYB), this is often automated as part of a streamlined user journey. This usually makes it easier for customers to obtain funding and financial services through these smaller, web-based platforms.

Ramping up the journey towards embedded finance

Where fintech is really shifting the dial is through its ability to create integrated ecosystems in which people can access all financial services, including lending, in one place.

Consumers and small businesses are starting to move away from traditional banking and towards integrated financial services that are seamlessly embedded within their preferred marketplaces, whether that’s Amazon, Facebook, or Uber. A recent industry report revealed 83% of small businesses now want to access financial services through their software platforms.

Embedded finance is thriving as a result, with analysts expecting the global market to hit $1.9 trillion by 2028 as both consumers and business owners increasingly seek out financial solutions that align with their consumption habits and meet them where they are present.

Embedded finance is having a huge impact on the SME sector in particular. It’s no secret small businesses have historically faced a real struggle to get funding from mainstream banks and financial institutions, but embedded finance is now bridging that gap.

On one hand, it’s enabling businesses to bypass the banks to access more flexible cashflow solutions and funding from alternative lenders that will help to fuel their growth in today’s tough economy. And on the other, it’s driving customer acquisition and retention by giving them the ability to bake innovative financial solutions into their customer journey.

Looking to the future, all transactions – whether it’s investing in new equipment or purchasing supplies – will come with financial solutions woven into the purchase journey itself, making separate banking interactions obsolete.

Staying relevant amidst the convergence of financial services

Where will this leave traditional banks and the other major financial institutions? Will it leave them behind or will it push them forward to innovate?

They will need to quickly learn to look past their products and services and start focusing on the evolving needs of their customers. Their ability to then offer financial services effectively within marketplaces and other ecosystems will determine their chances of keeping pace with the new standard for engaging with finance.

Many will look to work with fintech partners, who can draw on their agility and other inherent advantages to help banks reconnect with their customers in a more meaningful, and cost-efficient, manner. Half (49%) of US banks now believe fintech partnerships are important when it comes to making their business model fit for purpose in the digital age. It will be interesting to watch how this continues to develop.

Ultimately, I believe collaboration will be key to unlocking the frictionless financial future that both consumers and small businesses are crying out for – and it can also help to level the playing field for legacy financial institutions worried about their future.