Fintech and the Future of Banking

Fast growing fintech firms are forcing traditional brick-and-mortar lenders to adapt to new realities in the banking sector.

By Zeid Nasser

The term Fintech, which is short for financial technology, has emerged over the past few years to describe Internet-driven businesses that are disrupting and expanding the financial sector.

Banks and investment institutions traditionally operate in the most heavily regulated industry. That regulation has increased since 2008, when they were blamed for the global economic recession. That’s why it’s surprising to witness this industry being opened up by startups, many of whom operate outside the realm of regulators.

Online lending services, crowdfunding and crowdsourcing platforms, currency and stock trading services, cryptocurrencies, financial services comparison sites, electronic payment services and others populate the space loosely defined as fintech.

There’s some disagreement among analysts regarding what fintech actually encompasses. But the term commonly refers to startup platforms created by technology entrepreneurs, with little or no financial services background, financed by venture capital funds and private equity investors who don’t represent banks. This makes these startups the outsiders jumping into a new field.

Accordingly, the fresh perspective and solutions they offer are reshaping the concepts of lending, funding, and clearing of payments in a manner that’s better geared towards the requirements of SMEs and young, enterprising individuals.

These startups are also attracting big investments. In 2013, fintech startups globally received $4 billion of investment, which tripled to $12 billion in 2014. It’s expected this year’s numbers will show further exponential growth.

Fintech startups have lower costs and provide more digitally accessible financial services. Starting out with smaller teams, no physical branches, no legacy banking services or IT structures, they can naturally offer better rates. For example, lending platforms are directed at a new type of borrower, one who wants to apply for a loan online and outside office hours, and wants a faster response time without waiting around for a slow loan approval committee to give the green light.

This explains the growth of regional startups like peer-to-peer lender liwwa, which has already lent hundreds of thousands of dollars to SMEs in Jordan. Liwwa has strong connections, and a welcome sign of change in our banking sector is that it’s obtained the commendable support of both Bank al Etihad and Capital Bank.

Crowdfunding is another fast-growing phenomenon. The global leader, Kickstarter, reported in October that more than $2 billion have been pledged to projects since it started in 2012. In comparison, a similar platform in our region is Zoomaal, which since 2013, has helped its members raise close to $1 million in funding for their projects from individual backers.

Typical of fintech companies, Zoomaal was founded by a university student and is run by a young team that’s funded by venture capitalists not affiliated with banks. Eureeca is another crowdfunding platform in our region that has been quite successful, founded by ex-investment specialists and growing rapidly.

In terms of electronic payment gateways, everyone’s aware of global companies like PayPal. However, one of our biggest local success stories is Madfoo3atCom, which is a startup that provides a platform for banks, billers, and customers to facilitate payments through electronic channels. Again, rather than disrupting the industry, it’s being embraced by it with the endorsement of the Central Bank of Jordan and the participation of many local banks to facilitate its operations.

Spotting a clear trend, traditional banks are now getting in on the game.

Belgium’s ING, for instance, has opened its own fintech accelerator dedicated to supporting the next big idea which could become its own competitor in cloud-enabled financial services.

Other banks aren’t being so bold, and are choosing to simply offer their services on emerging marketplaces like loan comparison websites. An example in our region is, which has been serving the UAE market for a few years now. It enables users to compare credit cards, personal, home, and car loans offered by several banks. The site does the legwork for you, ensuring enough options are available and up-to-date.

But the question remains: Should banks see these new finance channels as an existential threat? Not yet. For example, in the United States, has arranged $9 billion in loans through its marketplace. But brick-and-mortar banks hold $885 billion in credit card debts alone.

The claims that fintech will kill off banks are largely exaggerated. Many traditional financial institutions seem to be smart enough to get in on future trends, and have probably learned from the retail and transport industries not to ignore or fight the next Amazon or Uber.