Will fintech take over the world

FinTech - a digital danger for banks?

Anna Baier, April 14th, 2021

Internet giants such as Google, Amazon, Netflix and Spotify have radically changed the consumption of many products - from information about books, series and films to music. After the Internet revolution in the entertainment and shopping sectors, developers and entrepreneurs have now discovered the financial and banking industries for themselves, where digital progress has been a long time coming.

Whether start-up or established company: Many companies nowadays describe themselves with the media-effective term "FinTech" (English from "financial services "and"technology "). Their business models are as numerous as they are variable: Mobile payment options are just as much a part of FinTechs as online account management, loan brokerage, software for computerized asset advice (so-called robo advisors) and digital investments (such as BERGFÜRST).

All FinTechs are turning internet based technologies, customer-centric approaches and modern systems to advance the digitization of financial products. This makes them a competition for traditional finance houses and attacks the banking world.

Goodbye bank branches

Over two thirds of Germans (65%) used online banking in 2020. This puts Germany just above the EU average of 60%, but still far behind its EU neighbors Denmark (94%) and the Netherlands (89%). Only in one of Germany's neighboring EU countries is online banking used less than in Germany: in Poland (49%).

Share of online banking users in 2020, by country

Source: Eurostat, as of April 2021

Bank branches are therefore becoming increasingly unpopular. Among other things, current account provider N26 takes advantage of this: It advertises with innovative solutions for online and mobile banking. Other FinTechs such as Paypal, Paydirekt and Billpay simplify transactions on the Internet, for example through services such as installment payments.

The Progress in digitization also shows the company Gini, which was named FinTech of the year in 2015. It is a tool for semantic data analysis of documents. For example, the customer photographs an invoice, the data of which is recorded in a structured manner and then automatically inserted into the mask of an online transfer. This is intended to relieve end users, from small businesses to banks, of the additional bureaucratic effort involved in typing.

Generate portfolios yourself

Recently the bank was the first person to talk to when it came to financial advice and investments, today it is Trend towards DIY (English "dO it yourself ”). The investor is himself: savings and budget plans, budgets and investment portfolios managed online can be generated by you yourself using algorithms and adapted to your needs.

The providers have short, concise names: They are called Mint or vaamo and lure customers with structures that are lean to cost-free, since advice and management of financial investments are increasingly being carried out by computers rather than people. Investment and trading now also work online via online brokers such as flatex and degiro.

New opportunities abroad

The search for high returns is inventive and now goes beyond national borders. The interest rates for overnight and fixed-term deposits within Germany are too low for you? Find, compare and invest in an account abroad via so-called interest brokers such as Weltsparen, savedo and Zinspilot.

Despite the legal situation on deposit protection within the European Union, caution is advised with these offers: nominally, deposits of € 100,000 per customer and institution are legally protected. However, if several (large) banks or financial institutions go bankrupt in the course of a crisis, not all EU countries will be able to guarantee their customers' deposits.

When choosing such an account, you should therefore not only consider the tempting high interest rates, but also the Creditworthiness of the EU countryin which the institute is located.

Crowdfunding: an often confused term

A special phenomenon of increasing digitization in the financial sector is the so-called crowdfunding. The “crowd”, ie the mass of private investors, can take part in a wide variety of projects.

Originally, crowdfunding only meant platforms like kickstarter.com or indiegogo.com, on which donors could participate in start-ups, charitable projects or even films. In return, the donors received little extras as a thank you.

But since then the meaning of the term has changed and expanded. Several concepts have now been grouped under the term crowdfunding.

1 | Crowdlending

Internet platforms such as Auxmoney, Smava or Kreditech have them Credit brokerage digitized for private investors.

Their greatest weapon is that loans can be given from private individuals to private individuals (crowdlending) - directly, without banks or other credit institutions in between. That should be more personal and, on top of that, profitable for the investors (lenders).

The platform is responsible for checking the creditworthiness of the borrowers. It generates a credit rating, which is then used to determine the nominal interest rate that the creditors receive. The better the score, the lower the risk of default and the lower the interest rates for investors.

Although many platforms provide external credit ratings such as the Schufa score in addition to their own ratings, it can be difficult for investors to assess the creditworthiness of personal loans.

2 | Equity crowdfunding

With the term crowdinvesting everyone will Capital investments in which a mass of private investors can invest money via an online platform. The best-known form of investment here is investment in startups, i.e. young companies with capital requirements.

Similar to crowdlending, the platform basically checks the concepts of the companies or people who want to collect money. The necessary information is then presented to the investors on the platform so that they can get an idea of ​​the risks and potential returns for themselves.

Because, despite many good ideas in the start-up scene, many young companies give up after a few years, these investments can be very risky and even lead to total failure. If successful, however, these investments also offer a relatively high return.

3 | PropTech

The joint investment in real estate also falls under the umbrella of the term crowd investing. For this there is the new suitcase word "PropTech" (English from "property "and"technology ”), which could become a buzzword to differentiate real estate investment from other forms of FinTech.

As with real estate funds, you as an investor can participate in various real estate objects at the same time - from apartments and nursing homes to commercial and existing properties such as department stores.

At the same time, PropTech has many advantages versus open-ended real estate funds: You can decide for yourself in which and how many investment properties you invest. Because real estate crowdinvesting platforms such as BERGFÜRST also offer the option of selling the acquired shares again in line with supply and demand, your capital is not necessarily tied up for a long time.

The nifty thing about this form of crowd financing is that until recently only large investors had the opportunity to participate in real estate projects with lucrative interest rates as mezzanine investors. Only they could raise the high starting amounts for it. Because crowdinvesting platforms are now pooling the money of many investors, private investors can now also benefit from this asset class.

Playing it safe: InsurTech

Even at InsurTech (English from "insurance "and"technology ”) is a sub-form of FinTech. Companies in this group are committed to the Insurance industry to modernize. In Germany, the number of InsurTechs is increasing, with the young companies offering solutions in various insurance areas.

Overview: InsurTech

Contract management / brokerage

A large number of the new InsurTechs - for example Treefin, Getsafe or the FinLeap Venture Clark - are basically nothing more than classic insurance brokers who make it easier for customers to manage insurance and offer consulting services.

The users store their existing insurance contracts in an app and in return receive an overview of the existing insurance policies.

Peer-to-peer insurance

With insurances such as Friendsurance, the policyholders are grouped together and their insurance premiums are collected in a common pool.

Spot Insurance

In some situations consumers only need short-term insurance, for example if they want to insure their stroller against theft for twelve months or if they want to take out 24-hour third-party driver protection. This area includes what is known as spot insurance.

Health insurance

Most InsurTechs have so far settled in the health sector. You collect health data, network with doctors and can thus offer customer-centered insurance models.

The list of insurance areas can be extended to any length: eCommerce insurance, usage driven insurance, car insurance - there are insurance offers for every situation in life, every usage behavior, every risk group.

One advantage of this industry is theirs flexibility. However, online companies are repeatedly criticized by their offline counterparts. These mainly throw them lack of transparency in front.

Will banks and insurance companies become superfluous?

The new forms of FinTech take on many of the tasks that were previously left to traditional banks and their branch offices without a fight. However, after the financial crisis, confidence in banks and credit institutions waned. This is beneficial for the new digital branch of the financial industry. The inhibition threshold for the user also decreases because online contracts often do not even require a signature and can be concluded from the comfort of home with a few clicks.

However, it is difficult to distinguish serious offers from empty promises or even attempts at forgery. Because the industry is young and growing, the competition is fierce - and one or two pioneers will probably disappear again as quickly as they appeared.

In addition, FinTech companies are only at the beginning: the established financial institutions with their large base of regular customers can still work on their weaknesses and make themselves more attractive for private investors. Only then will banks be able to keep up with growing digital competition in the long term.

Image Copyright: NPFire / Shutterstock.com

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