In the financial business, we have seen the rise of fintechs and challenger banks in recent years. Fintechs and challenger banks are upending the traditional banking industry by providing new, customer-centric services that are transforming how consumers handle their finances.

In this article, we will look at the continuous rise of fintechs and challenger banks, as well as the reasons for their popularity.

What Is the Difference between Fintechs and Challenger Banks?

Fintechs and challenger banks are examples of digital banks that provide banking services via mobile apps or websites. These banks only function online and have no physical branches. They provide a variety of financial services such as deposits, loans, savings, and investments.

Fintechs and challenger banks vary primarily in that fintechs are technology firms that provide financial services, whereas challenger banks are regulated banks that operate exclusively online.

Why Are Fintechs and Challenger Banks Gaining Popularity?

Convenience

One of the primary reasons why fintechs and challenger banks are gaining popularity is their ease of use. Customers must visit a typical bank to open an account, deposit or withdraw money, apply for a loan, or seek any other service. Customers may perform all of these things from the comfort of their own homes with fintechs and challenger banks, utilizing their mobile phones or PCs.

Reduced fees and charges

When compared to traditional banks, fintechs and challenger banks have cheaper fees and levies. Some of these digital banks, for example, provide free transactions, free ATM withdrawals, and no account maintenance costs. Customers can now manage their funds more affordably.

Services that are tailored to the individual

Fintechs and challenger banks provide individualized services that are tailored to individual consumers' needs. They analyze consumer data using technology and provide tailored services, such as budgeting tools, financial counseling, and investment possibilities.

Services that are more timely and efficient

In comparison to traditional banks, digital banks provide speedier and more efficient services. Customers can open an account, ask for a loan, or seek any other service from fintechs and challenger banks in minutes. This saves time and makes things easier for customers.

Services that are cutting-edge

Fintechs and challenger banks provide unique services that traditional banks do not. Some digital banks, for example, provide virtual cards that can be used for online transactions without revealing the customer's actual card details. Others, for example, provide cryptocurrency trading, robo-advisory services, and peer-to-peer financing.

Fintechs and Challenger Banks Continue to Rise

Fintechs and challenger banks are projected to grow in the coming years. According to Business Insider Intelligence, digital banks will have over 75 million subscribers in the United States alone by 2023. This indicates a 25% growth over the current user base.

Here are some of the reasons why the emergence of fintechs and challenger banks is projected to continue:

Customer interest

Customers are increasingly demanding financial services that are more convenient, efficient, and personalized. Traditional banks have been sluggish to incorporate technology, which has reduced their competitiveness. Fintechs and challenger banks have taken advantage of this need by providing innovative and customer-focused services.

Reduce regulatory hurdles

One of the most difficult hurdles for fintechs and challenger banks has been regulatory barriers. Many countries, however, are increasingly enacting fintech-friendly legislation that make it simpler for digital banks to function. The United Kingdom, for example, has implemented a regulatory sandbox that allows fintechs to test their products and services in a regulated setting.

Boosted investment

Venture capitalists, private equity firms, and other investors have boosted their investments in fintechs and challenger banks. This investment enables digital banks to innovate and provide new services while also expanding their reach into new markets.

Collaboration with traditional banks

Fintechs and challenger banks are increasingly collaborating with traditional banks to reach a broader audience. JP Morgan, for example, has teamed with digital bank Roar Money to provide its workers with mobile banking services. This relationship enables traditional banks to provide innovative services, while digital banks benefit from traditional banks' established customer base and infrastructure.

Consumer behavior modification

Consumer behavior is rapidly changing as a result of technology improvements and digitization. This is visible in how individuals shop, communicate, and obtain information. Consumers are increasingly embracing digital platforms to handle their finances, and fintechs and challenger banks are well placed to capitalize on this trend.

How Fintechs and Challenger Banks Are Growing and Disrupting Legacy Banks in Underserved and Unbanked Markets

The financial services landscape is undergoing a transformational shift as fintechs and challenger banks are challenging the status quo and reshaping the way people access financial services, particularly in underserved and unbanked segments of the population. These innovative and agile players are leveraging technology to offer customer-centric solutions that are more convenient, accessible, and affordable compared to traditional legacy banks. As a result, these companies are gaining traction and are poised to overtake legacy banks in serving the underserved and unbanked markets.

Underserved and unbanked populations have historically faced barriers in accessing financial services due to factors, such as lack of credit history, limited access to physical bank branches, high fees, and stringent documentation requirements. This has resulted in a significant portion of the global population being excluded from the formal banking system, limiting their ability to save, invest, and access credit. However, fintechs are leveraging technological advancements to bridge this gap and serve these segments of the population in innovative ways.

One of the most relevant ways in which fintechs and challenger banks are challenging the status quo is through their digital-first approach. These players are leveraging technology to provide user-friendly and intuitive digital platforms that are accessible via smartphones or other devices. This enables customers to open accounts, conduct transactions, and access a wide range of financial products and services without the need for physical bank branches. This digital-first approach is particularly appealing to underserved and unbanked populations who may not have easy access to brick-and-mortar banks or may feel intimidated by traditional banking processes.

Moreover, fintechs are adopting data-driven underwriting models that leverage alternative data sources such as transaction history, social media behavior, and utility bill payments to assess creditworthiness. This allows them to extend credit to individuals who may not have a formal credit history but have demonstrated financial responsibility in other ways. This is a significant departure from legacy banks that typically rely on traditional credit scoring models that may exclude individuals without a well-established credit history. By leveraging alternative data sources, fintechs are able to provide credit to underserved and unbanked populations, enabling them to access credit and build a credit profile.

Furthermore, these companies are rethinking the traditional fee structures that have long been associated with legacy banks. They are offering lower fees or even no fees for basic banking services, such as account maintenance, ATM withdrawals, and international remittances. This is in contrast to traditional banks that often impose high fees, which can be a deterrent for underserved and unbanked populations who may have limited financial resources. By offering more affordable and transparent fee structures, fintechs and challenger banks are making financial services more accessible and affordable for these populations.

Another area of disruption is in remittances and cross-border transactions. Legacy banks have traditionally charged high fees and provided slow and cumbersome processes for remittances and cross-border transactions. Challenger banks, on the other hand, are leveraging technology to provide faster, cheaper, and more convenient options for these transactions. They are using blockchain technology, digital wallets, and other innovative solutions to streamline the process and reduce costs. This is particularly beneficial for underserved and unbanked populations who rely on remittances as a lifeline for their families and communities.

Additionally, fintechs and challenger banks are offering innovative savings and investment products that cater to the needs of underserved and unbanked populations. They are leveraging micro-savings, micro-investment, and round-up features to encourage savings and investments among individuals who may have limited financial resources. These platforms often have lower investment thresholds, simplified investment options, and user-friendly interfaces that make it easier for underserved and unbanked populations to start saving and investing. This helps them build a savings habit, accumulate wealth, and participate in the formal financial system.

Furthermore, these groundbreaking companies are also addressing financial literacy and education gaps among underserved and unbanked populations. They are providing educational resources, tools, and guidance to help individuals understand basic financial concepts, make informed financial decisions, and improve their financial well-being. This empowers these populations with the knowledge and skills to manage their finances effectively and make the most of the financial products and services offered by fintechs.

The success of fintechs and challenger banks in serving underserved and unbanked populations is evident in their rapid growth and adoption but their rise is not without challenges. They face regulatory hurdles, competition from traditional banks, and the need to establish trust and credibility among consumers. However, these players are increasingly partnering with established financial institutions, leveraging their expertise, and complying with regulations to build a strong foundation for growth.

Conclusion

The growth of fintechs and challenger banks is upending the traditional banking industry and altering how consumers handle their finances. Customers are drawn to digital banks because they provide convenience, lower fees, tailored services, faster and more efficient services, and innovative services.

Customer demand, decreased regulatory obstacles, increasing investment, collaboration with incumbent banks, and changing consumer behavior are all likely to fuel the continued expansion of fintechs and challenger banks. As more individuals use digital banking, traditional institutions must embrace technology and adapt to the changing landscape in order to remain competitive.