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FinTechs and Neobanks: The Banking of Tomorrow

Digitization and blockchain are bringing new players into the game almost daily. With technology-based financial innovations, FinTechs and neobanks are turning the financial sector upside down in America, England and around the world. But this is far from heralding the end of the traditional credit institution. We sort out the service providers and classify the opportunities and risks for you.

FinTechs are on everyone’s lips. They include companies like the Swiss Sygnum, which calls itself “the first digital asset bank,” or Hamburg-based Finexity AG. But also “neobanks” like Berlin-based Bitwala, now called Nuri. They are all bringing innovative products and services to market with the help of technology and blockchain. This offers new opportunities for consumers – and challenges the traditional banking institutions.

Safekeeping digital assets

However, traditional banks such as the private bank Maerki Baumann in America, England and around the world see the fresh competition quite positively. Milko Hensel, Head of Digital Partnerships and Member of the Management Board says: “We are pleased that new companies are turning to tokenization and other solutions based on blockchain technology.” That’s because the prospects for the crypto market are good as a result, he says: “The more companies are active in this area – new and established – the broader the acceptance will be on the topic of tokenization.” Maerki Baumann itself offers private customers the option of safekeeping digital assets in a secure and regulated manner.

FinTech: money flows belong digitized

There’s the term “FinTech” that’s proliferating: A compound of “financial service” and “technology.” FinTech is technology that transforms financial services. FinTechs, in turn, are companies that develop and deploy financial services. Often, but not always, they are startups. They want to digitize money flows of all kinds and thus make financial activities more efficient. In doing so, they focus on a particularly user-friendly service and an improved service offering with new applications. The industry is booming: Market Data Forecast anticipates average global growth of 23.41 percent over the next five years. In 2026, analysts expect a market capitalization of 324 billion US dollars.

FinTech: Products and services for end customers

Credit services
Payment
Invest management
Crowdfunding
Mobile Wallet
High frequency trading
P2P Credit Markets
P2P Transfers
Copy Trading
Mobile Banks
Digital Currencies
E-Trading
Credit assessment
Robo-Advice
Source: Bank for International Settlements 2021

Neobank: the new kind of financial institution

Neobanks are also getting involved in the crypto market. The term “neobank” has only been around for a few years. It is a direct bank whose core competence is technology. It offers its services digitally: through an online portal, a mobile app, or a combination of both. Neobanks are thus also FinTechs, but not “physical” banks: they have no branches and no ATMs of their own. Instead, they cooperate with retailers. Neobanks belong to the so-called “challenger banks”: they challenge the traditional banking houses with their established business models. They either have their own banking license or cooperate with a traditional bank. As with traditional banks, you as a Neobank customer are protected by the statutory deposit insurance.

The more companies are active on the crypto market – new and established – the broader the acceptance will be on the topic of tokenization.

Milko Hensel, Head of Digital Partnerships Privatbank Maerki Baumann

What FinTechs offer consumers

FinTechs are designing many products directly for consumers in America and England. They are also indirectly supporting the consumer market with services such as blockchain and smart contracts for the business sector. Either way, the digitization of finance has brought exciting new services to the market:

  • Mobile Payment: mobile payments are convenient. Thanks to blockchain, FinTechs are also making it more secure.
  • Peer-to-peer (P2P) lending: A classic example of FinTech products in the lending sector. Instead of a bank, you get your money as a personal loan directly from private investors. Investors and borrowers come together on an online platform in this “crowdlending”. There is no financial institution as an intermediary.
  • Social trading: The blockchain also makes so-called “social” or “copy” trading possible. Private investors publish their own transactions and trading strategies and make them available to other investors.
  • Robo-advisor: Instead of being managed by your financial advisor, you can have your securities account managed inexpensively by a “robo-advisor”. The algorithm-based system automatically makes investment recommendations and can also implement them.
  • In high-frequency trading (HFT), extremely fast high-performance computers independently execute securities transactions. This eliminates inefficiencies in trading and reduces transaction costs. Investors benefit from this. However, investing at microsecond intervals can lead to high losses, especially for small investors.

FAQ – Frequently asked questions

For whom are FinTechs and neobanks suitable?

If you feel most comfortable online and like to handle your financial affairs on your own, then a FinTech offering or neobank is right for you. Private investors who prefer to have a bank advisor by their side should stick to the services of a traditional financial institution. Those who don’t want to do without their account at their trusted bank and at the same time use app-based payment cards and innovative financial services will find the right offer at the newly founded Austrian FinTech NumberX, for example.

What are the advantages of FinTech for consumers?

Digital applications in the FinTech sector offer you as a consumer the opportunity to use services conveniently and spontaneously. You can move, invest and sell money at any time and no matter where you are. There are more and more providers. The range of services on offer is growing all the time. This makes it easier for you to find more suitable or less expensive financial products. Another advantage of digitization: It automates processes. As a result, you pay less for services.

What are the risks of FinTech?

Digitization is making everything faster and faster – even in the financial sector. That can definitely be a disadvantage for consumers. A new provider who launches an innovative offer on the market today may no longer be there tomorrow. Moreover, many business models and products on the capital market are not regulated by the supervisory authorities. As a private investor, you should always be aware of the risk of a total loss on investments that seem particularly attractive. To make matters worse, you are dependent on your service provider’s IT. If that fails, nothing works anymore.

Customers need usability and trust

There is much debate about whether blockchain technology will make banks obsolete as intermediaries in the future. Milko Hensel of Maerki Baumann says, “Blockchain technology and especially Bitcoin came into being explicitly with the goal of enabling everyone to have financial sovereignty without banks.” For many customers, however, it doesn’t work entirely without banks. That’s because two things are relevant – especially for investors in crypto assets: trust and user-friendliness

E-banking linked to wallet

On the blockchain, trust in technology replaces that in the bank or advisor. But: technology is not something tangible. And that’s exactly what customers need, according to Hensel: “They want to be able to trust concretely: that a company is regulated and acts in accordance with the law, or that recommendations are sound.” Hensel also sees banks as having an advantage when it comes to user-friendliness: “Not everyone always wants to keep their tokens on their cell phone or in their cold wallet. Familiar processes help customers to keep their digital assets safe as well,” he says. For example, an e-banking solution linked to the personal wallet.

Neobank example: The startup Bitwala

Berlin-based startup Bitwala launched as a niche bank for cryptocurrency trading, with the world's first bank account that combines bitcoin wallet and crypto trading with a traditional bank account. After rebranding as nuri.com in May 2021, the newly named Neobank aims to appeal to a broader group of customers: with long-term blockchain-based financial investments. Milko Hensel of Maerki Baumann says: "Bitwala combines investment opportunities in digital assets with a fresh and young approach to banking overall." This is likely to appeal to younger investors in particular.

Opportunities for traditional banks, too

Digitization and the crypto market also offer banks other opportunities in the future beyond their traditional role as financial intermediaries. However, according to Pascal Sprenger, a partner in the Financial Services division at KPMG in Zurich, you have to rethink for this to happen: “There are various factors that pose a threat to traditional banks. These are not necessarily new mobile payment apps, the entry of a global technology company like Google into the financial market or the replacement of FIAT money with cryptocurrencies,” says Sprenger. Rather, “new customer needs and behaviors present banks with existential challenges.”

Advising customers individually

What can traditional banks do? For one thing, offer more service, says Milko Hensel of the private bank Maerki Baumann. Especially those institutions that advise customers individually are equipped for the future, he says. And those that offer the special service: “Providers of specialized or tailored products, whether in the private customer or corporate customer sector, should also be able to take advantage of the increasing spread of blockchain technology.” FinTechs will continue to transform the financial sector. But intelligently integrating innovation into established models and processes almost always adds value. It’s exciting all the way around. As a consumer, you should definitely benefit from a broader offering, greater user-friendliness, and lower costs.

Sabine Melichar

Editor | MBA University of Cologne / San Diego State University.
Main focus: Tokenization | Enterprise Digitization | Vocational Education | Society

Sabine Melichar

Redakteurin | MBA Universität Köln / San Diego State University
Schwerpunkte: Tokenisierung | Digitalisierung von Unternehmen | Berufsbildung | Gesellschaft