What Are Fintechs? How Are They Different Than Banks or Credit Unions?

FinTech is short for Financial Technology. As defined by Investopedia(Opens in a new window), it is the blanket term “used to describe new tech that seeks to improve and automate the delivery and use of financial services.” FinTech is often used to talk about digital-only banking solutions – think Mint, Ally, or Affirm. It can also refer to the technology that traditional financial institutions adopt to enable digital banking for their customers or members.

FinTech Adoption Rate

The most obvious difference between FinTechs and banks or credit unions? Their lack of physical locations. While most traditional banks and credit unions now offer digital banking – online banking and mobile banking apps almost always accompany an account – they also continue to offer branch locations for people who prefer face-to-face transactions. For some, this is an important distinction.

Other differences can be divided between things people love about FinTechs and things…well, things people really don’t like. And somewhere along that divide you can decide where your own preferences land.

Here’s What People Love About FinTechs

▸Convenience

Without a doubt, the most-cited benefit of banking with FinTechs is their convenience. While some people turned to FinTech during the pandemic – touchless banking felt safer – FinTech Magazine(Opens in a new window) believes that, “while COVID drove adoption of contactless technology, desire for convenience will carry it further.” With their always-open business model, FinTech transactions aren’t limited by traditional bank hours. Some experts(Opens in a new window) contend that FinTechs are doing to banking what Amazon has done for shopping. While banking may not yet be as exciting as Amazon’s extensive product availability and next-day delivery, FinTechs are certainly helping reshape its traditionally dull personality.

Traditional banks and credit unions aren’t oblivious to people’s expectations for convenience. Most traditional financial institutions offer digital banking tools, including online banking and mobile apps. These tools allow 24/7 banking – transfers, bill payments, even check deposits can be done on your time. 

▸Cashless

The pandemic led to a lot of changes, including a new-found preference for cashless transactions. Many businesses opted to accept cards only – some permanently. According to Business Wire(Opens in a new window), the share of cashless businesses in the US, UK, Canada, and Australia has more than doubled since pre-pandemic times. Statistical data supports the cashless ideology: Forbes(Opens in a new window) reports that 70% of consumers prefer paying with a card versus 22% who prefer paying with cash.

Are there drawbacks to being a cashless system? Absolutely. More on that below.

▸Lending

Easier and faster access to loans has also converted people to FinTechs. According to Data Science Central(Opens in a new window), the “advancements of fintech have made it possible for online or digital lenders to deal with the application and approval process within a day.” The loan approval process traditionally took time – and a visit to a branch. FinTechs make applying for loans fast and easy. And they often have more relaxed lending guidelines, looking at personal information(Opens in a new window) outside of an applicant’s credit score to determine eligibility. 

This is great news for people carrying below-average credit scores who need a loan. But it’s not without its risks. While the average delinquency rate(Opens in a new window) for traditional financial institutions sits around 1.77%, the average delinquency rate for FinTechs is 3.53%. In other words, while the accessibility of loans created by FinTechs is a potential windfall for some, it puts others in an unsustainable financial position – putting that segment of consumers into a deeper financial hole.