The Plastic Revolution: How Fintech Banking is Changing Credit Cards
By Helena Carnell, Account Executive
Big technological developments have always been met with fear and trepidation. Originally, the masses thought the steam engine would lead to mass job loss. Instead, it created new jobs and enabled organisations to be more efficient when industrial demand was rapidly increasing. More recently, in the 90’s, the internet and the World Wide Web became an established phenomenon – and now, the world wouldn’t function without it. Over the last year, AI took centre stage with ChatGPT pushing discussions forward that enabled significant transformation across the globe in the space of twelve months. Ultimately, innovation is inevitable. Sometimes terrifying, but inevitable.
The same logic can be applied when looking at the rise in fintech banking. Fintech, the application of digital technology to finance services, has reshaped, and will continue to reshape, the financial industry. The ongoing digitisation may be scary but it has created opportunities to build more inclusive, and efficient, finance services and has promoted further economic development. But where does that leave traditional banking methods?
In this blog, we aim to explore the differences between traditional and fintech banking.
For starters, what is fintech banking?
In the ever-evolving finance industry, one term that continues to resonate loudly is “fintech.” Short for financial technology, fintech encapsulates a diverse array of technological innovations aimed at transforming and enhancing various aspects of financial services. Whilst at first glance it may seem like something that only concerns bankers and financial institutes, it has slowly entrenched itself into everybody’s lives.
At the beginning, fintech primarily focused on payment and banking services, but its influence has since expanded across numerous sectors within the financial industry. Now, any transaction that you make via online banking is a result of fintech – as is every time you use a digital wallet. Noticing this trend and the ever-increasing reliance on technology, we are continuing to see more and more fintech banks opening up, with some very established names taking centre stage.
Looking more widely, fintech now encompasses a broad spectrum of products and services, not only mobile banking, but peer-to-peer lending, robo-advisors, blockchain technology, cryptocurrencies, and insurtech, among other things. All these innovations have democratised finance, making it more efficient, accessible and user-friendly. But where did it all begin?
The evolution of credit cards
Financial institutions have a strong track record of embracing tech-led innovation. As far back as the 1950’s, the financial industry drove the adoption of credit cards in a move, which at the time, brought huge levels of payment convenience.
What started as a card made out of cardboard for a select few for dining and entertainment purposes in New York quickly evolved into something that more closely resembled what we have today. IBM engineer Forrest Parry developed the magnetic stripe technology by glueing a strip of magnetic tape to the then plastic card in the 1960s. This innovation became the standard feature on cards today, streamlining payment processes and leading to the widespread adoption of both credit and debit cards.
However, when considering the ESG standpoint, it is very evident why the introduction of digital cards was so quickly adopted. In the present day, roughly 6bn plastic payment cards are produced every year, with 2.8bn credit cards utilised globally. These credit cards amount to 140m kg of plastic, posing a significant environmental burden. This environmental damage is one of the many factors that has driven positive change to digital payment systems that are not only more sustainable, but also more efficient and convenient for everyday transactions.
Whether completed via a phone app or even a watch, these fintech solutions saw significant growth over the past few years, accelerating massively as a result of the Covid-19 pandemic. Building on this growing trend will continue to take more and more plastic cards out of circulation, especially if financial services and app developers can continue to improve accessibility options and reassurance around security.
Are fintech banks safe?
As fintech relies on technology to facilitate transactions and store sensitive information, they are a popular target for criminals making them acutely vulnerable to cyberattacks. This opens up an array of challenges such as fraudulent transactions, identity theft, hacking, ransomware, insider threats and phishing attacks.
With this in mind, it is abundantly clear to fintech startup companies that financial systems require high protection due to the sensitive and highly confidential information that they hold. Fintech companies, therefore, prioritise data protection and compliance within financial regulations to ensure that consumers are secure and can trust the platform.
When deciding which fintech solution or platform to use, consumers can check that it operates from a secure and well-managed data centre, which is compliant with the NCSC’s 14 Cloud Security Principles, guaranteeing that the data is well protected and the risk of a data breach is low. To take one step further, some fintech systems will also include disaster recovery and automated backup features, reducing downtime and the impact on consumers.
Furthermore, as they understand the high risk, fintech companies ensure that payments are traceable and transparent, which makes tracking transactions easier alongside the detection of fraudulent activity. This also enables governments and regulatory authorities to monitor transactions and reduce corruption. Finally, contactless payment systems often use biometric authentication, such as fingerprint or facial recognition which strengthens and prevents unauthorised use of payment methods, reducing the risk of identity theft and fraudulent transactions.
Fintech vs. traditional banks
In the wake of the pandemic, it is clear that as a society we have become much more comfortable with contactless payments, with industry research showing that almost 60% of in-store shoppers paid using a contactless card last year – an increase of 94% compared to the previous year. Further industry insights that explored the generational increase of use through the pandemic found a 35% increase in 18-24 year olds, a 32% increase in 25-34 year olds and a 31% increase in 35-44 year olds.
These findings are very positive when taking a sustainability standpoint, especially when considering that when a physical card expires, there are no guidelines on how to dispose of them which ultimately leads them to a landfill. This is not the case with mobile e-wallets where the phone can function as all your cards. Finally, contactless transactions also improve the customer experience, lower barriers to entry in terms of cost, and produce better insight into purchasing patterns. However, this then poses the question: are fintechs a threat to banks?
Traditional banks are currently struggling to join the circle of technological innovations in order to satisfy the new demand and still resort, more often than not, to archaic and time-consuming procedures. The arrival of fintech, boosted by the development of technology, has made this task even harder and made fintech companies the frontline competitor of traditional banks.
With consumers increasingly opting for fintech, arguably the conclusion could be drawn that fintech is encroaching on traditional banks areas of responsibility. Alternatively, they could be seen as complimentary services. Fintech companies wish to be inline with certain activities exercised by traditional banks. Furthermore, some financial institutions are now adapting and collaborating with fintech companies to stay competitive and meet consumer demand. This collaboration on both sides has now led to the development of hybrid models which integrate the stability of established traditional banks with the innovation and agility of a fintech bank.
Is full fintech integration on the cards for 2024?
The total value of fintech investments worldwide rose from under $10bn per year before 2013 to $52.4 billion in 2023. The worldwide benefits are undeniable, from promoting financial inclusion and social equality to easing the day-to-day lives of consumers.
Yet, the shift towards digital payments still has challenges that must be taken into account, with the most significant being the digital divide between consumers with full and easy access to smartphones, reliable internet and technological know-how, and those without. This issue is arguably disproportionately impacting older generations in particular and creates the risk of financial exclusion – a situation that must be avoided.
To address these challenges, there is an ongoing need for more effective educational initiatives from both the industry and government. Through comprehensive training and support, organisations can bridge the digital divide, ensuring that everyone can utilise fintech banking in the future. After all, innovation is inevitable and we all need to have the tools needed to be prepared.
If you want any advice on how best to stay ahead of the curve, or educate stakeholders, consumers or organisations on the benefits of your own innovations, don’t hesitate to get in touch today.