Banking has been an essential service for centuries, with only minor changes to its business model over the years. You can see the headquarters of financial institutions in busy cityscapes and small branches in the center of communities across the country.
But the tech underlying the banking industry has seen many, many changes in that time. Back in the day you had to physically go to the bank to do almost anything with your money. Then dial-up modems and car phones came along and saved us some travel time. It used to be that “paper trail” meant literally that every transaction happened on physical paper. Then we got credit and debit cards, drive-through lanes, and nationwide ATM networks. Then we got the internet, then mobile banking.
One way to track how technology has changed banking is to think about how much time you’ve spent in an actual bank or credit union branch, then compare that with your parents’ or grandparents’ experiences.
The way we bank has changed to keep up with the times and the tech, and we’re in the middle of yet another transformative moment in the financial industry today.
Emerging technologies like artificial intelligence and cryptocurrency have changed the relationship of the bank or credit union to its customer — and arguably the customer’s relationship to money itself. The near future holds some startling possibilities for lending, borrowing, saving, and handling funds. Here's how those visions of the financial future are becoming today's banking reality.
What is fintech?
Money and tech have co-evolved since time immemorial. Money itself is a technology when you think about it. But fintech, the buzzy portmanteau of finance + technology, has a specific meaning when used these days.
Fintech is an umbrella term describing the industry of using technology to innovate traditional financial services. It includes online banks specializing in branchless loans and deposits, startups trying to strike digital gold in the crypto space, and mobile-only debt consolidation apps targeting Gen Zers taking the first steps of their financial journey.
The “tech” in fintech refers to different underlying technologies. Blockchain (the technology behind cryptocurrency and NFTs), artificial intelligence (AI), cloud computing, and virtual/augmented reality are all playing a role in the transformation. Before we explore the frontiers of fintech today, let’s get a quick history lesson on how technology has disrupted banking over the last few decades.
Banking goes online
In the 1990s, the banking industry began moving away from its traditional model. For many years banks provided a limited menu of financial services, including checking and savings accounts, business and personal loans, and safe deposit boxes. In the last few decades, the physical distance between the customer and the bank or credit union increased as the old-fashioned practices of brick-and-mortar branches began to go out of style.
ATMs made it easier to take your bank with you when you traveled, and services like traveler's checks, which were designed to protect consumers from the perils of carrying cash when away from home, became more and more unnecessary. The expansion of ATM networks led to the rise of ATM fees, making it convenient to withdraw money from any machine anywhere — for a price. It was predicted as recently as 2016 that bank branches would disappear entirely.
Digital banking solutions
In the late ’90s, the industry began moving to digital banking, accessible on a desktop, laptop, and eventually as a smartphone app.
Today, you can shape and customize your banking platform to fit your specific needs. A loan application can be completed through a bank or credit union's mobile app or website. The process of underwriting and approving the loan is completed much faster, with the bank quickly accessing an applicant's credit scores and history. Once approved, loan statements are posted and updated on the platform, and payments are made by regular automatic debit or at the discretion of the borrower. The bank can also integrate car loans and mortgages onto the platform. With digital signatures, the entire process can be done electronically.
Digitization and the migration of more and more of our day-to-day routine online have fundamentally changed the way banks and credit unions operate and the way people interact with them. But these changes were only precursors to the changes that still lay ahead. We’re in the early, growing-pain stages of technological change that will alter the way we bank in the near future.
Enter the neobanks
Banking's migration to digital platforms has given rise to a new operating model known as the neobank, which exists solely in the digital space. Neobanks don't require a traditional bank branch to offer variations of traditional services, such as savings accounts, checking accounts, debit cards, loans, and payment processing.
A digital-only bank is not technically an actual “bank” as it does not hold a legal charter, like a full-fledged national bank. Some have applied for one, which allow them to function as a bank on their own and to expand their menu of services. Neobanks usually partner with more established banks may offer FDIC- or NCUA-insured accounts, which protect depositors of banks and credit unions against loss should the institution fail. A familiar example is San Francisco-based SoFi, one of the largest neobanks, which received a federal banking charter in January 2022.
Neobanks picked up steam during the Covid-19 pandemic. The largest digital-only fintechs will soon have a customer base equal to traditional national banks. Chime, based in San Francisco, is one of the largest such businesses, and has been projected to reach more than 22 million account holders by 2025.
A digital-only presence means lower overhead costs for a financial company, which can pass on the savings by cutting or eliminating fees and setting competitive interest rates on savings accounts, mortgages, and business loans. As more neobanks secure banking charters, the sector will pose serious competitive challenges to full-service physical banks.
Digital payments and BNPL
Digital banking is also changing the way we send and receive payments. It used to be that you sent your utility bill, mortgage, car loan, and insurance payments as paper checks in the mail. Today, you can call or go online to set up regular debits or request a payment be made directly from your checking account.
In addition to stunting the market for physical checks and postage stamps, digital payment technology is generating heated competition in the online payment field. As one example of the changing dynamic of payments, more companies are offering goods on a buy now, pay later basis, also known as BNPL. These transactions are processed through apps such as Afterpay, PayPal, and Klarna, which allow payments for online purchases to be spread over a period of weeks or months.
Some have observed that BNPL may lead to a decline in the use of credit cards, debit cards, and cash for retail and online purchases, changing processes that have been in place for decades. In the future, conventional banks and neobanks may step in to facilitate these payment arrangements for their account holders, directly competing with BNPL payment apps and their staggered payment services.
The BNPL trend poses a direct threat to the credit card and its inconveniences (over-limit and late charges, annual fees, high interest rates, and constantly changing terms of service). Paying for merchandise or services in a few weekly or monthly installments through a BNPL arrangement can be done as an interest-free, short-term unsecured loan.
Paying the installments of a BNPL arrangement on time and in full does not currently provide a boost to the customer's credit score, unlike with a credit card. This is because merchants do not advise the credit bureaus when customers make payments. The merchant benefits by selling to customers who normally wouldn't be able to come up with the full amount on the day of purchase, and being a responsible short-term borrower gains the customer the option to postpone the full payment.
Although paying back a BNPL purchase on time does not positively impact the borrower’s credit score, failing to make BNPL payments does make its way into that borrower’s credit report.
One other factor for consumers to consider is the risk of overextending personal budgets — for example, being unable to make a monthly payment if an emergency expense pops up. When making a BNPL purchase with limited savings, you have to cross your fingers that your financial position doesn't change before the 'pay later' part of the transaction is complete.
Crypto, blockchain, and the banking industry
Digital transformation has brought a revolution to the banking industry in the form of cryptocurrency. The dollars in your wallet and in your savings account are fiat money, meaning they are ultimately given value by the government that issued them. Cryptocurrency has no physical form and no centralized authority. Its value is verified by the blockchain, a “distributed ledger” technology that operates in a fundamentally different way to centralized, fiat money. Individuals keep their crypto assets in digital wallets, and businesses can accept payments and take out loans using cryptocurrency without getting anywhere near a bank.
It took the first cryptocurrency, Bitcoin, more than a decade to find even limited use. Without practical applications, and no acceptance by banks or merchants, Bitcoin, and other cryptocurrencies seemed to be good for nothing more than risky trading and speculation.
But with wider acceptance in recent years, cryptocurrency has flourished outside of the conventional banking system, and there's little chance of it disappearing anytime soon. The number of people buying, trading, and saving crypto globally reached 221 million in June 2021, according to a study by Crypto.com.
The banking sector has adjustments to make in the face of these changes. Traditional banks and credit unions may increasingly offer payments and loans in crypto, as well as their own form of deposit accounts for digital assets. Instead of signing up for yet another app, a trader in crypto coins or non-fungible tokens (NFTs, another emerging blockchain-based asset class) may have the option of using their bank's mobile platform or credit card. Smaller banks are blazing the trail: New York-based Quontic Bank now offers a debit card with rewards offered to users in Bitcoin.
At some future point, big banks (and major corporations) will develop their own cryptocurrencies, an experiment already carried out by J.P. Morgan in 2020 with JPM Coin, which can be used among the bank’s clients to settle payments.
Personalization and chatbots
Not every advancement changes the entire principle of the banking relationship. In fact, much emerging banking technology is designed to re-emphasize the importance of building personal connections with account holders. One of the most important digital banking trends driving this change is the chatbot, an automated online interface for personalized banking services.
Through artificial intelligence, online conversations with customers are automated, with the bank's responses and suggestions driven by the customer's own history. A chatbot can deliver real-time changes in market and banking data, such as the bank's current mortgage interest rate. This allows account holders access to additional support options outside of traditional banking hours. If you're looking at your mobile app at 2am, help might be just a moment away thanks to your bank’s chatbot.
As chatbots are enriched with more specialized and data-driven AI, banks will be able to offer a menu of appropriate services and products tailored more accurately to the individual customer.
New technologies also promise to change how in-person payments are made. Real-time payments, allowing individuals to transfer funds instantly to another individual or business through a banking platform, are gaining momentum.
Real-time payment is part of a broader business model known as banking as a service. In BaaS, banks associate themselves with non-bank businesses to provide more convenience and flexibility for customers on both platforms. A company such as a hotel chain might offer its own bank accounts, credit and debit cards, loans, and payment services in association with a traditional bank as a partner.
These services can be accessed directly through the non-bank partner's app or website. Although the bank handles the transaction and the money, the non-bank provides access to the financial services.
BaaS ultimately means open banking and more convenient relationship banking. Open banking means the ability to aggregate customer information from all financial accounts: checking and saving, credit cards, investment, and lending accounts, for example. Banks and credit unions are increasingly able to provide this one-stop shop on their own, or by partnering with service providers to their mutual benefit.
An open banking app — in which bank data is made transparent and opened to processing by third-party service providers — helps with financial planning, like saving for a major purchase, retirement, or your kid’s education. It will offer a complete credit history, and more proactive credit counseling services. With more open data sources, consumers with little or no financial history may have an easier time securing credit for purchases.
Open banking is becoming a reality as software engineers fully integrate data from multiple sources into a single application, like Revolut in the UK, or the pan-European Token Open Banking. Regulatory hurdles will have to be overcome for similar apps to gain steam in the United States, where banks must also ensure continuing compliance with the Bank Secrecy Act.
Issues of data privacy and protection will also arise, and are already becoming part of our everyday banking jargon. The European Union took an important step in addressing this problem in 2018 by putting into effect a Payment Services Directive requiring banks to make their data available to third-party service providers.
Banking and the metaverse
As banking moves toward more open platforms and personalization, a new dimension is manifesting in the metaverse — a hybrid of virtual reality and augmented reality that became a hot topic when the tech giant formerly known as Facebook changed its name to Meta in 2021.
The metaverse is a parallel world in digital space, with its own businesses, population centers, homes, methods of transport, money, and community banking institutions. Think SimCity concepts with real-world components. Like “cyberspace,” which was invented by cyberpunk author William Gibson in the ‘80s and came to describe a new conception of space in the early internet era, “metaverse” was coined by sci-fi writer Neal Stephenson to describe an interactive realm accessed through VR headset. Facebook/Meta (and Oculus) are trying to make that a mainstream reality.
In 2018, EQIBank became the first bank to offer its customers both crypto and traditional deposit accounts. This bank is now carving out another niche in the metaverse, with plans to build a complete banking service that spans various digital worlds developed under the names Polka City, Netvrk, and Human Protocol.
Members of these virtual worlds will have access to the conventional menu of banking services, courtesy of EQIBank. They can earn and spend traditional money in that space, as well as currencies and tokens meant exclusively for metaverse banking use. Customers can convert their virtual currency to traditional money and spend it in the "real world," greatly expanding the utility of virtual business and virtual work.
The future of fintech
A financial services company trading in crypto via a “branch” in the metaverse may sound a bit far-fetched for a conventional industry like banking. Then again, direct deposit, debit cards, and ATMs were hard to imagine not that long ago.
The only certainty is that things change. Banking tech has already taken some startling and interesting turns in recent years, challenging long-standing practices and institutions, and turning sci-fi concepts into functional software and services.
Even if some of what you read about in this article doesn’t pan out all the way — if we don’t all go out and buy expensive VR headsets, for example — the smart money always bets on the future looking a little different than today, and understanding fintech trends today may be the tool you need to achieve financial success tomorrow.
Discover more ways to be proud of your money in our previous blog post, "Guide to checking accounts."