Financial innovation and technology combined is called fintech. This new ecosystem integrates the current evolution of blockchain technology with financial products to provide users with swift, affordable and efficient services. Tech startups innovate and simplify the current financial system. Challenger and neo-banks disrupt traditional finance and are at the forefront of further developments. The main distinction between Fintech and financial institutions are its regulation and the mandatory capital requirements.
The differences between regulated banking practices and fintech restrict the latter to hold customer funds on their accounts. Instead, they (currently) hold accounts with regulated financial institutions. The risk of failure for creditors seems transferred to the systemic banking system. Yet, this assumption is breached by an additional third party risk. Honest conduct by the fintech and absolute compliance with global anti-money laundering frameworks is therewith furthered. However, fintech failure leaves all creditors unsecured and surrendered to traditional insolvency procedures.
Ripple effects of fintech failure are visible throughout society. Account balances, pension funds, and stock indexes may be impacted. As such, risk mitigation starts with the choice of the appropriate financial institution. This is followed by a diverse asset allocation to limit potential losses. Creditors may also wish to hedge risk by insuring the account balance, whilst appreciating that there is no regulatory or government backed deposit protection for fintech deposits.
Even though fintech firms often provide IBAN accounts or other account numbers, these are not considered bank accounts. Bank account opening is limited to regulated financial institutions with a banking license. Fintech firms often have a license to operate as a ‘Payment Institution’ or ‘Electronic Money Institution’. This is a main disclaimer for the uninformed in need of a swift solution to make or receive payments. The accounts at these electronic money institutions do not always qualify for all incoming and outgoing payments.