Traditional vs new age finance in the modern age
Date : 22.March.2018The concepts of finance have always remained consistent with the times. The methods of executing financial services have undergone many changes though. Traditional finance relied on building a strong one-stop-shop with the entire gamut of services that an individual would need. With the Glass-Steagall act, commercial and investment banking separated for all times to come. But even then, financial institutions grew to be these giants that assumed powerful roles in the world. While there were investment banking corporations that controlled the space of investments and stock-broking, big banks controlled the overall lending and borrowing businesses. Fifty years down the line, we have different paradigms in the financial world that are also promising in their own right. These new paradigms are doing things differently and have newer business models and offerings that even challenge the status quo. The new age financiers are growing rapidly with the growth in technology and the growing need for a more customer-focused and dynamic service. As a new age financial company, we at Prest Loans (www.prestloans.com) decided to put together a list of how traditional finances compares against new age finance.
1) Lending has more flavours in new age finance- Lending in the age of traditional finance consisted of two kinds. One was the lending done by banks which was under high scrutiny, regulation and process governance. The other was helmed by ‘loan shark’ who operated under the radar who often charged unreal rates of interest and resorted to any means necessary to recover their sum. The new age of finance has Non-Banking Financial Corporations that bring the regulated culture of banks but being dynamic like the loan sharks. NBFCS are actually doing better than ever in India, with the current market share for NBFCs for Micro, Small and Medium Enterprises (MSMEs) at 18% which was 8% five years ago1. PrestLoans (www.prestloans.com) is one such NBFC, doing well in the age of alternative lending.
2) Technology plays a much bigger role for new age finance- New age finance relies on technology to deliver a better financial output to the customer. The application of technology in traditional finance has been legislation driven. The application of it for new age finance has been the desire to innovate and do better. Hence, new age financial players can be seen using the help of FinTech in automating processes, easing the application process, automating credit checks and increasing transparency.
3) New age finance looks at customer loyalty in a very different way- Traditional finance relied on long-term relationships and nurturing them with many methods other than providing traditional finance (the tradition of gifts etc. for customers runs to this day). New age financial firms, while working on their own long-term relationships, realize that the modern customer’s loyalties are easily swayed. A modern customer would happily switch e-Wallets or NBFC or banking service if he or she gets a better and more relevant experience. New age firms have hence worked to build that compelling experience that wins them customers all around the world, without them physically being in touch with every customer.
4) New age finance builds experiences over building products and services- New age financial firms often talk about ‘the perfect experience’ rather than their products and services. In sharp contrast to traditional finance, the new age players simplify their core message for the end customer. They only focus on conveying the value that they really add without talking about what products and services do they offer. Talking about experience and concentrating on that, is a great way to build customer confidence today.
5) New age finance is using the newer trends like block-chain- Block-chain is looking to revolutionize the concept of financial ledgers and the authority of banks. By decentralizing ledgers and storing distributed copies (that are hence very secure) the concept of all money in one place could go away. While this puts the business model of traditional institutions under great peril, new age firms are finding it easier to embrace the trend and leveraging it.
6) New age financial firms are smaller and more agile- A new regulation like the GDPR in Europe2 or the open banking regulation3 shakes the corridors of traditional players. New age players are smaller and can adapt to these regulations in a much quicker manner. They can take bolder decisions and use smarter technology to actually utilize the opportunity. A classic example is the demonetization wave causing a lot of trouble to banks but e-Wallets like PayTM and Free-Charge bloomed. More recently, while banks find the business lending market stifled due to dual GST, new age lending firms like PrestLoans (www.prestloans.com) are using it to their advantage to help MSMEs secure better credit.
Conclusion
We would also like to highlight that an old player is not necessarily traditional and a new firm doesn’t automatically become ‘new age finance’. It is a question of mindset and methodology and changing of deeply set ways that decades of financial markets have taught us. The best thing that a larger player can do is partnering with a smaller firm like a FinTech company that can provide a particular product or service which can give an edge to the bigger player. With a thoughtful approach to finance, using technology and keeping user experience at the center, a traditional financial company can mould itself to be a formidable, new-age player.
Sources:
3: https://www.cnbc.com/2017/12/25/psd2-europes-banks-brace-for-new-eu-data-sharing-rules.html
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