What are the differences between digital finance and traditional finance?

Günsel Topbaş, Co-Founder of Manifest Executive Consultancy, made the following assessment regarding the differences between digital finance and traditional finance:

“Now, when we look at traditional finance and new finance, or digital finance, I want to make a comparison at a few levels. First of all, I think the most striking difference is the demographics. When we look at senior employees in traditional finance companies, we see that the average age at the CEO level is around 45. In new generation Fintech companies, this average is 30 or 6. So there is a generational difference. This is an important difference. What does it bring us? It actually brings a difference in approach. While traditional institutions primarily prioritize compliance, reputation, and profitability, new generation institutions, especially those we would call Fintech, are focused on innovation, challenges, scaling, and growth. As a result, managers in traditional institutions, both due to their demographics and the characteristics of the institutions, take a less risk-averse, more protective, and more conservative approach to innovations and financial technologies. However, Fintech, both in terms of its demographics and its own characteristics, is much more agile, much more innovation-oriented, and entrepreneurial.” Between 2010 and 2020, traditional institutions generally only used Fintech in their mobile and digital applications, but resisted it to some extent in other products, staying away from it due to the lack of regulation and their unwillingness to take risks. However, since 2020, and especially in the current period, we are seeing collaboration between traditional and innovative institutions. In other words, the initial claim made by Fintech companies 10 years ago – “we are now the masters of this field, we will replace banks” – actually necessitates collaboration and cooperation, both because of the smaller balance sheet sizes and market reputations of Fintech companies, and because banks are subject to both larger capital structures and regulations. We are currently experiencing this process, and I believe it will continue to strengthen in the future.

Comparing Traditional and Digital Finance

The financial world has been undergoing a significant transformation between traditional and digital finance in recent years. The differences between these two types of finance are particularly noticeable in terms of demographic structures and business practices. Traditional financial institutions are generally led by older and more experienced leaders, while in the digital finance world, young and dynamic leaders come to the forefront. This situation leads to the adoption of different approaches and strategies in the financial world. Traditional financial institutions focus on issues such as compliance and reputation, while digital financial institutions exhibit an innovation and growth-oriented approach.

Demographic Differences

While senior executives in traditional financial institutions are generally 45 years and older, this average age is around 30 in the fintech world. This demographic difference creates a generational difference in approach within the financial world. Younger leaders exhibit a more innovative and risk-taking attitude, while more experienced leaders generally adopt a more conservative and protective approach.

Differences in Approach

Traditional financial institutions prioritize compliance, reputation, and profitability, while fintech companies focus on innovation, challenges, and scalability. This difference creates a significant divide in the approach to financial technologies and innovations. Traditional institutions are more cautious about innovation, while the fintech world exhibits a more agile and entrepreneurial attitude.

Regulation and Risk Management

Traditional financial institutions, due to their subjection to regulations, follow a more cautious risk management policy. Fintech companies, on the other hand, operate in areas where regulations are less effective, allowing them to offer more flexible and innovative solutions. However, this situation is changing over time, and fintech companies are also having to comply with regulations.

Collaboration and Partnerships

Initially, fintech companies aimed to replace banks, but this approach has changed over time, and a collaboration-oriented strategy has been adopted. Traditional financial institutions and fintech companies are forming partnerships and working together, leveraging each other’s strengths. These collaborations create a win-win situation for both parties.

Future Trends

The collaboration between traditional and digital finance appears set to strengthen further in the future. Technological advancements and changing consumer expectations are creating new opportunities in the financial world, requiring both types of finance to work together. This process will contribute to making financial services more accessible and innovative.

Conclusion

The differences between traditional and digital finance are leading to significant changes in the financial world. Demographic structures, differences in approach, and regulations constitute the fundamental elements of this change. Collaboration between traditional financial institutions and fintech companies contributes to making financial services more innovative and accessible. In the future, these collaborations are expected to strengthen further, creating new opportunities in the financial world.