TECHNOLOGY

Financial Technology – Fintech

8 Mins read

  What Is Financial Technology – Fintech? 

Financial Technology (Fintech) is used to define new tech that tries to improve and automate financial services delivery and use. ​​​At its core, Fintech is used to help companies, business owners, and consumers better manage their financial services, processes, and lives by using specialized software and algorithms used on computers and, increasingly, smartphones. Fintech, the word, is a key to “financial technology.” 

While Fintech emerged in the 21st Century, the term was initially applied to the technology employed at established financial institutions’ back-end systems. ​Since before, there has been a shift to more consumer-oriented services and a more consumer-oriented definition. Fintech now includes different sectors and industries so as education, retail banking, fundraising and nonprofit, or investment management, to name some.

Fintech more includes the development and use of cryptocurrencies such as bitcoin. While that segment of Fintech may view the most headlines, big money yet lies in the traditional global banking industry or its multi-trillion-dollar market capitalization.

Financial Technology – Fintech

 Understanding Fintech 

Widely, the term “financial technology” can apply to any innovation in how personalities transact business, from digital money to double-entry bookkeeping. Because the internet revolution including the mobile internet/smartphone revolution, but, financial technology has grown explosively, and Fintech, which first referred to computer technology applied to the back office of banks or trading firms, now describes a wide variety of technological interventions into personal and commercial finance.

Fintech now describes different financial activities, such as money transfers, depositing a check with your smartphone and bypassing a bank branch to apply for credit, raising money for a business startup, or managing your investments, normally without the help of a person. According into this EY’s 2017 Fintech Adoption Index, one-third of consumers use at least two or more fintech services. These consumers are also increasingly aware of Fintech as a part of their daily lives.1

Key Takeaways

  • Fintech refers to integrating technology into offerings by financial services companies to improve their use and delivery.
  • It primarily works with unbundling contributions by such firms and creating new markets for them. Startups disrupt incumbents in the finance industry with expanding financial inclusion and using technology to cut operational expenses.
  • Fintech funding is on the increase, although regulatory problems abound.

 Fintech in Practice 

The common talked-about (and various funded) fintech startups share the same characteristic: all are designed to be a threat to, challenge, and eventually assume established traditional financial services providers with being more nimble, following an underserved segment, or giving quicker and better service.

For example, Affirm tries to cut credit card companies out of the online shopping process by giving consumers a way to secure immediate, short-term loans for buying. While rates can be expensive, Affirm claims to provide consumers with low or no credit to ensure credits and build their credit histories. Then, Better Mortgage seeks to streamline the home mortgage process (and obviate traditional mortgage brokers) with a digital-only present that can reward users with a verified pre-approval letter within 24 hours of applying. GreenSky tries to link home improvement borrowers with banks by helping consumers avoid entrenched lenders and save on interest by giving zero-interest promotional periods.

For customers with no or low credit, Tala allows consumers in the developing world microloans to do a deep data dig next their smartphones to their transaction history and unrelated things, such as what mobile games they play. Tala seeks to give such consumers more reliable options than local banks, unregulated lenders, and different microfinance institutions.2

Summary, if you have always wondered why some aspect of your financial life was so unpleasant (such as applying for a mortgage by a traditional lender) or seemed like it wasn’t quite the right fit, Fintech has (or seeks to have) a solution for you. For example, Fintech aims to answer questions like, “Why is what makes up my FICO score so magic and how it is used to judge my creditworthiness?”

Being such, loan originator Upstart needs to make FICO (and different lenders, both traditional and Fintech) obsolete using different data sets to determine creditworthiness. They include employment history, education, including whether a would-be borrower knows their credit score to decide whether to underwrite and rate loans.3 Related treatment is given to financial services that range of bridge loans for house flippers (LendingHome) to a digital investment platform. This addresses the reality that women live longer and have individual savings requirements, tend to earn smaller than men, and have different pay curves that can leave less time for savings to grow (Ellevest). 

  Fintech’s Expanding Horizons 

Up to now, financial services institutions have a kind of services under a single umbrella. The scope of these services included a broad range from traditional banking activities to mortgage and trading services. In its most basic information, Fintech unbundles these services into unique offerings. The combination of streamlined offerings with technology allows fintech companies to be more efficient and cut down on each transaction’s costs.

Suppose one word can describe how many fintech innovations have affected traditional trading, banking, financial advice, and products. In that case, it’s ‘disruption,’ like financial products and services that were once the realm of branches, salesmen, and desktops go toward mobile devices or democratize away from big, entrenched institutions.

Like the case, the mobile-only stock trading app Robinhood charges no fees for trades. Peer-to-peer lending sites similar to Prosper Marketplace, Lending Club, and OnDeck promise to reduce rates among the opening up competition for loans to large market forces. Business loan providers such as Kabbage, Accion, Lendio, and Funding Circle (with others) give startup and established businesses easy, secure platforms to secure working capital. Oscar, an online insurance startup, got $165 million in funding in March 2018.4 So important funding rounds are not unusual and happen globally for fintech startups.

But, established, traditional banks have been paying attention and have invested heavily into becoming more like the companies that seek to disrupt them. For example, Goldman Sachs launched the consumer lending platform Marcus in 2016 and newly expanded its operations to the United Kingdom.5

This told, many tech-savvy industry watchers warn that keeping apace of fintech-inspired innovations needs more than just ramped up tech spend. Rather, competing among lighter-on-their-feet startups requires a significant change in thought, processes, decision-making, and overall corporate structure.

  Fintech and New Tech 

New technologies, like predictive behavioral analytics, machine learning/artificial intelligence, and data-driven marketing, will get the guesswork and habit out of financial choices. “Learning” apps will not only read the habits of users, usually hidden to themselves. They will also involve users in learning games to make their automatic, unconscious spending, and saving choices better. Fintech is a keen adaptor of automated customer service technology, using chatbots and AI interfaces to help customers with basic tasks and keep down staffing costs. Fintech is more leveraged to fight fraud by leveraging information about payment history to flag transactions outside the norm.

  Fintech Landscape 

Fintech startups earned $17.4 billion in funding in 2016 and were on pace to surpass that sum as of late 2017, according CB Insights, which counted 26 fintech unicorns globally valued at $83.8 billion. This same firm reported that there were 39 VC-backed fintech unicorns worth $147.37 billion with the end of 2018.

North America produces the largest of the fintech startups, with Asia a nearly close second. Global fintech funding hit a new big in the first quarter of 2018, let by a significant uptick in North American deals. Asia, which could surpass that the United States in fintech deals, more saw a spike in inactivity. Funding activity in Europe was at a 5-quarter low in Q1 2018 but surged back in Q2. 

Some of the various active areas of fintech innovation include and revolve around the coming areas:

  • Cryptocurrency and digital cash.
  • Blockchain technology, add Ethereum, a distributed ledger technology (DLT) that maintains records on a computer network, has no central ledger.
  • Smart contracts, which use computer programs (often using the blockchain), automatically execute agreements among buyers and sellers.
  • Open banking, a concept that lists on the blockchain and posits that third-parties should have access on bank data to create applications that create a connected network of financial institutions and third-party providers. An instance is the all-in-one money management tool Mint.
  • Insurtech, which seeks to use technology to analyze and streamline the insurance industry.
  • Regtech, which aims to help financial service firms meet industry compliance rules, particularly those who are covering Anti-Money Laundering and Understand Your Customer protocols that fight fraud.
  • Robo-advisors, such as Betterment, use algorithms to automate investment advice to lower its cost and increase convenience.
  • Unbanked/underbanked services seek to serve disadvantaged or low-income individuals who are ignored or underserved with traditional banks and mainstream financial services companies.
  • Cybersecurity, given this proliferation of cybercrime and the decentralized storage of data, cybersecurity and Fintech are intertwined.

  Fintech Users 

There are four general categories of users for Fintech: 1) B2B for banks and 2) their business clients, and 3) B2C for little businesses and 4) consumers. Trends toward mobile banking, data, increased information, and more accurate analytics and decentralization from access will generate opportunities for all four groups to communicate in previously unprecedented ways.

As for users, as with most technology, the more youthful you are, the more likely it will be that you are informed of and can truly describe what Fintech is. The fact is that consumer-oriented Fintech is frequently targeted toward millennials given the vast size and rising earning (and inheritance) potential of that much talked about the segment. Any fintech watchers believe that this focus on millennials has to do with the size of that marketplace than the knowledge and interest of Gen Xers and Baby Boomers in using Fintech. First, Fintech tends to offer little to older consumers because it fails to address their problems.

If it happens to businesses, before the arrival and adoption of Fintech, a business owner or startup would have moved to a bank to secure financing or startup capital. If they expected to accept credit card payments, they would have to establish a relationship with a credit provider and even install infrastructure, so as a landline-connected card reader. Now, with mobile technology, those barriers are a thing of the past.

  Regulation and Fintech 

Financial services are with the usual massively regulated sectors in the world. Not surprisingly, regulation has appeared as the number one concern with governments as fintech companies take off.

As technology is integrated into financial services methods, regulatory problems for such companies have increased. In some instances, the issues are a function of technology. In others, others are a reflection of the tech industry’s impatience to disrupt finance.

For example, automation of methods and digitization of data make fintech systems vulnerable to attacks from hackers. New hacks at credit card companies and banks illustrate the facility with which bad actors can gain access to systems and create irreparable damage. The most important topics for consumers in such cases will pertain to the responsibility for such attacks and the misuse of personal information and critical financial data.

There have also been instances wherever the collision of a technology culture that believes in a “Go fast and break things” philosophy with the conservative and risk-averse world of finance has produced undesirable results. San Francisco-based insurance startup Zenefits, which was valued at over a billion dollars in individual markets, broke California’s insurance laws on providing unlicensed brokers to sell its products and underwrite insurance policies. This SEC fined the firm $980,000, and they had to pay $7 million to California’s Department of Insurance.

Regulation is more difficult in the emerging world of cryptocurrencies. Initial coin offerings (ICOs) are a new fresh form of fundraising that allows startups to raise capital directly of lay investors. At the same time, most countries are unregulated and have grown fertile ground for scams and frauds. Regulatory uncertainty for ICOs has allowed entrepreneurs to slip safety tokens disguised as use tokens past the SEC to avoid fees, also compliance costs.

Because of the diversity of presents in Fintech and the disparate industries it touches, it is difficult to formulate a single and general approach to these problems. For the largest part, governments have used existing regulations and, in some examples, customized them to regulate Fintech.

They have established fintech sandboxes to evaluate the implications of technology in the area. This passing of the General Data Protection Regulation, a framework for collecting and using personal data, while the EU is a different attempt to limit individual data available to banks. Many countries where ICOs are familiar, such as Japan and South Korea, have also led in developing regulations for such presents to protect investors.

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