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What is Fintech?
Fintech is defined as computer programs and other technology used to support or enable banking and financial services. Fintech refers to the integration of technology into offerings by financial services companies in order to improve their use and delivery to consumers.
Four primary fintech areas — digital lending and credit, mobile/digital payments, cryptocurrency, blockchain and digital wealth management — have been identified as areas of strongest interest, due to their rapid pace of growth, technological disruption, and regulatory and other risks.
Examples of fintech firms include, but are not limited to the following:
Mobile Banking
Insurance (Insuretech)
Trading
Banking as a Service (BaaS)
Global FinTech Solutions
Fintech Weekly offers the following comprehensive description of this growing segment:
The term Fintech (Financial Technology) refers to software and other modern technologies used by businesses that provide automated and improved financial services. The fast and innovative progresses such as Mobile Payments changed the way we manage our finances. Tech-savvy customers expect money transfer, lending, loan management and investing to be effortless, secure and scalable, ideally without the assistance of a person or the visit of a bank.
Established bank products find themselves increasingly displaced and for both businesses and customers banking has largely become more convenient, efficient and easy to access. In contrast to traditional banks, FinTech startups operate flexibly and fast when it comes to implementing new services based on changing demands.
Hallmark examples of FinTech in our daily life are Mobile Payment apps, Cryptocurrency and Blockchain like Bitcoin and Gemini. In the future the range of FinTech services is predicted to transform the market even more with AI and machine learning and will make FinTech products an integral part of our digitalized life.
Latest Developments in FinTech
Since the mid 2010s, fintech has exploded, with both startups receiving billions in venture funding (some of which have become unicorns), and incumbent financial firms either snatching up new ventures or building out their own fintech offerings, according to Investopedia, which offers the following information about the fintech landscape,
North America still produces most of the fintech startups, with Asia a relatively close second, followed by Europe, note Investopedia. Some of the most active areas of fintech innovation include or revolve around the following areas (among others):
Cryptocurrency, digital tokens (e.g., NFTs), and digital cash. These often rely on blockchain technology, which is a distributed ledger technology (DLT) that maintains records on a network of computers but has no central ledger. Blockchain also allows for so-called smart contracts, which utilize code to automatically execute contracts between parties such as buyers and sellers.
Open banking is a concept that proposes that all people should have access to bank data to build applications that create a connected network of financial institutions and third-party providers. An example is the all-in-one money management tool Mint.
Insurtech seeks to use technology to simplify and streamline the insurance industry.
Regtech seeks to help financial service firms meet industry compliance rules, especially those covering Anti-Money Laundering and Know Your Customer protocols which fight fraud.
Roboadvisors, such as Betterment, utilize algorithms to automate investment advice to lower its cost and increase accessibility.
Unbanked/underbanked services that seek to serve disadvantaged or low-income individuals who are ignored or underserved by traditional banks or mainstream financial services companies. These applications promote financial inclusion.
Cybersecurity. Given the proliferation of cybercrime and the decentralized storage of data, cybersecurity and fintech are intertwined.
Fintech Users
There are four broad categories of users for fintech: 1) B2B for banks and 2) their business clients, as well as 3) B2C for small businesses, and 4) consumers. Trends toward mobile banking, increased information, data, more accurate analytics, and decentralization of access will create opportunities for all four groups to interact in heretofore unprecedented ways.
As for consumers, as with most technology, the younger you are the more likely it will be that you are aware of and can accurately describe what fintech is. The fact is that consumer-oriented fintech is mostly targeted toward millennials given the huge size and rising earning (and inheritance) potential of that much-talked-about segment. Some fintech watchers believe that this focus on millennials has more to do with the size of that marketplace than the ability and interest of Gen Xers and baby boomers in using fintech. Rather, fintech tends to offer little to older consumers because it fails to address their problems.
When it comes to businesses, before the advent and adoption of fintech, a business owner or startup would have gone to a bank to secure financing or startup capital. If they intended to accept credit card payments they would have to establish a relationship with a credit provider and even install infrastructure, such as a landline-connected card reader. Now, with mobile technology, those hurdles are a thing of the past.
Regulation and Fintech
Financial services are among the most heavily regulated sectors in the world. Not surprisingly, regulation has emerged as the number one concern among governments as fintech companies take off.
As technology is integrated into financial services processes, regulatory problems for such companies have multiplied. In some instances, the problems are a function of technology. In others, they are a reflection of the tech industry’s impatience to disrupt finance.
For example, automation of processes and digitization of data makes fintech systems vulnerable to attacks from hackers. Recent instances of hacks at credit card companies and banks are illustrations of the ease with which bad actors can gain access to systems and cause irreparable damage. The most important questions for consumers in such cases will pertain to the responsibility for such attacks as well as misuse of personal information and important financial data.
There have also been instances where the collision of a technology culture that believes in a “Move fast and break things” philosophy with the conservative and risk-averse world of finance has produced undesirable results. San Francisco-based insurtech startup Zenefits, which was valued at over a billion dollars in private markets, broke California’s insurance laws by allowing unlicensed brokers to sell its products and underwrite insurance policies. The SEC fined the firm $980,000 and they had to pay $7 million to California’s Department of Insurance.
Regulation is also a problem in the emerging world of cryptocurrencies, according to Investopedia. Initial coin offerings (ICOs) are a new form of fundraising that allows startups to raise capital directly from lay investors. In most countries, they are unregulated and have become fertile ground for scams and frauds. Regulatory uncertainty for ICOs has also allowed entrepreneurs to slip security tokens disguised as utility tokens past the SEC to avoid fees and compliance costs.
They have established fintech sandboxes to evaluate the implications of technology in the sector. The passing of General Data Protection Regulation (GDPR), a framework for collecting and using personal data, in the EU is another attempt to limit the amount of personal data available to banks. Several countries where ICOs are popular, such as Japan and South Korea, have also taken the lead in developing regulations for such offerings to protect.
Summary
BaaS is reworking the way consumers engage in financial transactions and access their information. Positioning your financial service to capitalize on this new market opportunity takes careful consideration of all factors.
