Fintech gained increased popularity in the past years and quickly became one big buzzword in business and technology. But What Is Fintech exactly? How can we benefit from it?
You don’t need a finance or computer science degree to figure out that Fintech is a mixture of finance and technology. Whether you’re in the dark or well clued, stay with me, and I will shed some new light on this hot topic.
What is Financial Technology (Fintech)?
Financial Technology (Fintech) defines emerging technologies targeted at enhancing and automating financial services distribution and utilization. At its core, Fintech is used to help enterprises, company owners, and customers like you and me efficiently control financial transactions and processes. Fintech breathes through the use of complex tools and algorithms that are handled by computers and increasingly smartphones.
Originally Fintech described the ensemble of technologies used in the back-end processes of financial institutions such as banks. As financial institutions shifted towards more consumer-oriented offerings and concepts, the term Fintech started to expand its meaning to include various sectors and industries such as retail banking, finance, fundraising, investment management, education – to name a few.
Ok, but what makes Fintech that special? And why traditional financial institutions are concerned about it?
Until a few years ago, banks had a tight grip on pretty much everything that involved money. Things were great, and they become only bigger. And like everything that gains weight, it becomes slow and complacent. Banks were not in a rush to innovate or become competitive.
Fast-forward to the digital age. The wide access to technology allowed smaller and more agile players to enter the financial space with new exciting ways of using data and digital means and gave traditional banks a real run for their money.
Fintech involves the development and use of cryptocurrencies such as Bitcoin, Ethereum, Ripple, etc. Though this sector receives the vast majority of the Fintech news these days, the conventional banking industry, with its trillion-dollar business, still capitalizes on the world’s biggest chunk of money.
One thing is certain. The more the word Fintech crops through your news feed, the more headaches the old-fashioned financial sector gets.
How Does Fintech Work?
Broadly speaking, the word “financial technology” refers to any progress in the way people deal with transactions, from double-entry accounting to the invention of digital money.
The social Internet/smartphone revolution enabled financial technology to evolve explosively. Today, Fintech companies unbundle all types of transactions that financial institutions traditionally did and focuses on a niche financial service, making it as streamlined and user-friendly as possible.
“We’re witnessing the creative destruction of financial services.” – Arvind Sankaran.
Fintech now represents a range of financial practices, such as money transfers, depositing a check via mobile phone, bypassing a bank to apply for a loan, handling your savings, or collecting money for a startup. And all these without the help of an individual.
In Fintech terms, it’s called Decentralization.
Centralized vs. Decentralized Finance
Centralization refers to the central control point: banking institutions in finance or governments in a country’s context. Historically, centralization of finance was desirable as a measure of global financial systems, considered more reliable and stable than personal management. These systems were essential for cross-border transactions because of the complexity of the networks.
But there’s a catch: the concentrated finance sector is not as stable as we pretend it is. Realistically, structured financial networks are plagued by several problems, such as bribery, forgery, dubious loan procedures, and more. Sounds familiar?
The decentralization of finance has become a hot topic post-2007-2008 financial crisis, driven by the public’s growing disillusionment with the centralized financial sector and its shortcomings.
People call for control of their personal data more than ever before, ownership and money, and decentralization are labeled as a possible solution.
The under-banked, or communities experiencing financial upheaval, will feel the biggest impact of decentralized finance. These people can quickly obtain access to a global financial exchange market and handle their own trades with an internet connection and smart device being the only requirements.
Furthermore, these technologies are both openly auditable and censorship tolerant, perfect as an additional measure of protection for avoiding abuse and coercion.
Fintech In Action
The most popular and well-funded fintech companies share the same characteristic: they are built for being more flexible, targeting an underserved segment, or offering faster and/or improved service to be a threat to, challenge, and potentially usurp entrenched conventional financial services players.
Here are some examples of companies using Fintech successfully:
- Online payment gateways such as PayPal.
- Brokerage platforms such as Robinhood, Thinkorswim, eToro, etc., allow trading for various financial instruments.
- Platforms allow you to convert fiat to cryptocurrencies or buy and trade cryptocurrencies such as Coinbase, Binance, Kraken, BitMex, etc.
- Smart contracts by replacing the traditional paper-based contracts with code/transaction protocol run on a blockchain such as Ethereum and intended to perform automatically, monitor, or record activities and acts lawfully relevant in compliance with the terms of the agreement.
- Online charity or fundraising platforms such as Chuffed, Community Funded, Pennies, etc.
- Fintech specialized in medicare, e.g., Oscar, an American insurance company that disrupts the whole traditional healthcare system by using transparent and affordable medical bills.
- Fintech specialized in Microloans, e.g., Tala providing microloans to consumers in the developing world with low or no credit access by digging deep data on their smartphones for purchase history data and some apparently innocuous items, such as what mobile games they enjoy. Tala aims to provide those borrowers with safer choices than local banks, unregulated creditors, and other microfinance institutions.
- Fintech in cybersecurity given the proliferation of cybercrime and decentralized data storage.
And the list can go on.
In short, any organization that uses the Internet, smart devices, software, and cloud platforms to offer financial services to its clients can be referred to as Fintech.
Fintech – Where Next?
To date, financial services institutions have provided a range of services under a single umbrella. The scope of these services embodied a diverse spectrum from mainstream banking operations to lending and trading services.
In the most simple form, Fintech can unbundle these programs into individual offerings. The convergence of seamless products and technologies allows fintech firms to be more effective and reduce each transaction’s costs.
The Robinhood smartphone stock exchange app charges no trading costs.
Banks have paid heed and have invested heavily in the past years to become more like the firms attempting to challenge them. Have a look at Goldman Sachs’s list of investments in the Fintech space, for instance.
Global Fintech Landscape
In just the past two years, customer adoption rates for FinTech-powered platforms have doubled and, in some cases, tripled across main Asia-Pacific markets.
Hong Kong, Singapore, and South Korea have 67% approval of FinTech, while Australia currently stands at 58%. For now, most markets still lag well behind China’s 87% penetration, except India, which is now almost bound up with Asia’s leading digital power.
In 2021, China remains the main driver for innovation in the financial & technology space. FinTech services are now fully part of the Chinese lifestyle, unimpeded by legacy technology, and helped by their convergence with China’s pervasive and robust e-commerce and social media networks (Alibaba and WeChat).
The Chinese population awareness and usage of Fintech platforms and services are truly unparalleled in the world.
EY Global FinTech Adoption Index showed that 87% of Chinese respondents are now using one or more FinTech platforms, and a whopping 99.5% are aware of online applications that allow money transfer, mobile payments, and transactions of non-bank money.
We expect to see even more shifts in the Asian financial services environment over the next few years, guided by technological advancements, rivalry among Fintech firms, and, probably most importantly, loosening legislation.
If in Asia Fintech is experiencing widespread adoption for years now, social media and e-commerce companies are still considering whether or not to expand into financial services in the West. It will be no surprise if you won’t hear about some of these companies in a few years.
Fintech & Artificial Intelligence
Suppose finance can be married with technology, then new tech makes no exception. Technologies such as Artificial Intelligence (AI) and Machine Learning (ML), with their predictive behavioral analysis and data-driven marketing, can take the guesswork and human errors out of the financial system.
The modern financial sector’s primary criteria, such as improved customer service, cost-efficiency, retail data integration, and enhanced security, focus on AI and ML’s financial solutions. Adopting AI/ML and its combined applications enable the industry to build a healthier and more exciting economic environment for its clients.
The use of AI and ML improved banking and financial operations. With such smart technologies, fintech firms provide tailor-made goods and services following the emerging industry’s needs.
According to the Forrester sample population, about 50 percent of financial services and insurance firms were using AI and ML in 2020 worldwide. And the number is expected to increase with newer advancements in technology.
AI and ML can genuinely give a competitive edge to Fintech and change the face of the traditional financial services through AI-powered customer support, accurate decision making, improved trading and wealth management, fraud prevention, predictive analysis, and more.
For Fintech, there are four broad types of adopters:
1) B2B for banks and 2) banks’ customers, 3) B2C for small companies, and 4) consumers. Mobile banking trends, increased information, information, and more accurate analyses and access decentralization allow all four groups to interact in previously unprecedented ways.
Fintech appears to deliver little to older customers in terms of customer orientation, so it does not target their issues. The reality is that consumer-oriented fintech is mainly aimed at millennials, considering the tremendous scale and their increasing earnings ability. Some Fintech researchers believe that this emphasis on millennials has more to do with the market scale than Gen X or Baby Boomers‘ willingness to jump into the Fintech boat.
Financial services are among the world’s most highly regulated markets. That’s no wonder that Fintech legislation has become the number one priority for governments as Fintech firms started to become popular.
Regulatory issues for such firms have multiplied as technology is introduced into financial services systems. One of the biggest challenges actually comes from the tech industry’s ambitions to disrupt the financial sector.
Service automation and digitization as a whole make Fintech applications vulnerable to attacks by hackers. The latest cases of credit card hacks are reminders of how quickly ill-disposed people can compromise databases and inflict irreparable harm to people and the institutions serving them.
In such cases, the most relevant action for users would be the accountability for such attacks and the abuse of personal information and substantial financial details.
Likewise, cryptocurrencies are no exception to the rule. Initial Coin Offerings (ICOs) is a modern funding method that enables Fintech startups focused on crypto to collect money from investors in exchange for a digital coin or token even before the company had a marketable product or Minimum Viable Product (MVP).
The initial lack of ICO regulation worldwide led to the crypto-world becoming a breeding ground for scams and theft. As a result, governments started implementing regulations in the crypto space aggressively in the past few years.
Security Token Products (STOs) – are basically identical to ICOs but conforms to regulatory specifications. STOs surfaced as a response to lack of oversight when it comes to ICOs, adding control to blockchain-based crowdfunding and providing more confidence in fundraising via blockchain-based tokens.
To control the fast phase of development in this area, most countries established sandboxes to test and evaluate the new tech’s implications in that sector. They have established Fintech sandboxes to evaluate the implications of technology in the sector.
2021 brought some great news for crypto-fans. After fresh recommendations from a U.S. banking regulator on using some forms of less risky digital coins for payments, the cryptocurrency market could be inching closer to mainstream finance.
According to a statement from the US Office of the Comptroller of the Currency on January 2021, federally chartered banks can use so-called stablecoins for payment activities and participate in the underlying blockchain checks and records transactions. The move may allow banks to grow reliable coins for quicker payments, according to Bloomberg.
Most analysts expect Fintech to broaden its presence beyond the mainland. Either through the growing popularity of virtual banks, broader access to financial services for the underbanked, or cheaper access to medicare, the innovations in the Fintech area won’t chase to amaze us in the next few years.