What is fintech? Defining financial technology

April 08, 2022

What is fintech? Fintech is a blending of the words financial and technology and refers to emerging technology that improves the delivery and use of financial services. Fintech facilitates a wide range of products and services used by consumers and businesses including mobile banking, peer-to-peer payments, online investing, cryptocurrency and many other offerings.

What is a fintech company?

Broadly speaking, a fintech company is one that employs emerging technology to provide financial services. The technology used depends on the offering and whether it’s applied to back-end systems or customer-facing experiences. Fintech encompasses everything from the internet to cloud services, mobile apps, blockchain, artificial intelligence, cryptocurrency, digital payments applications and more.

A growing preference for digital payments among consumers and businesses, greater investments in solutions based on new technologies and high adoption of IOT devices all support the expansion of the global fintech market. The Americas is the region with the most fintech startup companies globally with 10,755 as of November 2021. EMEA (Europe, the Middle East and Africa) is not far behind with 9,323 fintech startups, and the Asia Pacific region has 6,268 (also as of November 2021).

Who uses fintech?

With 88% of Americans using some type of fintech app to manage their finances, fintech use has become nearly as ubiquitous as smartphone use. While younger generations including 95% of millennials are the most prolific users of fintech, other generations are quickly getting up to speed on fintech offerings. Fintech use among consumers aged 56 and older doubled between 2020 and 2021 to 79%.

Fintech users fall into four main categories: 1) financial institutions (B2B); 2) financial institutions’ clients; 3) small businesses (B2C); and 4) consumers. All four groups cite similar reasons for using fintech products and solutions: convenience, control and cost savings. Additionally, fintech enables all four groups to interact, facilitating opportunities for greater access to financial services and more accurate data and analytics.

What do fintech companies do?

Fintech companies integrate new and emerging technologies into financial services to enhance and automate these services for businesses and consumers. By modernizing traditional financial offerings through technology, fintech companies help their customers improve access, streamline operations and manage costs for a wide range of financial matters.

What makes a fintech company: The three Ds of financial technology

The global fintech market has experienced massive growth and is anticipated to increase at a CAGR of around 20% over the next four years to reach a market value of approximately $305 billion by 2025. Fintech holds a commanding presence within the financial services industry and the consumer marketplace and is characterized by three key factors.

1. Digitization

Fintech leverages advanced financial technology to empower businesses and consumers to take more control over the financial aspects of their lives. Underlying it all is digitization . The rapid and widespread adoption of digital technologies, driven in great part by the ubiquity of smart phones, provides the basis of all fintech offerings.

New digital technologies driving fintech include things like machine learning/artificial intelligence, predictive behavioral analytics, data driven-marketing and automated customer service technology (e.g. chatbots ) – all which help expediate financial services to consumers and reduce operational costs for business. And the market is growing. Global spending on digital transformation reached 1.3 trillion US dollars in 2020, growing 10.4% year-on-year.

2. Decentralization

The second “D” is decentralization. By unbundling conventional financial services such as mortgages, investments and business loans into individual offerings, fintech improves access to financial services. Enabled by digital technologies, consumers and businesses can bypass traditional routes and more directly and quickly obtain the services they need. This helps expand financial inclusion by making financial services more accessible to people who are unbanked or underbanked.

3. Disruption

Digital technologies and decentralized services have upended the traditional way of accessing financial products and services, which brings us to the third “D.” Fintech is one of the great disruptors in the financial services industry. Unencumbered by processes entrenched in larger organizations, fintech start-ups have been able to respond to changes in the marketplace more easily and push innovation through faster and at greater scale. And they’ve gotten the attention of venture capital firms. In recent years, investment funding in fintech companies has hit record levels, surging 169% from 2020 to $131.5 billion in 2021.

How is fintech changing financial services?

Financial institutions, investment firms, insurance agencies and other traditional financial services organizations are responding to the digitization, decentralization and disruption in the industry. With fintech potentially touching every aspect of a financial transaction, traditional players have no choice but to embrace new opportunities to expand their offerings and improve the customer experience.

Banks and credit unions are investing in fintech products and services to improve conventional offerings. They’re using fintech for fraud monitoring, to process payments, streamline accounting processes and to improve customer-facing activities like personal banking, mortgages and business loans. During the onset of the COVID-10 pandemic, fintech played a major role in financial institutions helping their customers secure government assistance through the Payroll Protection Program.

On the consumer side, the digital technologies driving fintech have become intrinsic to everyday financial transactions. Fintech underlies the peer-to-peer payment apps that make it easy for friends to split a dinner check, the banking apps that allow consumers to make deposits by taking a picture with their smartphone and the apps that make it easy for consumers to manage investments on their own.

What are the fintech categories?

In the past few decades, fintech innovation has spread broadly to cover most aspects of finance. Fintech companies are most often categorized into payments, investments, banking and insurance. Fintech companies also operate in matters having to do with cryptocurrency, personal and equity financing and international money transfers.

Payments fintech: Financial technology companies that work within payments typically specialize in letting people pay each other outside of the banking system. They no longer need to pay bank fees for peer-to-peer payments.

Investment fintech : Investment and wealth management fintech companies help financial institutions understand customers and data better in order to offer better products and services and ultimately find the right saving and investing strategies for their clients.

Banking fintech : Companies in this space often offer different options and fee structures than traditional banks. These companies focus on the underbanked consumers who often don’t get approved for traditional loans and credit cards.

Insurance fintech: Fintech companies in this category typically use technology to reach customers that don’t have insurance coverage or need a different type of insurance (for a short period of time).

Cryptocurrency fintech: These financial technologies offer a convenient way to buy and sell preferred cryptocurrencies. Cryptocurrency exchanges in this space also typically offer ways to purchase, store, trade and sell crypto (bitcoin, Ethereum, Cardano, Litecoin, etc.).

Equity financing fintech: Companies in this sector of financial technology help businesses raise money easily whether via crowd funding or access to specific type of investor without going through banks to ask for loans.

International money transfer fintech: These companies offer less expensive and faster ways to transfer money internationally.

What are examples of fintech companies?

With fintech such a hot topic spanning so many categories, there’s no shortage of “most popular fintech companies” lists. Here’s a look at some of the fintech companies occupying payments, investments, banking, cryptocurrency and insurance.

Payments: Klarna, a leader in invoice and credit-based payments, has carved a commanding niche for itself in the expanding buy now, pay later (BNPL) space. In 2017, Klarna partnered with Worldpay from FIS to provide payment services to help e-commerce businesses improve conversion rates and streamline the checkout process.

Investments:Founded in 2012 as eShares, Inc., Carta is a cloud-based equity management solution that helps companies and investors manage their capital tables, valuations, investments and equity plans. One of the company’s differentiating factors is the number of registered patents and trademarks it holds.

Banking:Digital banking startup and alternative bank Chime offers a mobile-first banking experience that has gained the attention of younger, middle-income consumers. Chime is not actually a bank and instead leverages banking services by The Bancorp Bank or Stride Bank, N.A., Members FDIC.

Insurance:“Insuretech” companies like Hippo are taking fintech into the insurance space to streamline the applications and claims process. Hippo uses AI, satellite imagery, public data and other factors when estimating coverage and premiums.

Cryptocurrency:“Kraken, which operates one of the largest cryptocurrency exchanges, became the first fintech of its kind in US history to receive a bank charter recognized under federal and state law. It will be the first regulated US bank to provide financial services for digital assets.

Equity:Crowdfunding services like Kickstarter offer ways for business and individuals to seek basic or additional funding for projects.

International money transfer:Ripple uses blockchain to provide a faster and less expensive way for financial institutions to process payments anywhere in the world.

When did fintech start?

While the word seems relatively new, fintech is not an entirely new concept. Finance and technology have a long history together, beginning more than 150 years ago when telegrams and morse code were developed and used to communicate financial matters and facilitate transactions. Some academics have gone so far as to assign different eras in the evolution of fintech. Following is a short overview.

1886-1967: This was a time of building the foundation for what would years later be coined “fintech.” The US saw the completion of infrastructure such as the first transatlantic cable in 1866 and the establishment of Fedwire in 1918 (although the Fed began transferring funds between parties three years prior). The ability to conduct financial transactions over long distances was a huge advancement in financial services.

1967-2008: This phase of fintech’s history is characterized by the move from analog to digital in financial services beginning with the installation of the first ATM in 1967. The 1970s witnessed greater digitization of financial services with the introduction of NASDAQ, the first digital stock exchange, and SWIFT, which established a communication protocol between banks that made large cross-border payments possible.

The progress toward digital banking continued into the 1980s with the development of bank mainframe computers, and online banking. Digital banking really began to take center stage in the 1990s with consumers embracing the convenience it offered. The launch of PayPal 1998 pointed to the greater trend toward online payment systems.

2008-2015: The financial crisis ushered in a new era marked by changes in financial regulations and heightened adoption of mobile devices, both of which helped set the stage for start-ups using financial technologies like cryptocurrencies and blockchain. It was in these years that fintech began to have a larger influence on banking and the ability to use digital technology to connect disparate financial systems. Banking as a Service (BaaS) platforms enabled financial institutions to replace legacy systems with digital solutions that improved the customer experience.

What’s the future of fintech?

While fintech continues to expand opportunities for both consumers and businesses, it also faces security and regulatory challenges. In the highly regulated financial services industry, government entities are grappling with the most effective way to safeguard fintech transactions without hindering their effectiveness.

The financial services industry is historically risk-adverse, and problems arise when fintech moves too quickly. With fintech touching a broad range of offerings and industries, formulating a unified, comprehensive approach to deal with security, regulation and risk is challenging. We expect the response in all these areas will continue to evolve as fintech advances as a dominant force in financial services offerings.

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