Financial technology (Fintech): its applications and impact on our lives (2024)

What is financial technology (Fintech)?

Financial technology (commonly known as fintech) is used to describe new technology that aims to improve and automate the delivery and use of financial services. At its core, fintech is used to better help companies, entrepreneurs and consumersmanage their financial activities, processes and life. It is composed of specialized software and algorithms used on computers and smartphones. Fintech, the word, is a shortened combination of 'financial technology'.

When fintech emerged in the 21st century, the term was originally applied to the technology used in the backend systems of established financial institutions, such as banks. From approximately 2018 to 2022, there was a shift towards consumer-oriented services. Fintech now encompasses several sectors and industries, such as education, retail banking, fundraising, and non-profit and investment management, to name a few.

Fintech also includes the development and use of cryptocurrencies, such asBitcoin. While that segment of fintech may grab most of the headlines, the big money is still in the traditional global banking sector and its billions of dollars.market value.

Understand Fintech

Broadly speaking, the term “financial technology” can apply to any innovation in the way people do business, from the invention of digital money to double-entry bookkeeping. Since the Internet revolution, financial technology has grown explosively.

You probably use some element of fintech every day. Some examples include transferring money from your debit account to your checking account via your iPhone, sending money to a friend via Venmo, or managing investments through an online broker. According to EY's Global FinTech Adoption Index 2019, two-thirds of consumers use at least two or more fintech services, and these consumers are increasingly aware of fintech as part of their daily lives.

Fintech practice

The most talked about (and most funded) fintech startups share the same characteristics: they are designed to challenge and ultimately take over traditional financial services firms by being more agile and serving an underserved segment of the population, orprovide faster or better service.

For example, financial mattersTo confirmlook to cutcredit card companiesout of the online shopping process by offering consumers a way to obtain immediate, short-term loans for purchases. Although prices may be high, Affirm claims to offer consumers with poor or no credit a way to secure credit and build their credit.credit history.

EquivalentBetter mortgagesaims to streamline the home loan process with a digital-only offering that can reward users with a verified pre-approval letter within 24 hours of application. GreenSkyseeks will connect home improvement borrowers with banks by helping consumers avoid lenders and save on interest by offering promotional periods without interest.

For consumers with little or nonecreditTala offers microloans to consumers in the developing world by conducting deep data mining on their smartphones for their transaction history and seemingly unrelated things, such as which mobile games they play. Tala seeks to provide such consumers with better options than local banks, unregulated lenders and othersmicrofinancieringinstitutions.

In short, if you've ever wondered why a certain aspect of your financial life was so uncomfortable (like applying for a mortgage with a traditional lender) or felt like it didn't quite fit, fintech probably has (or is planning to do this) a solution for you.

Fintech's expanding horizons

Essentially, fintech breaks down financial services into individual offerings that are often easier to use. Combining streamlined offerings with technology allows fintech companies to operate more efficiently and reduce the costs associated with each transaction.

If one word can describe how much fintech innovations have impacted traditional commerce, banking, financial advice and products, it is “disruption” – a word you have probably heard in mainstream discussions or in the media. Financial products and services that were once the domain of departments, salespeople and desktops are now more commonly found on mobile devices.

For example, the mobile-only stock trading appRobin Hoodnot charge fees for transactions,Inpeer-to-peer (P2P) lendingsites like Prosper Marketplace, LendingClub, and OnDeck promise to lower rates by opening up lending competition to broad market forces. Business loan providers such as Kabbage, Lendio, Accion, and Funding Circle, among others, offer startups and established businesses simple, fast platforms to secure working capital. Oscar, an online insurance startup, received $165 million in funding in March 2018.Such significant funding rounds are not unusual and are happening worldwide for fintech startups.

This shift to a “digital first” mentality has prompted more traditional institutions to invest heavily in similar products. For example, investment bank Goldman Sachs launched consumer lending platform Marcus in 2016 in an effort to enter the fintech space.

That said, many tech-savvy industry observers warn that keeping up with fintech-inspired innovations will require more than just increased technology spending. Instead, competing with lighter startups requires a significant change in mindset, processes and decisions. production and even the overall corporate structure.

Fintech and new technologies

New technologies, such asmachine learning/artificial intelligence (AI), predictive behavioral analytics and data-driven marketing will take the guesswork and habit out of financial decisions. 'Learning' apps not only learn users' habits, but also engage users in learning games to improve their automatic, subconscious spending and saving decisions.

Fintech is also an enthusiastic adapter of automated customer service technology, using chatbots and AI interfaces to help customers with basic tasks and keep staff costs down. Fintechs are also being used to combat fraud by using payment history information to flag transactions that fall outside the norm.

Fintech landscape

Since the mid-2010s, fintech has exploded, with startups receiving billions in fundingrisk financing(some of which have becomeunicorns) and established financial companies entering new ventures or building out their own fintech offerings.

North America continues to produce the most fintech startups, with Asia a relatively close second, followed by Europe. Some of the most active areas of fintech innovation include (among others):

• Cryptocurrency(Bitcoin, Ethereum, etc.), digital tokens (e.g.non-fungible tokens or NFTs), and digital cash. These often depend onblockchaintechnology, a distributed ledger technology (DLT) that maintains data on a network of computers but has no central ledger. Blockchain also makes so-calledsmart contracts, which uses code to automatically execute contracts between parties such as buyers and sellers.
• Open bank, a concept that proposes that all people should have access to banking 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 toolMunt.
• Insurtech, which aims to use technology to simplify and streamline the insurance industry.
• Regtech, which aims to help financial services providers meet industry compliance regulations, particularly those related to money laundering and Know Your Customer anti-fraud protocols.
• Robo-advisors, asImprovement, using algorithms to automate investment advice to reduce costs and increase accessibility. This is one of the most common areas where fintech is known and used.
• Unbanked or underbanked services that aim to serve disadvantaged or low-income individuals who are ignored or underserved by traditional banks or mainstream financial services providers. Promote these applicationsfinancial inclusion.
• Cybersecurity. Given the prevalence of cybercrime and decentralized data storage, cybersecurity and fintech are intertwined.
• AI-chatbots, which became popular in 2022, is another example of fintech's increasing presence in everyday use.

Fintech users

There are four broad categories of users for fintech:

• Business-to-business (B2B)for banker
• Customers at B2B banks
• Business-to-consumer (B2C)for small businesses
• Consumers

Trends toward mobile banking, more information, data, more accurate analytics, and decentralization of access will create opportunities for all four groups to interact with each other in unprecedented ways.

In consumer terms, the younger you are, the more likely you are to be aware of and accurately describe what fintech is. Consumer-focused fintech is primarily aimed at Gen Z and millennials, given the sheer size and increasing earning potential of these generations.

When it comes to businesses, before adopting fintech, a business owner or startup would have gone to a bank to secure financing or seed capital. If they wanted to accept credit card payments, they would have to build a relationship with a credit provider and even install infrastructure such as a landline card reader. With mobile technology, these obstacles are now a thing of the past.

Regulation a Fintech

Financial services are among the most heavily regulated industries in the world. As such, regulation has emerged as the top concern among governments as fintech companies take off.

According to the USMinistry of FinanceWhile fintech companies create new opportunities and possibilities for businesses and consumers, they also create new risks that we need to be aware of. “Data protection and regulatory arbitrage” are the main concerns of the Ministry of Finance. In its latest report in November 2022, the Ministry of Finance called for greater supervision of consumers' financial activities, especially when it comes to non-banks.

Regulation is also an issue in the new world of cryptocurrencies.Initial Coin Offerings (ICOs)is a form of fundraising that allows startups to raise capital directly from lay investors. In most countries they are unregulated and have become a fertile ground for fraud and fraud. Uncertainty over regulations for ICOs has also allowed entrepreneurs to smuggle security tokens disguised as utility tokens past the US.Securities and Exchange Commission (SEC)to avoid fees and compliance costs.

Due to the diversity of fintech offerings and the different sectors involved, it is difficult to formulate a single, comprehensive approach to these issues. For the most part, governments have used and in some cases adapted existing rules to regulate fintech.