What is Fintech (Financial Technology)?
Fintech is a combination of “finance” and “technology.” Although it’s a blanket term that can mean many different things, it describes the evolution of an industry where new technology use-cases are developed and deployed to streamline more traditional-looking finance functions.
While the general public typically associates fintech with really cutting-edge new concepts like blockchain and algorithmic trading, the term applies to a wide variety of much more “boring” applications. They include but are not limited to everyday banking, insurance, and other back-office risk management functions.
Mobile banking – something that hundreds of millions of people worldwide take entirely for granted – is technology supporting the delivery of traditional banking services (aka fintech). Even your Starbucks app is a form of financial technology in that it facilitates payments and a proprietary rewards program using a mobile device.
Understanding Financial Technology
Fintech is considered by many to be a relatively recent development, which is not entirely accurate. While it has evolved very quickly over the last decade, that’s mainly due to advancements in technology, more generally, which are now being applied to the finance sector.
Financial institutions have sought to streamline service delivery and cut costs by using technology for many decades, including the advent of the first automated teller machine (ATM) as far back as the 1960s. Even credit cards, which predate ATMs, were a revolutionary technological advancement relative to cash and cheques in the payments space.
The technologies that underpin fintech business models vary considerably. They include blockchain technology, artificial intelligence (AI), machine learning, and other significant data functions like robotic processing automation (RPA). Each use case is unique, but the underlying theme is a collective effort to disaggregate the financial services sector, which, historically, has enjoyed a highly protected status due to high levels of regulation.
How are Fintechs Impacting Traditional Financial Services Firms?
Traditional financial services providers (mainly banks and credit unions) serve three core functions:
- They hold money – including deposits and a variety of investment products.
- They lend money – including secured loans (like mortgages) and unsecured loans (like student lines of credit).
- They move money – everything from simple, everyday payments to international money transfers using global networks like SWIFT (Society for Worldwide Interbank Financial Telecommunications).
Cryptocurrencies, for example, have been a significant development in the payments space (moving money). And while there is much debate about whether or not cryptocurrencies are actual currencies, there is no doubt that they can serve as a medium of exchange.
The blockchain technology that underpins the various cryptos exists to decentralise (the historically very centralised) finance sector – bypassing traditional banks, financial institutions, and payment channels – often called the legacy financial system. Defi is itself a recent term and a by-product of the fintech revolution. It’s a combination of the words “decentralised finance.”
Countless other fintechs in the payment space have slowly started chipping away at the legacy financial system, including apps that have become familiar household names like Apple Pay.
Fintech businesses are also disrupting the lending money component of traditional financial services firms. They include new products and services like buy-now-pay-later (BNPL), peer-to-peer lending platforms (P2P), and a variety of fast and highly automated underwriting programs (using AI and RPA-driven algorithms) to drive quick credit decisions and funding for both consumers and businesses – eliminating the friction of borrowing from a traditional financial services firm.
And finally, the financial services industry’s traditional function of holding money is not immune to the fintech revolution. These include virtual banks that hold charters and clear all required regulatory hurdles within their various jurisdictions.
The business of investing has been remarkably transformed, with the democratisation of trading effectively hollowing out the brokerage industry as we know it. They were formerly very high-margin, fee-based businesses, but online discount brokerages have forced many firms to waive their fees altogether to remain competitive.
An entire generation of young consumers engage almost exclusively with robo-advisors and savings apps; they rarely set foot in a physical bank branch.
The fintech revolution has created a variety of essential and growing subcategories. They include the aforementioned “defi,” “insuretech” (insurance technologies), and “regtech” (regulation technology), among others.