The Big Q: What is Fintech?
The Big A: Fintech is the new applications, processes, products, or business models in the financial services industry, composed of 1 or more complementary financial services and provided as an end-to-end process via the Internet.
Financial technology (Fintech) is used to describe new tech that seeks to improve and automate the delivery and use of financial services.
At its core, fintech is utilized to help companies, business owners and consumers better manage their financial operations, processes, and lives by utilizing specialized software and algorithms that are used on computers and, increasingly, smartphones.
Fintech, the word, is a combination of “financial technology“.
When fintech emerged in the 21st Century, the term was initially applied to the technology employed at the back-end systems of established financial institutions.
Since then there has been a shift to more consumer-oriented services and therefore a more consumer-oriented definition.
Fintech now includes different sectors and industries such as education, retail banking, fundraising and nonprofit, and investment management just to name a few.
Fintech also includes the development and use of crypto-currencies such as Bitcoin. That segment of fintech may garner the most headlines, but the big money lies in the traditional global banking industry and its multi-trillion-dollar market cap.
The term “financial technology” applies to any innovation in how people transact business, from the invention of digital money to double-entry bookkeeping.
Since the Internet revolution and the mobile internet/smartphone revolution financial technology has grown explosively, and fintech, which originally referred to computer technology applied to the back office of banks or trading firms, now describes a broad variety of technological interventions into personal and commercial finance.
Fintech now describes a variety of financial activities, such as money transfers, depositing a check with your smartphone, bypassing a bank branch to apply for credit, raising money for a business startup, or managing your investments, generally without the assistance of a person.
According to EY’s 2017 Fintech Adoption Index, then 33% of consumers utilize at least 1 or more fintech services and those consumers are also increasingly aware of fintech as a part of their daily lives.
The Key Takeaways
- Fintech refers to the integration of technology into offerings by financial services companies in order to improve their use and delivery to consumers.
- It primarily works by unbundling offerings by such firms and creating new markets for them. Startups disrupt incumbents in the finance industry by expanding financial inclusion and using technology to cut down on operational costs.
- Fintech funding is on the rise, but regulatory problems abound.
Fintech in Practice
The most talked-about, and most funded fintech startups share the same characteristic: they are designed to be a threat to, challenge, and take the place of entrenched traditional financial services providers by being nimble, serving an underserved segment or providing faster and/or better service.
For example, Affirm seeks to cut credit card companies out of the online shopping process by offering a way for consumers to secure immediate, short-term loans for purchases. While rates can be high, Affirm claims to offer a way for consumers with poor or no credit a way to both secure credits and also build their credit histories.
Similarly, Better Mortgage seeks to streamline the home mortgage process and do away with traditional mortgage brokers with a digital-only offering that can reward users with a verified pre-approval letter within 24 hrs or applying.
GreenSky seeks to link home improvement borrowers with banks by helping consumers avoid entrenched lenders and save on interest by offering Zero-interest promotional periods.
For consumers with no or poor credit, Tala offers consumers in the developing world microloans by doing a deep data dig on their smartphones for their transaction history and seemingly unrelated things, such as what mobile games they play. Tala seeks to give such consumers better options than local banks, unregulated lenders and other microfinance institutions.
Fintech seeks to answer questions like, “Why is what makes up my FICO score so mysterious and how it is used to judge my creditworthiness?”
As such, loan originator Upstart wants to make FICO obsolete by using different data sets to determine creditworthiness. They include employment history, education, and whether a would-be borrower knows their credit score to decide on whether to underwrite and how to price loans.
Similar treatment is given to financial services that range from bridge loans for house flippers, to a digital investment platform that addresses the fact that women live longer and have unique savings requirements, tend to earn less than men and have different salary curves that can leave less time for savings to grow.
Fintech is Expanding
Up until now, financial services institutions offered a variety of services under 1 umbrella. The scope of these services encompassed a broad range from traditional banking activities to mortgage and trading services.
In its basic form, Fintech un-bundles these services into individual offerings. The combination of streamlined offerings with technology enables fintech companies to be more efficient and cut down on costs associated with each transaction.
If 1 word can describe how many fintech innovations have affected traditional trading, banking, financial advice, and products, it’s ‘disruption,’ like financial products and services that were once the realm of branches, salesmen and desktops move toward mobile devices or simply democratize away from large, entrenched institutions.
For example, the mobile-only stock trading app Robinhood charges no fees for trades, and peer-to-peer lending sites like Prosper Marketplace, Lending Club and OnDeck promise to reduce rates by opening up competition for loans to broad market forces.
Newly minted business loan providers offer startup and established businesses easy, fast platforms to secure working capital.
Oscar, an online insurance startup, received $165-M in funding in March 2018.
Such significant funding rounds are not unusual and occur globally for fintech startups.
Traditional banks and investment bank are paying attention and have invested heavily into becoming more like the companies that seek to disrupt them.
For example, investment bank Goldman Sachs launched consumer lending platform Marcus in Y 2016 and have expanded its operations abroad.
That said, many tech-savvy industry watchers warn that keeping apace of fintech-inspired innovations requires more than just ramped up tech spend.
Rather, competing with lighter-on-their-feet startups requires a significant change in thinking, processes, decision-making, and even overall corporate structure.
Fintech and New Tech
New technologies, like machine learning/artificial intelligence, predictive behavioral analytics, and data-driven marketing, will take the guesswork and habit out of financial decisions.
“Learning” apps will not only learn the habits of users, often hidden to themselves, but will engage users in learning games to make their automatic, unconscious spending and saving decisions better.
Also, Fintech is a keen adaptor of automated customer service technology, utilizing chatbots to and AI interfaces to assist customers with basic task and also keep down staffing costs.
And Fintech is also being leveraged to fight fraud by leveraging information about payment history to flag transactions that are outside the norm.
There were 39 VC-backed fintech unicorns worth $147.37-B by the end of Y 2018.
North America has produced most of the fintech startups, with Asia a relatively close 2nd.
Global fintech funding hit new highs with US 1st in Y 2018. Asia, saw a spike in activity. Funding activity in Europe was much less.
Some of the most active areas of fintech innovation include or revolve around the following areas:
- Cryptocurrency and digital cash.
- Blockchain technology, a distributed ledger technology (DLT) that maintain records on a network of computers, but has no central ledger.
- Smart contracts, which utilize computer programs (often utilizing the blockchain) to automatically execute contracts between buyers and sellers.
- Open banking, a concept that leans on the blockchain and posits that 3rd-parties should have access to bank data to build applications that create a connected network of financial institutions and 3rd-party providers.
- Insurtech, which seeks to use technology to simplify and streamline the insurance industry.
- Regtech, which seeks to help financial service firms meet industry compliance rules, especially those covering Anti-Money Laundering and Know Your Customer protocols which fight fraud.
- Robo-advisors 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.
- Cybersecurity, given the proliferation of cybercrime and the decentralized storage of data, cybersecurity and fintech are intertwined.
There are 4 broad categories of users for fintech:
- B2B for banks
- their business clients
- B2C for small businesses
Trends toward mobile banking, increased information, data, and more accurate analytics and decentralization of access will create opportunities for all 4 groups to interact in 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, rising earning and inheritance potential of that 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 capita. Now, with mobile technology, those hurdles are a thing of the past,” Shayne Heffernan, PhD, founder Heffernan Capital Management aka HeffCap
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 keen ability 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 players 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.
Because of the diversity of offerings in fintech and the disparate industries it touches, it is difficult to formulate a single and comprehensive approach to these problems. For the most part, governments have used existing regulations and, in some cases, customized them to regulate fintech.
They have established fintech sections to evaluate the implications of technology in the sector.
The passing of General Data Protection Regulation, 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 SKorea, have also taken the lead in developing regulations for such offerings to protect investors.
Paga: Paga is a mobile payment platform that allows its users to transfer money and make payments through their mobile devices.
Robo-Advisor Robo-advisors are digital platforms that provide automated, algorithm-driven financial planning services with little to no human supervision.
M-Pesa:M-Pesa is a mobile banking service that allows users to store and transfer money through their mobile phones.
RegTech: RegTech is the management of regulatory monitoring, reporting, and compliance within the financial industry through technology.
Digital Transaction:A digital transaction is a seamless system involving 1 or more participants, where transactions are effected without the need for cash.
B2B Robo-Advisor: A B2B robo-advisor is a digital automated portfolio management platform used by financial advisors.
Have a terrific week.