What Is Fintech All About? Why It's the Future of Money

Money makes the world go round, and financial institutions control how fast it spins.

When you think of the financial industry, you likely imagine a room full of mahogany desks with rows of people in suits waiting to deposit their checks. Well, it's not all about glamor anymore.

The financial services sector is built on people’s trust and confidence. The nature of this sector mandates a high level of trust between consumers and the businesses responsible for their financial security.

Unfortunately, this confidence is repeatedly betrayed. The 2008 financial crisis is the prime example of a global breakdown that brought the world to its knees. Not only did people lose their investments and jobs, but governments also lost their citizens' money to keep crisis-ridden businesses capitalized.

As a result, a new generation of technology startups emerged in finance, conceptualized to function with complete trust and transparency. These reformers were mainly tech companies, so they were branded as fintechs. 

Fintechs are agile, asset-light, and disruptive. With offerings such as digital banking platforms and cryptocurrency, fintech startups are enough to overtake and subsequently marginalize existing financial companies.

Fintech provides limitless uses, ranging from mobile banking and insurance to cryptocurrencies and investment programs. Financial firms in developed countries turn to fintech to modernize their business practices, reduce costs, and introduce online solutions for their clients.

Fintech solution providers offer applications that perform various functions for banks and other financial companies. These applications operate through a cloud-based computing platform with a virtual environment to host the system and conduct internet transactions.

To some, fintech sounds futuristic and exciting. For others, it’s just a popular buzzword thrown around a lot without clearly understanding what it actually means. Either way, fintech’s impact on businesses is indisputable. 

Fintech has seen a meteoric rise in the past few years. You can now perform long and tardy financial operations with a click of a button or a swipe of screen. Using products and services like credit card applications and new insurance quotes is now seamless and efficient.

Fintech is transforming conventional institutions such as banks and insurance organizations via technological innovations. Fintech technologies provide potential benefits to organizations,  particularly small and medium-sized enterprises (SMEs) since these technologies are vital to economic development and job creation.

Initially, the term fintech applied to tech banks and other financial entities used in their back-end systems but now focuses on consumers and encompasses all consumer-facing services. Retail banking, education, investment management, fundraising, and non-profit work are common examples of fintech.

Some of the most successful startups are characterized as fintech companies. The funds you Venmoed your friend for Starbucks? That's fintech. The PayPal transfer for your new sneakers or the company stocks you buy via a smartphone app? This is fintech too!

The fintech umbrella includes insurance technology (insurtech), regulatory technology (regtech), financial data APIs, payments, banking, and mobile banking, among other types of technology. Each represents a distinct category of finance-specific technology.

All of these technologies developed due to the explosion of the internet and mobile tech. Even lumbering, highly regulated, and cautious industries such as insurance embrace these innovative and effective fintech solutions.

Financial services institutions usually keep fintech companies at bay. Such companies are considered industry disruptors and potential competitors. However, as tech giants invest in and partner with fintech companies, wisdom and self-interest triumph over caution. This newfound acceptance and promotion of fintech innovations with huge investments will accelerate fintech’s development and implementation throughout the financial services sector.

What is a fintech company?

Fintech companies combine technology (artificial intelligence, blockchain, and data science) in conventional financial sectors to make them better, quicker, and more efficient. These companies make financial services more accessible to a broader public. Although generally identified with startups and new businesses, fintech applies to popular enterprise-level companies as well.

Fintech encompasses different types of businesses, some of which are software firms creating programs to solve various financial problems. Other firms are investment businesses that help companies raise capital, generate loan arrangements, and support economic processes.

Some examples are peer-to-peer lending, share trading, and crowdsourcing platforms. Fintech also includes platforms financing directly to businesses or consumers. Digital wallets are another form of fintech as they use technology to make financial transactions more efficient.

Who needs fintech?

Fintech businesses constantly improve financial services for better accessibility. Companies and individuals benefit from easy-to-use and more easily accessible economic systems that fintech holds together.

Fintech's growth has been gradual due to its largely fragmented, non-integrated products. However, the speed is now increasing tremendously. To maintain this rapid growth, it’s crucial to create alternatives so that all types of fintech users can communicate more easily. Advances in access decentralization, precise analytics, big data, increased information, and mobile banking are critical for fintech’s future adoption.

There are two fintech user groups.

Business (B2B) users

Before the emergence and adoption of fintech, businesses reached out to the bank to handle their financial activities. For credit card payments, it needed a solid connection with a credit card company and the essential infrastructure built. Such burdensome constraints no longer exist.

B2B engagements are now taking place outside of banks. Companies can quickly find and acquire funding and other financial services due to ongoing digital advancements.

Consumer (B2C) users

Fintech provides various B2C applications for individuals. Innovative cash applications allow everyone with a smartphone to effortlessly transfer money and manage their accounts.

In terms of market diffusion, Millennials and Gen X use fintech heavily. This is because they know its numerous advantages over traditional financial products. Because of their expanding purchasing power and segment size, today's consumer-oriented fintech apps primarily aim at these demographic groups.

Why is fintech important?

The financial industry isn't typically associated with agility. Today, however, flexibility and agility are exactly what consumers and company owners expect and demand. Compared to corporate and retail banks, fintech solutions are often cheaper, faster, and more efficient, allowing users to avoid costs associated with traditional banking transactions.

Fintech apps help accelerate tedious processes such as obtaining a credit score report or conducting an international fund transfer. Platforms like TransferWise help perform these activities almost instantly.

Fintech improves financial inclusion. Consumers without personal access to banking or in places where traditional banking infrastructure doesn’t exist can leverage fintech applications for online financial assistance. It’s often safer than conventional banking, which has been infamous for poor cybersecurity.

While many fintech services incorporate both conventional brokers/advisers and algorithms, others help customers navigate and tackle financially challenging activities without ever engaging with an actual person. Furthermore, fintech solutions are no longer one-size-fits-all. Instead, they provide tailored services that satisfy specific financial needs, sometimes at significantly cheaper rates than typical financial service providers.

Fintech is successful mainly because it enables small businesses to compete on the same playing field as established financial firms. Thanks to fintech, it’s no longer about the big beating the small, but the fast beating the slow. It’s about the quickest and most responsive in efficiently meeting ever-changing consumer expectations.

How does fintech work?

Fintech isn’t entirely new. Technology is always a part of the financial sector whether it's the advent of credit cards, automated teller machines (ATMs), electronic trading floors, personal financial services, or high-frequency trading. The nature of financial technology differs from project to project and application to application.

Fintech is inherently disruptive, but not without controversy. This makes it a fascinating and unsettling phenomenon. Financial service providers need to closely monitor consumer demands and technological advances, along with the constant threat of new competition from every corner of the world. Still, fintech takes it to entirely another level.

Fintech now leverages machine learning (ML) algorithms, blockchain, and data science to accomplish everything from processing credit risks to governing hedge funds. Moreover, a subset of regulatory technology known as regtech helps fintech businesses navigate the complex world of compliance and regulatory challenges.

Fintech is a positive paradigm shift in the financial services industry. The new era promises a future in which financial products and services are more accessible, user-friendly, and efficient, making businesses adopt fintech strategies.

Some direct their efforts on bringing financial services to previously underbanked markets. Others focus on using technology to improve customer experience, enable real-time communication between customers and financial institutions, or develop products that offer better value to end-users.

Cybersecurity concerns often develop as fintech grows. With the sudden global rise of fintech companies and marketplaces, cyberattacks and other infrastructural weaknesses are also increasing. Fortunately, this technology is constantly evolving to reduce existing fraud risks and counter new threats.

Evolution of fintech

At the turn of the century, fintech startups started revolutionizing the financial industry, mainly in the payment, loyalty, lending, wealth management, financial planning, and insurance sectors. The credit card industry has come a long way from Diners Club cards to ATMs and credit cards for e-commerce purchases. Point of sale (POS) equipment and card scanners also changed over time.

Although the payment experience changed, traditional payment processing service providers and card providers didn’t pay attention to user experience and innovation. Because of the 2008 financial crisis mentioned above, a significant portion of their assets and efforts focused on compliance obligations.

Meanwhile, businesses like PayPal were already reshaping the financial landscape with a unified payment experience through its e-wallet services. When using e-wallets, consumers need to specify the wallet's credentials while purchasing online. Wallets, in turn, manage details such as personal information, credit card info, and shipment information. 

Several firms immediately adopted wallet services, including retail stores and telecommunications providers. Fintechs significantly revolutionized the payments industry by offering peer-to-peer (P2P) payments through social media.

These firms also successfully reached a sizable portion of the middle-class demographic with low-cost wealth management and consulting services. Large investment banks mainly neglected the middle-class demographic since their cost structures didn’t justify investing below a specific minimum threshold. 

By providing robo-advising services, fintech companies offered middle-class clients the next level of investment. Since most of this demographic can’t watch investment trends, robo-advising such customers helped businesses succeed.

Fintech companies played a key role in enabling investing in social causes through cutting-edge tech like robo-investing. Some fintechs leverage robo-investment strategies to invest in companies involved in social issues that fit investors’ preferences.

Compared to massive, bulky core components typically seen in giant financial institutions, the fintech core systems are significantly simpler to handle. Innovations such as high network speeds, faster computers, mobile devices, Web 2.0, cloud computing, and the internet of things (IoT) further help fintech businesses accelerate the transition. 

Because of these technological disruptions, fintech companies can introduce novel products and engage consumers with simple business procedures. Modern tech helps reduce business costs, all while providing a far better consumer experience.

Word-of-mouth and social media exposure made many fintech startups popular, with high client acceptance. Greater use of financial technology solutions attracted investors, triggering a chain reaction of upheaval in the business. As a result, fintech companies began providing new business models and helped evolve the financial industry.

Increasing network speeds and lower data prices from telecom carriers are essential factors in the success and development of fintech applications. From the debut of 1G networks to today’s 5G networks, network speeds are consistently improving. There’s also a significant drop in the cost of data transmission.

Moreover, telecom providers facilitate the easy transmission of voice over internet protocol (VoIP), internet access, video, and multimedia messages via mobile devices. Mobile phones are a major technological breakthrough fueling fintechs.

Benefits of fintech

Fintech applications offer the B2B space many potential benefits. While some fintech applications are consumer specific (personal finance applications for one) or directly benefit the consumer, most solutions in this space are B2B focused.

• Introduce transparency. One of the major benefits of fintech, especially in blockchain-based fintech and AI-powered regtech, is transparency. Fintech projects generate auditable money trails and help identify fraudulent activity faster than humans. The transparency in these projects catalyzes the evolution of anti-money laundering (AML) and know your customer (KYC) aspects of the industry.
• Improve decision-making. This is one area where fintech helps businesses immensely, given the increasing usage of AI in solutions. Companies can now rely on AI-powered, data-driven insights to shape strategy. These insights help companies make better and informed decisions about where to direct resources and target clients.
• Drive automation. Another primary benefit of fintech is its ability to save time and money. Automation and easy access to fintech platforms drive financial operations through to completion. Providers and users can perform various tasks with increased flexibility. This improves efficiency and throughput while saving time.

Challenges of fintech

Fintech's future is limitless. The fintech sector is still in its infancy, brimming with untapped potential and expanding by the day. But it isn't all roses and butterflies.

Fintech is currently facing significant hurdles, and to secure long-term success, institutions must step up to the plate and solve these issues. Only leaders who address these concerns will pave the way for real transformative development.

• Data security: Data security is a real issue in the digital age, whether in mobile banking, payment applications, or fintech in general. Traditional banking systems rely on security guards, CCTVs, vaults, and massive bulletproof doors to safeguard their data. However, when it comes to virtual security, it’s not as simple. Vulnerabilities are far more subtle and can significantly impact consumers with their money and personal data at stake.
• Compliance: Regulation and compliance have been in the spotlight in recent years, with general laws such as PSD2, which controls payment services, and GDPR, which oversees data usage. Regulations and compliance affect every element of the financial business. As additional global rules are implemented, fintech businesses need to stay compliant – this is critical to vendor and consumer trust.

Fintech uses and examples

Because fintech is such a broad space, many subcategories fall in its purview.  The fintech revolution affected every financial services industry, from insurance and compliance to banking and payments. Fintech seeks to create efficient and effective institutions, provide users with more choices, increase transparency, and cut down on time wasted in financial transactions.

Insurance

Fintech caused such a buzz in the insurance sector that it necessitated creating a different subcategory altogether. This subcategory is insurtech, a combination of insurance and technology. As part of fintech, insurtech now handles everything from vehicle and health to house insurance. The insurance business operates on the premise of risk-sharing among its clients, with the possibility of only a few making claims at a time. As a result, this industry needs to maintain a healthy pool to stay afloat. 

The traditional insurance approach uses actuarial tables to assign each client a risk rating and group customers together to ensure that the policies are lucrative for business. This suggests that some people may end up paying extra based on the level of data used to classify them.

The strict regulations governing the insurance industry held back the development and implementation of insurance-specific applications. However, insurance agencies have now recognized the potential of insurance-specific solutions.

To meet changing customer needs, insurtech startups offer personalized insurance for assets and property. Users can tailor insurance coverage to the various products they want to insure. Individuals and businesses can choose to insure selective valuable items over others not so important in emergencies. 

Another area in which fintech businesses disrupt the industry is aggregating data on various insurance packages and related coverage from different insurance providers.  This makes it much easier for clients to look at the numerous available possibilities and select the insurance products they need. 

Customers can easily apply for or terminate a policy via a website or a mobile app during their trial period with an insurance firm. For example, insurtech provider, Insureon, helps large companies and startups offer personalized policies for small and medium-sized businesses to cover their unique needs.

Some fintechs are challenging the health insurance business with end-to-end assistance, including primary care while connecting individuals to hospitals in an emergency. Insurtech is ushering in the new age of collaborative insurance through P2P and on-demand insurance.

Regulation

Regulatory technology (regtech) helps financial institutions meet financial compliance regulations. Regtech is becoming quite popular, partly due to the recent adoption of disruptive fintech products. Regtech businesses use cloud computing through SaaS to help financial institutions efficiently and cost-effectively comply with financial regulations.

Regtech focuses on automating compliance rules or processes for financial institutions, particularly those involving AML and KYC requirements, to combat fraud. It enables the rapid and cost-effective handling of vast data, including transaction data or records and compliance papers such as corporate tax filings.

Regtech delegates the risk to an institution's legal department with data on online money laundering operations. This includes more about the underground markets and activities that a traditional compliance team may not be aware of. Regtech solutions monitor online transactions in real time and uncover faults or abnormalities in digital payments.

Any anomaly is reported to the finance company, which investigates it to determine whether or not a fraudulent activity is taking place. Financial institutions that uncover possible threats to financial security early on help reduce the risks and costs associated with assets lost and data breaches.

For example, New York-based fintech, Chainalysis, leverages blockchain to combat money laundering, fraud, and compliance issues in the cryptocurrency industry. The regtech software providers assist financial companies and cryptocurrency trading platforms with KYC and fraud prevention. In addition, fintech providers also collaborate with major financial institutions and governments to detect and respond to illicit activities.

Banking

Traditional banks were first seen as places for secure investments and various convenient services. But, technological improvements in recent years prompt traditional banks to compete with fintech.

Banking software isn’t new, but it has rapidly developed in recent years, specifically in the web and mobile banking sector. With customers shifting their focus to fiscal viability, many financial companies are implementing or extending their mobile banking capabilities to meet the increased demand for digital banking. Mobile banking allows consumers to conduct all banking activities directly on their mobile devices.

Consumer banking technology, also known as banktech, uses digital infrastructure to provide banking solutions and financial products similar to those accessible at traditional banks. It also provides alternatives to brick-and-mortar banks with digital technology.

Most banks now provide some web and mobile banking functionality on their platforms. Banktech delivers a better user experience, less operational friction, and lower costs compared to conventional banking. It drives financial inclusion for unbanked or underbanked, enabling these users to skip the step of banking with a brick-and-mortar institution.

For example, Chime is a forerunner in mobile banking, offering no-fee and automated savings accounts and early payday using direct deposit.

Lending

Lending is one of the most critical tasks of the money markets and banks. Financial services lenders include investment companies and individual lenders. The lending industry as a whole is divided into two categories: formal lending and informal lending.

In formal lending, the lender and borrower enter into a legal agreement to lend a specific sum for a set period. The borrower guarantees that the original money, including interest, will be returned to the lender after the agreed term.

Informal lending predates formal lending. It often includes low-value transactions, but this type of transaction is executed far more frequently than any other type of lending. P2P lending is another name for this form of lending. 

Informal lending involves lending between friends, relatives, acquaintances, and so on. It also includes loans from quasi-governmental organizations, non-profit groups, and religious institutions.

Following the 2008 financial crisis, established credit and lending institutions faced higher compliance-related loan approval requirements. As a result, their processes became more complicated and time-consuming. As a result,fintechs emerged with disruptive solutions in this market.

The goal of lending technology, also known as lendtech, is to provide financial services to customers through more accurate and efficient processes. Innovative lendtech systems can evaluate and validate identification credentials using AI and ML algorithms for error-free outcomes. Predictive analytics algorithms project income possibilities, assess a borrower's track record, evaluate collateral, and forecast changes in borrower behavior.

Fintech lending is classified into the following categories of financing.

Peer-to-peer (P2P) lending

It involves the transactions made directly between people. For example, Upstart is a fintech startup established by a group of former Google employees. The company uses its underwriting software to identify future prime borrowers based on their education and employment history, even with current sketchy or limited credit.

POS lending

This lending style is common as a formal lending channel in most established economies. It also exists in practically all other markets as informal, ad hoc, and situational lending. POS lending mostly occurs at the merchant’s point of sale, where individuals seek credit to cover their purchases.

Fintechs formalized POS lending to capitalize on possible prospects. Initially, it was PayPal, and then a slew of other businesses, like Affirm, Klarna, and Zest, became prominent in this market.

Online lending (B2B/B2C)

After the 2008 financial crisis, it became challenging for bankers to offer loans. Established banks also fell behind in terms of a compelling digital experience. Fintechs bridged this gap with online workflow and transparent use of proprietary ML algorithms and digital partnerships.

Online lenders provide a list of quotations with the best possible repayment conditions. Their websites also include multiple options of fixed and adjustable interest rates based on the search parameters. Some fintechs, such as Avant, Earnest, Kabbage, and OnDeck, have opted to capitalize on this potential.

Payday lending

Payday lending is an unsecured loan for a small sum of money with a relatively short payback period. The lenders draw the repayment from the individual's future paycheck. People mostly take these loans to cover financial obligations such as car insurance payments.

Besides credit unions, fintechs worldwide are disrupting the payday lending industry with various alternative proposals. EarlySalary, a payday lending startup, is transforming the payday loan industry. EarlySalary is a startup established in India that bridges micro-financing needs with quick loans.

Microfinance

People in most developing countries, including China, India, Brazil, and Bangladesh, cannot easily obtain loans through banking services. Fintech companies in these nations operate as for-profit or non-profit organizations to alleviate poverty. Large banks acknowledge this as a potential economic prospect and are preparing to foray into this marketplace.

Microfinance startups are bringing the unbanked into the financial systems and promoting financial inclusion. Sandah, an Egyptian fintech company, provides microfinance and home financing solutions for the underbanked. Furthermore, the company aims to expand project opportunities, generate career chances for young professionals, and improve the skills of industrial employees.

Crowdfunding

It involves several investors or lenders monetarily contributing to a project’s present or future expenditures. The number of contributions and the desired outcome vary between investor and lender groups in crowdfunding.

Crowdfunding platforms also enable small investors to invest in opportunities otherwise reserved for major investors, such as venture capitalists (VCs) and fund houses. For example, AngelList is a platform for startups to raise money online, recruit and apply to incubators to grow their ventures.

Payment

One of the most complicated areas in the financial world is the payments industry. The largest subcategory in fintech space, payments, simplified various business activities. Numerous participants in the payments sector need to collaborate to make it effective.

Payments solutions aim to shorten transaction times between financial institutions, especially in the international money transfer market, which has been the bane of many entrepreneurs' existence. 

Payment technology or paytech focuses on asset management and the safe and efficient processing of different payment transactions. The development and integration of electronic processing applications and various processing networks merge with consumer-level technologies such as wearables and connected devices to improve digital connection and customer identity protection.

Investments are highest in the payment fintech sector, followed by wealth management. Payment solutions are disrupting fields such as peer-to-peer payments, wallets, and POS solutions. 

Apart from fintech startups directly revolutionizing the payment sector, some other fintechs contribute to the payment business in different ways. Onboarding, know-your-customer (KYC), and loyalty-related products are among the business functions that these fintech companies are challenging.

With payment gateway solutions such as Square, small businesses can now accept credit and debit cards, attracting a whole host of potential customers unwilling to use cash. The multichannel wallet revolution started with the launch of wallet firms such as PayPal. Still, the advancements in mobile technology accelerated the availability of client-side scripting capabilities.

With the release of the first-generation iPhone, the mobile phone industry and other mobile devices changed how people did business. Mobile payments, in particular, are now an important fintech category, opening the door to financial inclusion for everyone.

Fintech POS systems help businesses replicate an online shopping experience. Some POS fintech companies facilitate online e-commerce transactions integrated with payments and comparable iPad solutions for physical brick and mortar establishments. Other suppliers use a Bluetooth-enabled credit card reader at POS terminals, mainly for in-store sales.

Remittance and money transfer

One significant area where fintech has made a profound impact is remittance and money transfer solutions. These tools are crucial for individuals and businesses alike, especially those involved in international transactions.

Traditional methods of sending money across borders were often slow, expensive, and fraught with bureaucracy. However, fintech solutions have revolutionized this process by providing faster, more affordable, and more transparent options.

Companies like TransferWise (now Wise) have made it possible to perform international money transfers almost instantly, with lower fees and better exchange rates than conventional banks.

Blockchain

While blockchain isn’t unique to the financial services industry, it’s slowly getting accepted. Blockchain technology keeps records on a network of computers. All data is housed in a distributed ledger, which ensures the integrity of the data housed in the system by cross-referencing it against all the other ledgers in existence. 

The data structure that holds transactional records on a blockchain contributes to security, transparency, and decentralization. Each transaction is encrypted, and the likelihood of successful cyber-attacks is negligible. 

Blockchain platforms help manage smart contracts, Proof-of-Work, and peer-to-peer transactions. Although this new technology is still in its early development phase, blockchain allows financial organizations to provide more secure, private, and transparent means of tracking the entire life cycle of financial transactions.

Blockchain technology is used in various ways in the financial services industry. For many years, blockchain served as the foundation for cryptocurrency, a type of digital or virtual money that eliminates the need for banknotes or coins. Blockchain-based cryptocurrency platforms like Coinbase enable users to purchase and trade cryptocurrencies such as Bitcoin and Litecoin.

While the regulatory bodies are still instituting solid regulations, blockchain technology, whether public or private, is here to stay. It also introduces the concept of open banking, which argues that third-party suppliers should have access to bank information to develop apps that establish a network of affiliated financial institutions and third-party providers.

Data 

Financial data APIs change the financial services industry’s view of banking and bolster open banking as a viable concept. Open banking refers to banks supporting financial technology startups with client data essential to developing applications for banking clients. 

Data anonymization is the key to the future viability of open banking, as it involves cleansing data of any personal information before it is passed on. This ensures user privacy and allows companies to use these massive datasets to develop innovative solutions that benefit the entire industry. Regulators lead the open banking efforts with laws to promote competition and consumer choice by catalyzing innovation in the sector. 

Financial data APIs are multifaceted tools that can provide value in various ways, including connecting businesses to stock information.

The future of fintech: what could it be?

The next few years look bright for the fintech industry. Advances in artificial intelligence, data handling, and analytics will drive even more innovation in the industry. Open banking practices and an increase in financial data APIs will drive the development of fintech applications even further. Blockchain projects can potentially catalyze rapid evolution in the banking industry and beyond.

The financial services industry has to adapt and lean on technology in both positive and negative economic upheavals. COVID-19 pandemic has underlined the importance of financial institutions with a solid and agile digital infrastructure. Read more about why financial institutions are increasingly adopting fintech in a remote world.