Fintech, a combination of the terms “financial” and “technology,” refers to businesses that use technology to enhance or automate financial services and processes. The term encompasses a rapidly growing industry that serves the interests of both consumers and businesses in multiple ways. From mobile banking and insurance to cryptocurrency and investment apps, fintech has a seemingly endless array of applications.
Fintech refers to the application of software and hardware to financial services and processes, making them faster, easier to use and more secure. The fintech industry includes everything from payment processing solutions to mobile banking apps.
Today, the fintech industry is huge. And if recent venture capital investments in fintech start ups which reached an all-time high in 2021 can be considered a vote of confidence, the industry will continue to expand for years to come.
One driving factor is that many traditional banks are supporters and adopters of new fangled fintech, actively investing in, acquiring or partnering with fintech start ups. Those are ways for established banking institutions to give digitally minded customers what they want, while also moving the industry forward and staying relevant.
How Does Fintech Work?
The inner workings of financial technology products and services vary. Some of the newest advancements utilize machine learning algorithms, blockchain and data science to do everything from process credit risks to run hedge funds. There’s even an entire subset of regulatory technology dubbed regtech, designed to navigate the complex world of compliance and regulatory issues of industries like you guessed it fintech.
As fintech has grown, so have concerns regarding cybersecurity in the fintech industry. The massive growth of fintech companies and marketplaces on a global scale has led to increased exposure of vulnerabilities in fintech infrastructure while making it a target for cybercriminal attacks. Luckily, technology continues to evolve to minimize existing fraud risks and mitigate threats that continue to emerge.
Though the fintech industry conjures up images of emerging start ups and disruptive technology, traditional banks and financial institutions are in the game now too, adopting fintech services for their own purposes. Here’s a quick look at some examples of how the industry is enhancing and evolving some areas of finance.
TYPES OF FINTECH STARTUPS AND COMPANIES
- Consumer banking and investing
- Mobile payments
- Insurance tech
- Digital lending and leasing
- Budgeting apps
Mobile banking is the central focus of many finance technology companies. In the world of personal finance, consumers have increasingly demanded easy access to their bank accounts, especially on a mobile device. Most major banks now offer some kind of mobile banking feature, especially with the rise of digital-first banks, or neobanks. Neobanks are essentially banks without any physical branch locations, serving customers with checking, savings, payment services and loans on completely mobile and digital infrastructure. Some banks also allow third-party software applications to access a user’s financial information, which is called open banking. Some examples of fintech banks or neobanks are Chime, Current, Aspiration and Varo.
Cryptocurrency and blockchain intersect with fintech in a number of ways. For starters, several crypto trading platforms have emerged in recent years that allow users to trade different kinds of cryptocurrencies and take advantage of decentralized exchanges. And to keep people’s digital currency safe, a number of crypto wallets have sprung up as well. In addition, several fintech companies use blockchain technology for payment processing, money transfer and secure digital identity management. Some examples of cryptocurrency fintech companies include Coinbase, Blockfi and SALT.
Fintech Investment and Savings
Fintech has caused an explosion in the number of investing and savings apps in recent years. More than ever, the barriers to investing are being broken down by companies like Robinhood, Stash and Acorns. While these apps differ in approach, each uses a combination of savings and automated small-dollar investing methods, such as instant round-up deposits on purchases, to introduce consumers to the markets.
Machine Learning and Trading
Being able to predict where markets are headed is the Holy Grail of finance. With billions of dollars to be made, it’s no surprise that machine learning has played an increasingly important role in fintech — and in trading specifically. The power of this AI subset in finance lies in its ability to run massive amounts of data through algorithms designed to spot trends and risks, allowing consumers, companies, banks and additional organizations to have a more informed understanding of investment and purchasing risks earlier on in the process.
Moving money around is something fintech is very good at. The phrase “I’ll Venmo you” or “I’ll CashApp you” is now a replacement for “I’ll pay you later.” These are, of course, go-to mobile payment platforms. Payment companies have changed the way we all do business. It’s easier than ever to send money digitally anywhere in the world. In addition to Venmo and Cash App, popular payment companies include Zelle, Paypal, Stripe and Square.
Fintech is also overhauling credit by streamlining risk assessment, speeding up approval processes and making access easier. Billions of people around the world can now apply for a loan on their mobile devices, and new data points and risk modelling capabilities are expanding credit to underserved populations. Additionally, consumers can request credit reports multiple times a year without dinging their score, making the entire backend of the lending world more transparent for everyone. Within the fintech lending space, some companies worth noting include Tala, Petal and Credit Karma.
Insurtech — Insurance Fintech
While insurtech is quickly becoming its own industry, it still falls under the umbrella of fintech. Insurance is a somewhat slow adopter of technology, and many fintech startups are partnering with traditional insurance companies to help automate processes and expand coverage. From mobile car insurance to wearables for health insurance, the industry is staring down tons of innovation. Some insurtech companies to keep an eye on include Lemonade, Kin and Insurify.
Fintech is not a new industry, it’s just one that has evolved very quickly. Technology has, to some degree, always been part of the financial world whether it’s the introduction of credit cards or ATMs, electronic trading floors, personal finance apps and high-frequency trading in the decades that followed. Over the past decade, though, the fintech industry has seen accelerated growth and fintech innovations are likely to only advance from here.
Some fintech trends to keep an eye on include;
Digital wallets, like Apple Pay and Google Pay, allows people to store their payment information in a mobile app, and then use that app when it comes time to pay for something. While digital wallets have been around for years, their usage is still on the rise.
Blockchain in Fintech
Blockchain — a public ledger capable of recording the ownership, origin and movement of digital assets will continue to impact the financial industry. For starters, the ledger technology and proliferation of smart contracts will greatly help with making the industry more secure and efficient.
Embedded finance is the term for when a non-financial business integrates fintech tools into its point of service. Examples include payment processing terminals at coffee shops and buy-now-pay-later buttons on e-commerce store checkouts. This integrated finance stack makes for a smoother, more-flexible experience for customers and we’re likely to see it more and more in the days ahead.
Serving Traditionally Underserved Populations
The overarching promise of fintech is that technology makes it easier to provide financial services to people who historically have had little or no access to them. Indeed, several fintech companies aim to eliminate long-standing barriers so that people typically younger people and people of color can more easily save, invest and build wealth for themselves.
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