What is Financial Technology (FinTech)? A Beginner’s Guide
I write about fintech, data, and everything around it
If you ever used Stripe or Square to make cross-border transactions, used Robinhood to trade cryptos or stocks or used iCapital to automate your private fund operations, then you have leveraged the power of FinTech in your personal and professional life.
A source reports that 3 out of 4 people are using FinTech on a day-to-day basis to manage their finance process, which signifies that people use Fintech more than they use social media.
As with emerging technologies, the FinTech industry is reshaping the way people are managing their finances. People can not only deposit or withdraw their money, but they can do a lot more with it.
If you are wondering precisely what fintech is, and how disruptive technologies have reformed the financial world, keep reading on this blog to discover the answers.
What is Financial Technology (Fintech)?
Fintech meaning
“Fintech, the acronym for Financial Technology, is the innovative use of technology in the design and delivery of financial services. The term Fintech includes a huge range of products, technologies, and business models that are changing the financial services industry.”
This includes everything from cashless payments, crowdfunding platforms, and robo-advisors to virtual currencies – to name a few.
So, every time you or your customer transfers money to someone’s Kickstarter campaign or to your friend’s account using Google Pay or Apple Pay or Venmo – that’s Fintech. And that’s just one example of Fintech.
Similarly, hundreds of companies disrupt the banking and finance industry by changing the way customers pay and borrow money through software or innovative technology.
Evolution of Fintech
Historically, as technology evolved, the banking and financial services industry was reasonably good at integrating those new technologies in order to serve customers better.
But all this changed during the financial crisis of 2008. Back then, banks started dealing with the numerous rules, regulatory requirements, and fines imposed on them. And innovation became a far-distant priority.
But at the same time, some of the most game-changing technological innovations have transformed the way we live and become a part of our lives. For example, think about WhatsApp, Facebook, or Uber.
This innovation change led to a gap between what the banks offered to their customers with respect to convenience & overall experience.
And this gap is where the Fintech startups are filling in and disrupting the overall banking & financial services landscape.
Before proceeding any further on why these new fintech models are better, let us understand more about the fintech landscape, segmentation by customers, and finally, the tech trends for 2023 & beyond.
How do fintech companies work?
Any company that fuses disruptive technologies such as blockchain, Artificial Intelligence, Robotic Process Automation (RPA), etc., to create innovative solutions for various aspects of the financial industry is referred to as a Fintech company. Their major goal is to improve cyber security and to make finance accessible to the broader public.
The roles of fintech companies vary based on their specific focus and the services it offers. For instance, investment apps like Robinhood make it easier and more convenient for users to buy and sell stocks, ETFs and cryptocurrencies with just a single tap from their mobile devices. With the launch of peer-to-peer money lending apps such as Upstart and LendingClub, loaning money from a selection of individuals is made easier for small business owners.
Fintech is a wide horizon covering different use cases. They are grouped into four broad categories; Business-to-Business (B2B) for banks, clients of B2B banks, Business-to-Consumers (B2C) for micro and small businesses and general consumers. Listed down are some examples of types of fintech companies that are reshaping the financial industry.
1.Fintech banks
Fintech banks, also known as digital banks, operate primarily online or through mobile apps by leveraging the latest technologies. Fintech banks aim to provide a more streamlined, customer-centric, and technologically advanced banking experience compared to traditional brick-and-mortar banks. Stripe, PayPal, Square, Robinhood, and Coinbase are a few noteworthy examples of fintech banks.
2. Insurtech
Insurtech is nothing but a combo of insurance and technology where insurance companies use technology to innovate and improve their processes. With the help of AI, Predictive analytics, chatbots and drones, insurtech companies can gather and analyze user data and make comprehensive decisions in their business. Unlike traditional insurance companies, Insurtech companies allow users to access their coverage details at a single tap of their mobile button.
3. Mobile Banking and Neo Banks
We are all everyday users of Apple Pay, Google Pay, Venmo, PayPal and other such forms of mobile payments. Believe it or not, with the growing popularity of mobile payments, cash is definitely losing its shine. With the growing demands of customers to access their bank accounts and transactions without any hassles, conventional banks have metamorphosed into digital banks.
Mobile banking involves using a mobile device for traditional banking tasks like checking balances and making transactions, while neo-banking refers to digital-only banks, with no physical branches, that offer modern financial services through apps and online platforms.
4. Payment and Remittance
Companies in this category facilitate electronic payments, money transfers, and remittances. This includes mobile payment apps, digital wallets, and platforms that enable cross-border money transfers.
5. RegTech
Regulatory technology (Regtech) companies develop solutions to help financial institutions comply with regulations and manage regulatory processes more efficiently. This can include tools for anti-money laundering (AML) compliance, know-your-customer (KYC) verification, and fraud detection.
6. WealthTech
WealthTech refers to the use of technology to provide innovative solutions for managing and growing wealth. This includes digital investment platforms, robo-advisors, personalized financial planning tools, tax optimization and advanced analytics.
Top Fintech Companies
Check out some of the most-talked-about fintech startups and companies that are slowly taking over conventional banks with their faster, better and nimble services.
Better Mortgage
Better Mortgage has eliminated the friction in the home mortgage industry. In contrast to the conventional mortgage model, the users get a verified pre-approval letter within a day of submitting their application.
GreenSky
GreenSky is an app that eliminates middlemen and connects home improvement borrowers with banks. The app is a godsend for users who were paying additional costs for middlemen and loan interests.
Affirm
A fintech company, Affirm, aims on expunging credit card companies by offering secure, instant and short-term loans for users, especially for users with poor or zero credit history.
SoLo Funds
SoLo Funds is a peer-to-peer lending platform built to assist consumers resolve short-term cash flow problems. Since it’s a digital-only application, users can accomplish their financial goals without having to resort to conventional financing options.
Bright
The fintech app Bright aims to build financial health for its users by providing interest-free cash prepayments, automated alerts for their transactions, budgeting platforms and a 360-degree view of their financial transactions.
Fintech Growth in Numbers
Even though the industry is shifting towards convenience and superior customer experience using technology, it’s still a long way to go. The Fintech firms are still only getting a slice of the entire banking customers.
The Expert Market Research reports that the global fintech market attained a value of $194.1 billion in 2022 and will grow at a CAGR of 16.8% to reach $492.81 billion by 2028. The digital payment industry is the leading fintech segment in the USA with a value of over $1.2 trillion. The USA will account for more than 62% of the global fintech transaction value.
According to the BCG report, with the USA leading the way with 11,651, there were about 26,393 fintech startups that flourished in 2023.
88% of legacy banking fear that they will lose out their revenues to fintech companies and 82% of companies are already geared up to strike a partnership with startup companies in the next 3-5 years. (Source: Brim. co)
These are signs that the fintech ecosystem is continuing to mature, especially as financial technology becomes more deeply embedded across other sectors of the banking and financial services industry.
Technologies Disrupting Fintech
There are quite a few technologies that have metamorphosed the FinTech landscape in the past decade and blockchain technology is inarguably the most significant one. The distributed, decentralized and immutable digital ledger that underlies the technology and the ability to make and transact cryptocurrencies has taken the fintech world by storm. But emerging technologies may override blockchain technology in the future. Some of the hard-to-miss technologies include:
- Smart Contracts: This technology wipes out paperwork and eases stressed administration with certain program logic.
- Robotic Process Automation (RPA): This technology can take much of mundane and repetitive tasks from humans and allow them to focus on more productive tasks.
- Internet of Things (IoT): Automatic identification, disconnection of unmanaged accounts, and agentless tracking is all an opus of IoT.
- Augmented Reality and Virtual Reality: Voice recognition software, retinal scans, biometric security, and face recognition to authenticate transactions is an example of AR and VR technology.
Bottom Line
With the help of fintech, the way we interact with money and conduct financial business is changing every day and is not going to slow down anytime soon. Fintech will always strive to reimagine traditional banking services and products, with customers being the center of focus.
If you want to stay ahead of the competition and offer a cut-above customer experience, it’s high time you embrace cutting-edge technologies.
Schedule a one-on-one free technical consultation with our battle-tested team to hear what’s brewing hot in the industry.
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