Fintech

What Is Fintech?

“Fintech,” as it is more popularly known, is a term used to describe new technology that aims to enhance and automate the supply of financial services. Fintech is primarily used to assist organisations, people, and consumers in better managing their financial operations, procedures, and lives. On laptops and mobile devices, it consists of specialised software and algorithms. “Fintech” is an abbreviation that stands for “financial technology.”

When the term “fintech” first debuted in the twenty-first century, it was used to describe the technology employed in the backend systems of respected financial firms, such as banks. Between 2018 and 2022, there was a shift towards consumer-oriented services. To name a few, the term “fintech” now applies to a long list of finance-based professions and enterprises, including education, retail banking, charitable fundraising, and investment management.

Fintech also encompasses the creation and application of cryptocurrencies such as Bitcoin. Despite the fact that the fintech industry may grab the majority of headlines, the traditional international banking sector, with its multitrillion-dollar market capitalization, is where the big money is.

How does Fintech apply to Banking?

Fintech applies to a wider range of customers, industries and unbanked business landscapes. Even though digital banking and finance service startups have evolved and developed practical fintech services for everyday banking, many other fintech fields, like personal finance, investing, or payments, have grown in popularity in recent years and rely on technology rather than knowledge and authority like traditional banks do, leaving space for fintech companies to take advantage of the absence of any sort of financial presence.

Understanding Fintech

The term “financial technology” refers to any advancement in how individuals do business, such as the creation of digital money or double-entry bookkeeping. Since the Internet revolution, the development of financial technology has exploded.

Every day, you presumably utilise some component of fintech. Using your iPhone to move dollars from your debit account to your checking account, sending money to a friend via Venmo, or tracking your assets with an online broker are just a few examples. With more than half of financial services consumers using two or more fintech services, customer experience and ease of acquiring services are becoming more prevalent to fintech providers.

What is a Fintech Company?

The most well-known (and well-funded) fintech firms all share one thing in common: by being more agile, catering to underrepresented communities, or delivering faster and/or better service, they want to compete with and ultimately replace existing financial service providers.

For instance, by giving users a way to obtain rapid, short-term loans for purchases, the banking company Affirm seeks to do away with the function of credit card issuers in online shopping. Affirm claims that despite the potentially high interest rates, it offers a means for those with poor or no credit to access credit and build a credit history. Similar to this, Better Mortgage offers a digital-only solution that may give applicants a confirmed pre-approval letter in as little as 24 hours in an effort to expedite the home mortgage application process. By supporting clients in avoiding lenders and saving money on interest, GreenSky intends to link home renovation borrowers with banks through its zero-interest promotional periods.

By carefully studying the data on its clients’ smartphones to look at elements like their transaction history and seemingly unrelated things like the mobile games they play, Tala offers microloans to consumers in the developing world who have terrible credit or no credit. Tala wants to provide these clients with more options than local banks, unregulated lenders, and other microfinance firms.

In conclusion, if you’ve ever wondered why a particular aspect of your financial life was so unpleasant or looked like it wasn’t quite the right fit, fintech probably has (or strives to have) a solution for you. An illustration of this would be submitting a mortgage application to a conventional lender.

Breakdown of the Fintech Industry

In its most basic form, fintech divides financial services into independent products that are typically easier to use. By fusing technology with streamlined goods, fintech companies may increase operational efficiency and lower transaction costs.

The phrase “disruption”—which you have probably heard in everyday discussions or the media—is the best way, to sum up how various fintech technologies have changed traditional trade, banking, financial advising, and product lines. Previously available only through branches, salespeople, and desktop computers, financial products and services are now more frequently found on mobile devices.

Several traditional institutions have increased their investments in comparable products as a result of this shift to a digital-first mindset. In order to get into the fintech business, investment firm Goldman Sachs launched the consumer lending platform Marcus in 2016.

Many tech-savvy industry observers, however, warn that keeping up with the innovations spurred by fintech necessitates more than just increased tech spending. Instead, a significant shift in thinking, processes, decision-making, and even overall corporate structure is needed to compete with lighter-than-their-feet startups.

Technology in Fintech 2023

Financial decisions will become more rational and less based on habit thanks to new technologies like machine learning and artificial intelligence (AI), predictive behavioural analytics, and data-driven marketing. In order to improve users’ instinctive, unconscious purchasing and saving decisions, “learning” applications teach users’ habits in addition to engaging them in educational activities.

In order to help consumers with basic activities and save human expenses, fintech is also a quick adopter of automated customer onboarding technologies. Fintech is also used to prevent fraud by using AML screening, identity verification, biometrics and payment history data to detect transactions that are out of the ordinary.

What is Fintech in Banking ?

Since the midpoint of the last decade, fintech has grown rapidly, with established financial institutions either acquiring new businesses or developing their own fintech products, and startups raising billions of dollars in venture capital (some of which have become unicorns).

The bulk of financial firms are still founded in North America, with Asia coming in second and Europe coming in third. Among the more active fields for fintech innovation are, among others, the following:

Non-fungible tokens (NFTs), digital currency, and cryptocurrencies (such as Bitcoin, Ethereum, and others). These frequently rely on blockchain technology, which is a distributed ledger technology (DLT) that lacks a central ledger and instead keeps records on a network of computers. Another component of the blockchain is smart contracts, which employ code to automatically carry out agreements between parties such as buyers and sellers.
According to the concept of “open banking,” everyone should have access to bank information in order to create apps that connect various financial institutions and third-party service providers.
Insurtechs are also popular in the mobile money space and provide an all-in-one money management application. These use inspiration and technology from fintech to deploy technology to simplify and streamline the insurance market while enabling customers with enhanced KYC onboarding and digital policy access.
Regtech strives to help financial services organisations comply with compliance rules, notably those relevant to anti-money laundering and know your customer fraud prevention.
Robo-advisors like Betterment automate investment advice to reduce costs and increase accessibility. This is one of the most significant contributors to the applications of fintech.
Unbanked/underbanked services are equipped with technology to help low-income or underprivileged persons. These services are aimed at users that are typically ignored or underserved by traditional banks or financial service providers. By creating pathways to connect such users to finance services, these programmes are seen to promote financial inclusion.
Cybersecurity. Because of the growth in cybercrime and decentralised data storage, cybersecurity and finance are intertwined.
The use of AI chatbots in 2022 is yet another example of how finance is becoming more ubiquitous in everyday lives.

Fintech Users and Growth

Users of fintech services are covered under each of these four major categories:

For banks,

Business-to-Business (B2B)
Customers of B2B banks

Small firms,

Business-to-consumer (B2C)
Customer

In terms of customers, the chance of being educated and able to clearly describe fintech grows with age. Gen Z and millennials are the primary target groups for consumer-focused fintech because of their size and growing earning potential.

Before the introduction of fintech, the process of enabling a business owner or startup to access financial services was much more complex and included many traditional and offline processes that were slow and repetitive. It usually included a visit to a bank for financing or startup capital. They would need to establish a contract with a credit provider and even set up infrastructure, such as a landline-connected card reader, if they wanted to take credit card payments. Because of advancements in mobile technology, these obstacles are already a thing of the past. Now, after being quickly verified as a legitimate vendor through PAN or GST Verification API, the financial services can be picked directly on a mobile phone app.

How do fintech companies make money?

Fintechs earn money in a variety of ways, depending on their area of specialisation. Fintechs that were derived directly from banking sectors, for example, may generate revenue by charging fees, charging interest on loans, and selling financial products. Investment apps may take a percentage of assets under management (AUM), charge brokerage fees, or employ payment for order flow (PFOF). Payment apps may impose fees for things like early withdrawals or credit card use, as well as collect interest on cash balances.

What are Fintech Regulations?

As one of the most regulated industries worldwide, financial services are susceptible to a wide array of threat exposure. As a result, as fintech businesses grow, regulation has become the government’s top worry.

Although fintech companies provide new options and capabilities to businesses and consumers, they also introduce new risks. The Authorities governing regulations list “data privacy and regulatory arbitrage” as its two key worries. They urged for more supervision of consumer financial activity to look out for money laundering or terrorist financing. Particularly when it comes to nonbank businesses, financial crime needs to be monitored closely through ongoing transaction monitoring and AI-based risk assessment.

Regulation is another challenge in the burgeoning world of cryptocurrencies. Startups can raise funds from retail investors directly through initial coin offerings (ICOs), a sort of fundraising. They are frequently unregulated, making them a sanctuary for fraud and frauds. Entrepreneurs have also been able to avoid the Securities and Exchange Commission (SEC) by disguising security tokens as utility tokens in order to avoid fees and compliance costs associated with ICOs owing to regulatory concerns.

It is challenging to provide a unified and all-encompassing solution to these issues due to the diversity of fintech’s products and the diverse industries it affects. By focusing on three major challenges, which are compliance, fraud, and onboarding, fintech can adhere to government’s ever-updating regulatory standards to control fintech.

Read our 2023 Fintech Onboarding and Compliance Guide

What are examples of Fintech?

Fintech has been used in several financial fields. Here are a few illustrations.

Robo-advisors are programmes or online platforms that automatically invest your money in the best ways possible, sometimes at a minimal cost, and are accessible to the general public.
It’s simple to purchase and sell stocks, exchange-traded funds (ETFs), and cryptocurrencies from your mobile device, sometimes with little to no commission, thanks to investment applications like Robinhood.
Digital Payment and Wallets such as PayPal, Venmo, Block (Square), Zelle, and Cash App make it uncomplicated to transfer money to individuals or businesses in an instant.
Personal finance applications such as Mint, YNAB, and Quicken Simplifi allow you to access all of your financial information in one place, set budgets, pay bills, and do much more.
Individuals and small company owners can borrow money from a variety of people who provide microloans directly to them through peer-to-peer (P2P) lending platforms like Prosper Marketplace, LendingClub, and Upstart.
You may retain and conduct transactions in cryptocurrencies and digital tokens like Bitcoin and non-fungible tokens (NFTs) via cryptocurrency apps, which include wallets, exchanges, and payment services.
The use of technology especially in the insurance industry is known as insurtech. One example would be the use of gadgets to track your driving and adjust your auto insurance prices.