WHAT IS FINTECH?
Fintech, a combination of the terms “financial” and “technology,” is the application of new technological advancements to products and services in the financial industry. Our guide will walk you through what fintech is and how it’s used.
What Is Fintech?
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.
Today, the fintech industry is huge. And if recent venture capital investments in fintech startups — 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 newfangled fintech, actively investing in, acquiring or partnering with fintech startups. 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?
Different financial technology products and services have different internal workings. Some of the most recent developments process credit risks, run hedge funds, and more using machine learning algorithms, blockchain, and data science. There is even a whole branch of regulatory technology called regtech that was created to help businesses like, you guessed it, fintech, navigate the complicated world of compliance and regulatory difficulties.
As the fintech sector has expanded, so have worries about cybersecurity. Fintech infrastructure has become more vulnerable and a target for cybercriminals because to the enormous rise of fintech businesses and marketplaces on a global scale. Fortunately, technology is always improving to reduce current fraud risks and neutralize emerging threats.
Traditional banks and financial institutions are now participating in the fintech industry as well, using fintech services for their own objectives, despite the association of the sector with young startups and disruptive technologies. Here are a few examples of how the industry is advancing and changing some aspects of finance.
Types of Fintech Companies
TYPES OF FINTECH STARTUPS AND COMPANIES
- Consumer banking and investing
- Mobile payments
- Insurance tech
- Digital lending and leasing
- Budgeting apps
Mobile Banking and Neobanks
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 mobile devices. 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 Fintech
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.
Payment Fintech
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, the 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 Lending
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 modeling 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 Trends
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
Digital wallets, like Apple Pay and Google Pay, allow 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
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.
