Enhancing Financial Services and Everyday Life

What Is Financial Technology (Fintech)?

Financial technology, commonly known as fintech, revolutionizes how financial services are delivered and consumed. At its essence, fintech helps businesses, entrepreneurs, and consumers efficiently manage their financial activities, leveraging cutting-edge software and algorithms accessible via computers and smartphones. Initially focused on backend technology for financial institutions in the early 21st century, fintech has since expanded into consumer-centric services. Today, it spans diverse sectors, including retail banking, education, investment management, nonprofits, and the burgeoning cryptocurrency market. This transition highlights fintech’s versatility and its profound impact on both traditional financial systems and everyday financial engagements.

Fintech also includes the development and use of cryptocurrencies, such as Bitcoin. Although cryptocurrencies often grab the headlines, most of the money is still in the traditional banking industry with its multitrillion-dollar market value.

Navigating the Basics of Fintech

Broadly, the term “financial technology” can apply to any innovation in how people transact business, from the invention of digital money to double-entry bookkeeping. Since the internet revolution, financial technology has grown explosively.

You probably use fintech daily, like transferring money between accounts on your phone, sending money via Venmo, or managing investments through an online broker. According to EY’s 2019 Global FinTech Adoption Index, two-thirds of consumers utilize at least two or more fintech services, and those consumers are increasingly aware of fintech as a part of their daily lives.

Real-World Applications of Fintech

Popular and well-funded fintech startups aim to disrupt traditional financial providers by being more agile, serving underserved populations, or offering faster and better services.

For example, financial company Affirm seeks to cut credit card companies out of the online shopping process by offering a way for consumers to secure immediate, short-term loans for purchases. While rates can be high, Affirm claims to offer a way for consumers with poor or no credit a way to secure credit and build their credit history.

Similarly, Better Mortgage seeks to streamline the home mortgage process with a digital-only offering that can reward users with a verified pre-approval letter within 24 hours of applying. GreenSky seeks to link home improvement borrowers with banks by helping consumers avoid lenders and save on interest by offering zero-interest promotional periods.

For consumers with poor or no credit, Tala offers consumers in the developing world microloans by doing a deep data dig on their smartphones for their transaction history and seemingly unrelated things, such as what mobile games they play. Tala seeks to give such consumers better options than local banks, unregulated lenders, and other microfinance institutions.

If you’ve ever found a financial task unpleasant, like applying for a mortgage, fintech likely offers or is developing a better solution. 

The Growing Influence of Fintech Across Industries

Fintech breaks down financial services into simpler, individual offerings, making transactions more efficient and reducing costs.

If one word can describe how many fintech innovations have affected traditional trading, banking, financial advice, and products, it’s “disruption”—a word you have likely heard in commonplace conversations or the media. Financial products and services that were once the realm of branches, salespeople, and desktops are now more commonly found on mobile devices.

For example, the mobile-only stock trading app Robinhood charges no fees for trades, and peer-to-peer (P2P) lending sites like Prosper Marketplace, LendingClub, and OnDeck promise to reduce rates by opening up competition for loans to broad market forces. Business loan providers such as Kabbage, Lendio, Accion, and Funding Circle (among others) offer startup and established businesses easy, fast platforms to secure working capital. Oscar, an online insurance startup, received $165 million in funding in March 2018. Such significant funding rounds are not unusual and occur globally for fintech startups.

This shift to a digital-first mindset has pushed several traditional institutions to invest heavily in similar products. For example, investment bank Goldman Sachs launched consumer lending platform Marcus in 2016 in an effort to enter the fintech space.

That said, many tech-savvy industry watchers warn that keeping apace of fintech-inspired innovations requires more than just ramped-up tech spending. Rather, competing with lighter-on-their-feet startups requires a significant change in thinking, processes, decision making, and even overall corporate structure.

How Emerging Technologies Empower Fintech

New technologies, such as machine learning/artificial intelligence (AI), predictive behavioral analytics, and data-driven marketing, will take the guesswork and habit out of financial decisions. “Learning” apps will not only learn the habits of users but also engage users in learning games to make their automatic, unconscious spending and saving decisions better.

Fintech is also a keen adapter of automated customer service technology, utilizing chatbots and AI interfaces to assist customers with basic tasks and keep down staffing costs. Fintech is also being leveraged to fight fraud by leveraging information about payment history to flag transactions that are outside the norm.

The Fintech Ecosystem: Overview and Insights

Since the mid-2010s, fintech has exploded, with startups receiving billions in venture funding (some of which have become unicorns) and incumbent financial firms either snatching up new ventures or building out their own fintech offerings.

North America still produces most of the fintech startups, with Asia a relatively close second, followed by Europe. Some of the most active areas of fintech innovation include or revolve around the following areas (among others):

• Cryptocurrency (Bitcoin, Ethereum, etc.), digital tokens (e.g., non-fungible tokens, or NFTs), and digital cash. These often rely on blockchain technology, which is a distributed ledger technology (DLT) that maintains records on a network of computers but has no central ledger. Blockchain also allows for so-called smart contracts, which utilize code to automatically execute contracts between parties such as buyers and sellers.
• Open banking, which is a concept that proposes that all people should have access to bank data to build applications that create a connected network of financial institutions and third-party providers. An example is the all-in-one money management tool Mint.
• Insurtech, which seeks to use technology to simplify and streamline the insurance industry.
• Regtech, which seeks to help financial service firms meet industry compliance rules, especially those covering Anti-Money Laundering and Know Your Customer protocols that fight fraud.
• Robo-advisors, such as Betterment, utilize algorithms to automate investment advice to lower its cost and increase accessibility. This is one of the most common areas where fintech is known and used.
• Unbanked/underbanked services that seek to serve disadvantaged or low-income individuals who are ignored or underserved by traditional banks or mainstream financial services companies. These applications promote financial inclusion.
• Cybersecurity. Given the proliferation of cybercrime and the decentralized storage of data, cybersecurity and fintech are intertwined.
• AI chatbots, which rose to popularity in 2022, are another example of fintech’s rising presence in day-to-day usage.

Who Benefits from Fintech? A Look at Key Users

There are four broad categories of users for fintech:

Trends toward mobile banking, increased information, data, more accurate analytics, and decentralization of access will create opportunities for all four groups to interact in unprecedented ways.

As for consumers, the younger you are, the more likely it will be that you are aware of and can accurately describe what fintech is. Consumer-oriented fintech is mostly targeted toward Gen Z and millennials, given the huge size and rising earning potential of these generations.

When it comes to businesses, before the adoption of fintech, a business owner or startup would have gone to a bank to secure financing or startup capital. If they intended to accept credit card payments, they would have to establish a relationship with a credit provider and even install infrastructure, such as a landline-connected card reader. Now, with mobile technology, those hurdles are a thing of the past.

Navigating the Regulatory Landscape in Fintech

Financial services are heavily regulated, so regulation is a major concern for governments as fintech grows.

According to the U.S. Department of the Treasury, while fintech firms create new opportunities and capabilities for companies and consumers, they are also creating new risks to be aware of. “Data privacy and regulatory arbitrage” are the main concerns noted by the Treasury. In its most recent report in November 2022, the Treasury called for enhanced oversight of consumer financial activities, specifically when it comes to nonbank firms.

Regulation is also a problem in the emerging world of cryptocurrencies. Initial coin offerings (ICOs) are a form of fundraising that allows startups to raise capital directly from lay investors. In most countries, they are unregulated and have become fertile ground for scams and frauds. Regulatory uncertainty for ICOs has also allowed entrepreneurs to slip security tokens disguised as utility tokens past the U.S. Securities and Exchange Commission (SEC) to avoid fees and compliance costs.

Because of the diversity of offerings in fintech and the disparate industries it touches, it is difficult to formulate a single and comprehensive approach to these problems. For the most part, governments have used existing regulations and, in some cases, customized them to regulate fintech.