Financial technology is advancing globally to improve and create financial applications with AI/ML-driven, algorithmic digital technology. FinTech significantly expands the types of financial data used. It enables insights, automated decisions, and actions for businesses and consumers.
What is Financial Technology (FinTech)?
Financial technology (FinTech) is the application of advanced, disruptive technologies that simplify, streamline, automate, and expand types of software, mobile apps, and services once available only through traditional banking and financial services. FinTech includes banking and brokerage, payments, credit analysis, insurance, loans, venture capital, RegTech, blockchain, and cryptocurrencies.
Understanding Financial Technology
Financial technology (FinTech) changes ways to digitally access banking and financial services and provides innovative new solutions.
FinTech automates transactions and routine tasks through robotic process automation (RPA) and applies specified rules (algorithms) to make decisions and automatically take actions. FinTech can increase business intelligence and provide consumers with more financial information and choices for decision-making.
Financial technology often uses data science technology (based on artificial intelligence (AI) or machine learning (ML), using structured and unstructured databases that may be referred to as big data.
The introduction of open banking (data sharing with API integration) allows third parties with permission to tap into and use customer banking data and information for new FinTech applications with embedded solutions. Although open banking is regulated in Europe, Hong Kong, and Australia, some countries, including the United States, are experiencing marketing-driven rather than regulatory-driven open banking adoption.
Is FinTech Safe?
It depends.
Some types of FinTech software incorporate adequate cybersecurity and fraud prevention measures to provide a safe user experience. E-wallet apps used for payments don’t allow payments to be recovered once sent and are used to perpetrate scams. Some cryptocurrency FinTech sites have been hacked, or user account information was used to steal significant crypto holdings from owners and exchanges.
New institutional crypto custodians will enter the market to provide a needed solution and mitigate these risks.
Types of FinTech
FinTech is applied in many industries to create new types of financial services, information, transaction processing, and products. Financial technology expands, automates, and simplifies pathways for access, transactions, decision-making, and approval processes.
Types of FinTech include but are not limited to mobile payments, crowdfunding platforms, international money transfers, blockchain and cryptocurrency, consumer banking, insurance, and Robo-advising and stock trading.
Mobile Payments
Mobile payments are a FinTech application. Mobile payments include e-Wallet digital payments and money transfers made through a mobile device (cell phone or tablet). The mobile payments may be peer-to-peer payments like Venmo or Apple Pay using NFC (near field communication technology) in physical stores or online. E-Wallet payments can include immediate account-to-account transfers of money or linked credit cards.
Crowdfunding Platforms
FinTech crowdfunding platforms have transformed equity raising from non-accredited investors and other types of fundraising through platforms like Indiegogo. Indiegogo and Kickstarter crowdfunding platforms are used to raise product funding. Indiegogo raises equity for startups; Kickstarter doesn’t issue equity. GoFundMe was launched to fund persuasive personal need campaigns through crowdfunding.
Regulation Crowdfunding offerings were initiated in the U.S. by the JOBS Act, formally titled Jumpstart our Business Startups Act of 2012. Startups and early-stage small businesses can access capital from a large number of small participants through crowdfunding. “
“Regulation Crowdfunding provides an exemption from the registration requirements for securities-based crowdfunding allowing companies to offer and sell up to $1.07 million of their securities without having to register the offering with the SEC,” according to the U.S. Securities and Exchange Commission.
International Money Transfers
International money transfers have become easier with FinTech applications. International money transfers can either go through a global bank (financial institution) network like SWIFT for international wire transfers or be made through an e-Wallet app that makes immediate transfers between platform user accounts or prepaid debit cards.
Blockchain and Cryptocurrency
Blockchain is a publicly-available, electronic decentralized ledger created using geographically dispersed computers that establish smart contracts and record cryptocurrency and NFT (non-fungible token) transactions. Bitcoin and Ethereum are examples of cryptocurrencies.
Blockchain technology requires validation and authentification as a consensus mechanism. This can be accomplished through proof of work (solving cryptographic mathematical calculations) requiring mining, proof of stake (significant ownership vouching), or proof of authority (reputation-based vouching) to complete a transaction.
Consumer Banking
As an example of widespread FinTech use, FinTech stats show the significant adoption of digital banking. 65.3% of Americans use digital banking in 2022 (Statista), and its usage is gaining. Digital banking includes online and mobile device access that replaces the need for branch banking.
Financial technology (FinTech) is an innovation embraced by the FDIC and globally to improve access to banking by consumers and businesses. FinTech use, through online and mobile banking, including mobile payments and deposits, reduces the number of unbanked consumers. The FDIC noted a shift in digital banking from online banking to mobile banking in its 2019 Survey Report: How America Banks: Household Use of Banking and Financial Services.
Traditional banks have in-house legacy systems, still using archaic programming languages like COBOL. But banks are tapping into FinTech directly or through partnerships with third parties for open banking applications that offer more insight to customers. FinTech consumer applications include snapshots of banking activity, credit rating details, and budgeting and saving tools built into mobile banking apps.
Top banks are also looking for third parties using FinTech solutions to update outdated core banking systems (for businesses and consumers) to modern cloud systems.
Insurance
FinTech insurance (InsurTech) applications include several AI-driven products and processes. Insurance industry FinTech software generates quick machine-driven underwriting decisions using information from online application forms and databases. It quickly handles online policy purchasing and activation and automates claims processing,
Robo-Advising and Stock-Trading
Fintech Robo-advising and stock-trading applications use machine learning and artificial intelligence for providing automated financial advice and wealth management. They apply quant finance algorithms to automatically build and manage an investment portfolio for investors, considering their investing risk profile. Examples of Robo-advisors providing investment management are SoFi, Betterment, and Wealthfront.
Robinhood is a widely-used, no-commission brokerage firm that’s a FinTech provider. Besides stock trading, Robinhood offers options, EFT, and cryptocurrency as investments. Robinhood is known for a meme stock investing event in which it stopped letting investors buy GameStop stock on January 28, 2021, to stay within its regulatory capital requirements limit.
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Examples of FinTech Today
Examples of FinTech today include:
- AP and other automation software relating to
- Accounts payable, finance, and payments
- Loans and insurance
- Blockchain, crypto, and NFT
- RegTech compliance software
- Peer lending.
Automation Companies
Innovative FinTech companies today prioritize automation. The application of FinTech to payments technology by Tipalti and other providers is saving companies substantial time and money through the streamlining and efficiency of FinTech software for accounts payable processing and making global mass payments to suppliers and partners.
FinTech is used to automatically approve credit-worthy customers for business accounts with credit terms, mortgages, other loans, and insurance policies.
Blockchain, Crypto, and NFTs
Cryptocurrencies, crypto exchanges, and Bitcoin ATMs using a blockchain are proliferating. Investment firms ask the SEC for approval of different types of Bitcoin, Ethereum, or other crypto funds with derivatives characteristics.
NFTs (non-fungible tokens) are digitized items like collectible art that provide social capital in keeping up with the Joneses. A high-priced NFT example is the Bored Ape Yacht Club collection on the Ethereum blockchain, priced in the hundreds of thousand dollars, according to NFT stats. Bored Ape Yacht Club is being featured in a Hollywood film trilogy produced by Coinbase, called The Degen Trilogy (beginning June 2022).
“In crypto parlance, a ‘degen’ is a common and often affectionate term used to describe someone who buys coins or NFTs without doing any meaningful research into what they’re actually buying,” according to c|net.
RegTech (Regulation Compliance)
RegTech is a type of FinTech that helps companies comply with government regulations as part of their risk management responsibilities. RegTech may be incorporated in AP automation and payments software to avoid anti-money laundering (AML), OFAC sanctions blacklists, and tax compliance. Or RegTech may be offered as a standalone software product for specific uses like AML compliance management.
Peer Lending
Peer lending or peer-to-peer lending connects borrowers seeking loans and investors with money to loan. Peer lending companies include LendingClub, a lender offering limited amounts of consumer loans (up to $40,000) and business loans (up to $500,000). LendingClub makes its non-traditional FinTech loans through LendingClub Bank, N.A. (member FDIC).
FinTech Trends to Watch For
Trends are emerging in several FinTech areas, including Blockchain-related cryptocurrency and smart contracts, ESG investing, and explosive growth of cross-border payments. Venture capital and private equity firms continue to invest in FinTech startups and growth companies.
Blockchain Smart Contracts Expansion
Blockchain is an increasing FinTech trend not only used for cryptocurrency transactions, like Bitcoin and Ethereum, but also for creating smart contracts. Although smart contracts are used today, they will increase as new adopters become providers and more users enter this space from various industries.
ESG Investing and Financial Solutions
FinTech providing environmental social and governance (ESG) solutions is expected to significantly increase, according to KPMG in Singapore (Pulse of FinTech H2 ‘21).
ESG investing is favored by many of the largest asset managers, pension funds, and many investors. The international United Nations COP26 climate change summit in 2021 mobilized governments, the SEC proposed mandatory ESG disclosures for public companies, and more people are demanding climate change mitigation. Financial technology can help governments, investment firms, and other companies achieve ESG goals and disclose compliance.
Growth of Cross-border Payments
Effortlessly making international cross-border payments is expanding rapidly, according to International Banker. This cross-border payment expansion includes e-Wallet apps for instant payments and also bank-to-bank transfers (eChecks and wire transfers), PayPal, and prepaid debit card payments, easily made through global mass payments software.
Crypto Custodians
Summarizing its Emerging Tech Research: Fintech Q3 2021, PitchBook states in its overview:
“As cryptocurrencies continue to earn mainstream acceptance, one area to watch is institutional crypto custodians, which store private keys, verify access, and approve transactions on behalf of clients.”
InsurTech Innovation
Large insurance companies are partnering with third parties to increase InsurTech innovation. The emphasis may expand from underwriting and risk assessment to prevention and financial capital improvement opportunities, according to McKinsey & Company in its Global perspectives on insuretechs.
Investments in FinTech Companies
Investments in FinTech are soaring. “The fintech industry continued its unrelenting pace of growth in 2021, raising $121.6 billion, which represents a 153% year-over-year increase in terms of global VC deal value,” according to PitchBook in a teaser for its 2021 Annual Fintech Report. Private equity firms are also investing in FinTech.
The lure of FinTech is attracting many new players outside the traditional financial industry, expanding the variety of FinTech applications available to businesses and consumers.
