Fintech refers to new technology that aims to improve and automate the delivery and use of financial services.
What exactly is fintech, and why is it important?
Our daily lives have been transformed by technology. Some of it has crept in gradually. Some came in with a bang. Some we’ve grown to love, while others we’re not so sure about. But there is no denying that all of this change has had a significant impact on how we behave and what we consider normal.
It’s difficult to imagine not being able to pay for food with the touch of a button, open a bank account from your kitchen table, or manage investments from pretty much anywhere. However, none of this would be possible without the use of financial technology
While the last few years have been difficult for all of us in a variety of ways, one thing that has emerged from the experience is our rapid adoption of new ways of working at rates that few of us could have predicted. All of this is made possible in some way by technology and our incredible ability as humans to adapt when necessary.
And financial services are following suit, using technology to improve the daily lives and experiences of customers, clients, and colleagues while maintaining a competitive edge. This trend has only accelerated since the COVID pandemic.
What exactly is fintech?
Fintech, which combines the words “financial” and “technology,” refers to methods of making financial processes and traditional financial services more accessible through the use of software. Fintech is a term used to describe new technology aimed at improving and automating the delivery and use of financial services. Fintech, at its core, is used to assist companies, business owners, and consumers in better managing their financial operations, processes, and lives through the use of specialized software and algorithms that are used on computers and, increasingly, smartphones. Fintech is an abbreviation for “financial technology.”
When the term “fintech” first appeared in the twenty-first century, it was initially applied to the technology used at the back-end systems of established financial institutions. However, there has been a shift to more consumer-oriented services and, thus, a more consumer-oriented definition since then. Fintech now encompasses a wide range of sectors and industries, including education, retail banking, fundraising and nonprofits, and investment management, to name a few.
Fintech firms are those that use technology to adapt, improve, or completely automate financial services. Consider mobile technologies that have transformed your phone into a payment mechanism or apps that enable you to act and transact in real time.
There is a growing list of things that have become second nature to many of us that did not exist just a few years ago. Trading and investment apps, mobile payments, and digital loans and credits are just a few examples.
However, underpinning all of these capabilities are rapidly evolving technologies such as machine learning, artificial intelligence (AI), robotic process automation (RPA), and blockchain – the foundational technology that powers cryptocurrencies like Bitcoin for example.
Why is Fintech important?
In general, the term “financial technology” refers to any advancement in how people conduct business, from the invention of digital money to double-entry bookkeeping. However, financial technology has grown explosively since the Internet and mobile Internet/smartphone revolutions. Fintech, which originally referred to the application of computer technology to the back office of banks or trading firms, now refers to a wide range of technological interventions in personal and commercial finance.
This includes everything from how quickly organizations respond to changing needs to how they design themselves to be successful. Historically, models were built around linear, manual processes. Modern technology models, on the other hand, require us to be more networked, automated, and data-driven in real-time.
One characteristic of successful fintech companies that has always stood out to me is a relentless focus on the customer; designing for the outcome rather than the process that you believe will get you there.
This healthy competition has been good news for the digital customer experience, as more and more organizations look to improve their services and products to make them faster and more inclusive.
Fintech now refers to a wide range of financial activities that can be performed without the assistance of a person, such as money transfers, check depositing with your smartphone, applying for credit without visiting a bank branch, raising funds for a business startup, or managing your investments.
Why is fintech expanding?
Technology is evolving and changing at rates that we simply cannot keep up with. Part of the challenge in the coming years will be identifying solutions to problems that need to be solved, instead of technology searching for a problem to prove its worth. Previously, financial institutions provided a variety of services under a single umbrella. The scope of these services included everything from traditional banking to mortgage and trading services. Fintech, at its most basic form, separates these services into individual offerings. The combination of streamlined offerings and access to deeper fintech companies to be more efficient while also lowering transaction costs.
Machine learning/artificial intelligence (AI), predictive behavioral analytics, and data-driven marketing are examples of new technologies that will remove the guesswork and habit from financial decisions. “Learning” apps will not only learn users’ hidden habits but will also engage users in learning games to improve their automatic, subconscious spending and saving decisions. Fintech is also an early adopter of automated customer service technology, using chatbots and AI interfaces to help customers with basic tasks while also lowering staffing costs. Fintech is also being used to combat fraud by using payment history information to flag transactions that are out of the ordinary.
The previous friction between fintech and incumbent banks is fading, and there is widespread recognition that success looks like a well-curated set of partnerships that deliver exceptional customer experiences and value. The opportunity comes from collaborating with fintechs rather than competing with them.
How is fintech shaping the future of banking?
Fintech has already made an impact in the banking industry. And, because more businesses and individuals depend on fintech to manage their daily needs, the market will continue to expand in unexpected places and ways.
If one word can describe how many fintech innovations have impacted traditional trading, banking, financial advice, and products, it’s “disruption,” as financial products and services that were once limited to branches, salespeople, and desktop computers migrate to mobile devices or simply democratize away from large, entrenched institutions.
Traditional banks, on the other hand, have been paying attention and have invested heavily in becoming more like the companies that seek to disrupt them. Goldman Sachs, for example, launched the consumer lending platform Marcus in 2016 and recently expanded its operations to the United Kingdom.
That being said, while banks and startups have developed useful fintech applications for basic banking (checking and savings accounts, bank transfers, credit or debit cards, loans), many other fintech areas have grown in popularity, such as personal finance, investing, or payments (among others).
What role does fintech play in financial services?
Fintech challenges and motivates the financial industry to try new things, ultimately improving the customer experience. After all, competition is good for us because it keeps us alert to the changes we need to make in order to be the best version of ourselves.
Not only do customers benefit, but the speed and agility with which many fintechs operate has inspired traditional financial service providers to structure themselves to support a more responsive model as well.
In short, fintechs are constantly identifying new opportunities and new spaces to operate in, forcing organizations that were content with their traditional approach to reconsider how they currently operate. In the end, the customer should come out on top.
How Do Fintech Companies Make Money?
Fintech companies earn money in a variety of ways, depending on their specialty. Banking fintech, for example, may earn money through fees, loan interest, and the sale of financial products. Brokerage fees, payment for order flow (PfOF), or a percentage of assets under management may be charged by investment apps (AUM). Payments apps may charge for features such as earlier withdrawals or credit card use, as well as earn interest on cash amounts.