What is fintech? Defining financial technology.
What is fintech? Fintech is a blending of the words financial and technology and refers to emerging technology that improves the delivery and use of financial services. Fintech facilitates a wide range of products and services used by consumers and businesses including mobile banking, peer-to-peer payments, online investing, cryptocurrency and many other offerings.
What is a fintech company?
Broadly speaking, a fintech company is one that employs emerging technology to provide financial services. The technology used depends on the offering and whether it’s applied to back-end systems or customer-facing experiences. Fintech encompasses everything from the internet to cloud services, mobile apps, blockchain, artificial intelligence, cryptocurrency, digital payments applications and more.
A growing preference for digital payments among consumers and businesses, greater investments in solutions based on new technologies and high adoption of IOT devices all support the expansion of the global fintech market. The Americas is the region with the most fintech startup companies globally with 10,755 as of November 2021. EMEA (Europe, the Middle East and Africa) is not far behind with 9,323 fintech startups, and the Asia Pacific region has 6,268 (also as of November 2021).
When did fintech start?
While the word seems relatively new, fintech is not an entirely new concept. Finance and technology have a long history together, beginning more than 150 years ago when telegrams and morse code were developed and used to communicate financial matters and facilitate transactions. Some academics have gone so far as to assign different eras in the evolution of fintech. Following is a short overview.
1886–1967: This was a time of building the foundation for what would years later be coined “fintech.” The US saw the completion of infrastructure such as the first transatlantic cable in 1866 and the establishment of Fedwire in 1918 (although the Fed began transferring funds between parties three years prior). The ability to conduct financial transactions over long distances was a huge advancement in financial services.
1967–2008: This phase of fintech’s history is characterized by the move from analog to digital in financial services beginning with the installation of the first ATM in 1967. The 1970s witnessed greater digitization of financial services with the introduction of NASDAQ, the first digital stock exchange, and SWIFT, which established a communication protocol between banks that made large cross-border payments possible.
The progress toward digital banking continued into the 1980s with the development of bank mainframe computers, and online banking. Digital banking really began to take center stage in the 1990s with consumers embracing the convenience it offered. The launch of PayPal 1998 pointed to the greater trend toward online payment systems.
2008–2015: The financial crisis ushered in a new era marked by changes in financial regulations and heightened adoption of mobile devices, both of which helped set the stage for start-ups using financial technologies like cryptocurrencies and blockchain. It was in these years that fintech began to have a larger influence on banking and the ability to use digital technology to connect disparate financial systems. Banking as a Service (BaaS) platforms enabled financial institutions to replace legacy systems with digital solutions that improved the customer experience.
Who uses fintech?
Fintech users fall into four main categories: 1) financial institutions (B2B); 2) financial institutions’ clients; 3) small businesses (B2C); and 4) consumers. All four groups cite similar reasons for using fintech products and solutions: convenience, control and cost savings. Additionally, fintech enables all four groups to interact, facilitating opportunities for greater access to financial services and more accurate data and analytics.
What do fintech companies do?
Fintech companies integrate new and emerging technologies into financial services to enhance and automate these services for businesses and consumers. By modernizing traditional financial offerings through technology, fintech companies help their customers improve access, streamline operations and manage costs for a wide range of financial matters.
What makes a fintech company: The three Ds of financial technology
The global fintech market has experienced massive growth and is anticipated to increase at a CAGR of around 20% over the next four years to reach a market value of approximately $305 billion by 2025. Fintech holds a commanding presence within the financial services industry and the consumer marketplace and is characterized by three key factors.
Digitization
Fintech leverages advanced financial technology to empower businesses and consumers to take more control over the financial aspects of their lives. Underlying it all is digitization . The rapid and widespread adoption of digital technologies, driven in great part by the ubiquity of smart phones, provides the basis of all fintech offerings.
New digital technologies driving fintech include things like machine learning/artificial intelligence, predictive behavioral analytics, data driven-marketing and automated customer service technology (e.g. chatbots ) — all which help expediate financial services to consumers and reduce operational costs for business. And the market is growing. Global spending on digital transformation reached 1.3 trillion US dollars in 2020, growing 10.4% year-on-year.
Decentralization
The second “D” is decentralization. By unbundling conventional financial services such as mortgages, investments and business loans into individual offerings, fintech improves access to financial services. Enabled by digital technologies, consumers and businesses can bypass traditional routes and more directly and quickly obtain the services they need. This helps expand financial inclusion by making financial services more accessible to people who are unbanked or underbanked.
Disruption
Digital technologies and decentralized services have upended the traditional way of accessing financial products and services, which brings us to the third “D.” Fintech is one of the great disruptors in the financial services industry. Unencumbered by processes entrenched in larger organizations, fintech start-ups have been able to respond to changes in the marketplace more easily and push innovation through faster and at greater scale. And they’ve gotten the attention of venture capital firms. In recent years, investment funding in fintech companies has hit record levels, surging 169% from 2020 to $131.5 billion in 2021.
