A Beginner's Guide to FinTech

Fintech, a combination of the words "financial" and "technology," refers to software designed to make financial services and operations simpler, faster, and more secure. The fintech industry encompasses anything from payment processing systems to mobile banking apps, all of which are intended to improve individuals' financial lives while also automating enterprise financial procedures.

What is Fintech?

Simply explained, fintech refers to the technology used to improve the delivery of financial services. The term only became popular in the twenty-first century, but it has influenced how people interact with their money for well over a century. 

Fintech is now synonymous with cryptocurrencies and start-up banks, but its origins can be traced back to the late nineteenth century when money could be moved about by telegrams and morse code - though this is unlikely to excite many investors today. 

However, there is plenty for investors to be enthusiastic about in the field, with $137.5 billion invested in fintech businesses in 2019, indicating that there are plenty of companies out there aiming to build the next big thing in fintech.

Underlying all of these capabilities, however, are quickly growing technologies such as machine learning, artificial intelligence (AI), robotic process automation (RPA), and blockchain, which underpins cryptocurrencies such as Bitcoin.

In a nutshell, the fintech industry is changing how financial institutions work. At the time of writing, investment in British fintechs had increased by more than 217%, trailing only the United States.

What are examples of fintech?

Fintech has been used in a wide range of financial applications. Here are only a few instances.

• Robo-advisors are programs or online platforms that automatically invest your money, generally at a low cost, and are available to the general public.

• Investment apps like Robinhood let you buy and sell stocks, exchange-traded funds (ETFs), and cryptocurrency from your mobile device, typically with little or no commission.

• Payment apps such as PayPal, Venmo, Block (Square), Zelle, and Cash App make it simple to pay individuals or companies online and quickly.

• Personal finance applications like Mint, YNAB, and Quicken Simplifi allow you to view all of your accounts in one location, create budgets, pay bills, and so on.

• Peer-to-peer (P2P) lending platforms such as Prosper Marketplace, LendingClub, and Upstart enable individuals and small business owners to obtain loans from a diverse group of individuals who make microloans directly to them.

• Crypto apps, such as wallets, exchanges, and payment applications, enable you to store and transact with cryptocurrencies and digital tokens such as Bitcoin and non-fungible tokens (NFTs).

• Insurtech is the application of technology specifically to the insurance industry. One example is the usage of gadgets that track your driving habits to change your auto insurance prices.

Why is fintech important?

Fintech growth and competition have prompted businesses such as Lloyds Banking Group to reconsider how they function. This involves everything from how quickly companies adjust to changing needs to how businesses build themselves to be successful. The models of the past were built around linear, mainly manual processes.

Modern technological models, on the other hand, necessitate a greater degree of networking, automation, and real-time data collection. There is one characteristic of successful fintech companies that has always stuck out to me: a constant emphasis on the client; designing for the end rather than the process that you believe will get you there.

This healthy competition has been beneficial to the digital customer experience, as more and more businesses strive to improve their services so that they are faster and their products are easier to use, more inclusive, and respectful of individual needs.

What Is Fintech Banking?

Banks employ fintech for both back-end procedures (e.g., account activity monitoring) and consumer-facing solutions, such as the app you use to check your balance. Banks utilize fintech to underwrite loans. Fintech enables individuals to access a wide range of bank services, such as paying for items using a smartphone and receiving investment advice on their home computers.

How Does Fintech Work?

Fintech works by simplifying financial processes for both individuals and corporations. When it comes to fintech apps, this is often accomplished via application programming interfaces (APIs), which allow two applications to communicate with one another and share data. This enables FinTech products to automate financial transfers, analyze expenditure data, and perform other functions.

Fintech apps can then use users' data in various ways, depending on their goals. Insurance applications may access policy information to provide individualized advice, banking apps can connect to checking accounts to make digital payments, and personal finance apps can monitor credit histories to track financial wellness.

In addition to standalone apps, fintech companies collaborate with other organizations to offer embedded financial services. Embedded finance incorporates financial services into non-financial applications. Take Apple Wallet as an example. Apple collaborates with several companies to store information such as credit card details for consumers to access digitally.

Fintech Companies

Stripe, a ten-year-old payment processor valued at $95 billion, tops the list for 2022. Klarna, a 16-year-old Swedish company that provides clients with financing for purchases at many big shops, came in second place with a $46 billion valuation.

Wealthtech (apps like Wealthsimple, an online investment management service for Canadians), investtech (like Acorns, which allows users to round up purchases to the nearest dollar and invest the difference in a diversified portfolio), and insurtech (such as Next Insurance, a mobile-first carrier) are some of the more granular industries within fintech. It affects almost every industry, geographic market, and company strategy.

How do fintech companies make money?

Fintechs earn money in a variety of methods, depending on their specialism. Banking fintechs, for example, may make money by charging fees, collecting loan interest, and selling financial products. 

Investment applications may levy brokerage fees, use payment for order flow (PFOF), or charge a percentage of assets under management (AUM). Payment applications may collect interest on cash balances and charge for services such as previous withdrawals or credit card use.

Why is fintech growing?

Technology is emerging and evolving at a pace that humans cannot possibly keep up with. Part of the task over the next several years will be to identify solutions to issues that need to be solved, rather than technology hunting for a problem to prove its value.

The friction we've seen in the past between fintech and incumbent banks is fading, and there's widespread recognition that success looks like a well-curated set of collaborations that deliver excellent customer experiences and value. The possibility stems from collaborating with fintechs rather than competing with them.

Bottom Line

Fintech has become so pervasive in financial services that it is nearly omnipresent. Consumers, organizations, and financial services corporations are increasingly relying on innovative mixes of software, hardware, and data to develop and provide both new and old financial goods and services. Fintech is deeply ingrained in the fabric of our financial civilization, and it appears that its influence will only increase in the future.