Financial technology (abbreviated fintech) refers to new technology that aims to improve and automate the delivery and usage of financial services. Fintech, at its heart, is used to assist corporations, company owners, and consumers in better managing their financial operations, procedures, and lives. It is made up of specialized software and algorithms used on computers and cellphones. The term “fintech” is an abbreviation for “financial technology.”

When the word “fintech” first appeared in the twenty-first century, it was initially used to the technology used at the backend systems of established financial organizations such as banks. There was a move to consumer-oriented services between 2018 and 2022. Education, retail banking, fundraising and nonprofit, and investment management are just a few examples of fintech sectors and industries.

Fintech also encompasses the creation and use of cryptocurrencies like Bitcoin. While that sector of fintech receives the most attention, the real money is still in the traditional global banking business, which has a multitrillion-dollar market value.

In general, the word “financial technology” refers to any advancement in how people do business, from the introduction of digital money to double-entry accounting. Financial technology has grown exponentially since the internet revolution.

You almost certainly utilize some form of fintech on a daily basis. Transferring money from your debit account to your checking account on your iPhone, giving money to a buddy via Venmo, or managing investments through an online broker are some instances. According to EY’s 2019 Global FinTech Adoption Index, two-thirds of customers use at least two or more fintech services, and these consumers are becoming more aware of fintech in their daily lives.

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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 study users’ patterns, but will also involve them in learning activities in order to improve their habitual, unconscious spending and saving decisions.

Fintech is also an early adopter of automated customer care technologies, employing chatbots and AI interfaces to help clients with basic tasks while reducing staffing expenses. Fintech is also being used to combat fraud by using payment history information to detect transactions that are out of the ordinary.

Fintech has surged since the mid-2010s, with companies obtaining billions in venture capital (some of which have become unicorns) and established financial firms either acquiring new ventures or developing their own fintech solutions.

North America continues to produce the majority of financial companies, with Asia a close second, followed by Europe. Some of the most active areas of fintech innovation include or revolve on (among other things):

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• 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.

Artificial intelligence will drive massive value creation

According to McKinsey, artificial intelligence (AI) can bring up to $1 trillion in value to the global banking industry each year. Banks and other financial institutions are expected to embrace an AI-first approach, better preparing them to withstand incursion by increasing technology corporations.

Automatic factor discovery, or the machine-based identification of the elements that drive outperformance, will become increasingly common in financial services, assisting in the refinement of financial modeling across the sector.

Knowledge graphs and graph computing will also play a larger role as a crucial application of AI semantic representation. Their ability to aid in the formation of linkages and the identification of patterns across complex financial networks by relying on a diverse set of frequently disparate data sources will have far-reaching ramifications in the coming years.

Finally, analytics that incorporates better privacy safeguards will encourage minimum data utilization, or the use of just relevant, essential, and suitably cleansed information in financial model training. These include federated learning, a type of decentralized machine learning that solves the privacy risk associated with centralizing datasets by bringing computational capacity to the data rather than the other way around. Advanced encryption, safe multi-party computing, zero-knowledge proofs, and other privacy-aware data analysis techniques will push consumer protection to new heights.

AI applications will permeate the whole financial industry’s activities, including front, middle, and back offices. Tailor-made products, personalized user experience and analytics services, intelligent service robots and chat interfaces, market trackers, automated transactions and robo-advisors, alternative credit ratings based on non-financial data, and facial recognition authentication are examples of customer-facing applications. Smart procedures, increased information representation tools (epitomized by knowledge graphs), and natural language processing for fraud detection are examples of middle-and-back office applications.

For banks, becoming a “AI-first” institution will result in increased operational efficiency through the extreme automation of manual operations (a “zero-ops” mindset) and the replacement or augmentation of human choices with sophisticated diagnostics. The broad use of classic and cutting-edge AI technologies, including as machine learning and facial recognition, to (near) real-time analysis of vast and complex customer data sets will result in improved operational performance.

Future “AI-first” banks will emulate the speed and agility of “digital native” enterprises and users. They will innovate quickly, offering new features in days and weeks rather than months and years. Banks will also work together with non-bank partners to develop new value propositions that span journeys, technology platforms, and data sets.