The convergence of technology and conventional financial services has given rise to a revolution in the constantly changing finance landscape known as Financial Technology, or FinTech. FinTech is transforming life on all levels—individuals, corporations, and communities—and its effects extend beyond figures and algorithms.

Let’s examine how technology is upending traditional finance in this article and how it is transforming our relationship with money, investments, and financial services in a way that is uniquely human.

What Is Financial Technology (Fintech)?

Fintech, an acronym for financial technology, refers to innovative technology designed to enhance and streamline the provision and utilization of financial services. Fintech is primarily used to assist organizations, entrepreneurs, and customers in managing their financial operations, procedures, and lives more effectively. It is made up of algorithms and specialized software that are utilized by computers and cellphones. The term “financial technology” is reduced to “fintech.”

When fintech first arose in the twenty-first century, it referred to the technology used in the backend systems of well-known financial institutions, such banks. There was a movement toward consumer-oriented services between roughly 2018 and 2022. Fintech now includes different sectors and industries such as education, retail banking, fundraising and nonprofit, and investment management, to name a few.

Fintech also includes the development and use of cryptocurrencies, such as Bitcoin. While that segment of fintech may see the most headlines, the big money still lies in the traditional global banking industry and its multitrillion-dollar market capitalization.

How Does Fintech Work?

In general, any advancement in the way people do business, such as the creation of digital currency or double-entry accounting, can be categorized as “financial technology.” Financial technology has grown at an exponential rate since the internet revolution.

It’s possible that you make everyday use of some aspect of fintech. via your iPhone to transfer funds from your debit account to your checking account, sending money to a buddy using Venmo, or managing your investments via an online broker are a few instances. Two-thirds of customers use two or more fintech services, and they are becoming more conscious of fintech in their everyday lives, according to EY’s 2019 Global FinTech Adoption Index.

Fintech in Practice

The most talked-about (and most funded) fintech startups share the same characteristic: They are designed to challenge, and eventually take over, traditional financial services providers by being more nimble, serving an underserved segment of the population, or providing faster or better service.

For example, financial company Affirm seeks to cut credit card companies out of the online shopping process by offering a way for consumers to secure immediate, short-term loans for purchases. While rates can be high, Affirm claims to offer a way for consumers with poor or no credit a way to secure credit and build their credit history.

Similarly, Better Mortgage seeks to streamline the home mortgage process with a digital-only offering that can reward users with a verified pre-approval letter within 24 hours of applying. GreenSky seeks to link home improvement borrowers with banks by helping consumers avoid lenders and save on interest by offering zero-interest promotional periods.

For consumers with poor or no credit, Tala offers consumers in the developing world microloans by doing a deep data dig on their smartphones for their transaction history and seemingly unrelated things, such as what mobile games they play. Tala seeks to give such consumers better options than local banks, unregulated lenders, and other microfinance institutions.

In short, if you have ever wondered why some aspect of your financial life was so unpleasant (such as applying for a mortgage with a traditional lender) or felt like it wasn’t quite the right fit, fintech probably has (or seeks to have) a solution for you.  

Fintech’s Expanding Horizons

In its most basic form, fintech unbundles financial services into individual offerings that are often easier to use. The combination of streamlined offerings with technology allows fintech companies to be more efficient and cut down on costs associated with each transaction.

If one word can describe how many fintech innovations have affected traditional trading, banking, financial advice, and products, it’s “disruption”—a word you have likely heard in commonplace conversations or the media. Financial products and services that were once the realm of branches, salespeople, and desktops are now more commonly found on mobile devices.

For example, the mobile-only stock trading app Robinhood charges no fees for trades, and peer-to-peer (P2P) lending sites like Prosper Marketplace, LendingClub, and OnDeck promise to reduce rates by opening up competition for loans to broad market forces. Business loan providers such as Kabbage, Lendio, Accion, and Funding Circle (among others) offer startup and established businesses easy, fast platforms to secure working capital. Oscar, an online insurance startup, received $165 million in funding in March 2018.4 Such significant funding rounds are not unusual and occur globally for fintech startups.

This shift to a digital-first mindset has pushed several traditional institutions to invest heavily in similar products. For example, investment bank Goldman Sachs launched consumer lending platform Marcus in 2016 in an effort to enter the fintech space.

Read Also: The Impacts of Artificial Intelligence on Business Models

That said, many tech-savvy industry watchers warn that keeping apace of fintech-inspired innovations requires more than just ramped-up tech spending. Rather, competing with lighter-on-their-feet startups requires a significant change in thinking, processes, decision making, and even overall corporate structure.

Fintech and New Technologies

New technologies, such as machine learning/artificial intelligence (AI), predictive behavioral analytics, and data-driven marketing, will take the guesswork and habit out of financial decisions. “Learning” apps will not only learn the habits of users but also engage users in learning games to make their automatic, unconscious spending and saving decisions better.

Fintech is also a keen adapter of automated customer service technology, utilizing chatbots and AI interfaces to assist customers with basic tasks and keep down staffing costs. Fintech is also being leveraged to fight fraud by leveraging information about payment history to flag transactions that are outside the norm.

Fintech Landscape

Since the mid-2010s, fintech has exploded, with startups receiving billions in venture funding (some of which have become unicorns) and incumbent financial firms either snatching up new ventures or building out their own fintech offerings.

North America still produces most of the fintech startups, with Asia a relatively close second, followed by Europe. Some of the most active areas of fintech innovation include or revolve around the following areas (among others):

• 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.

Fintech Users

There are four broad categories of users for fintech:

• Business-to-business (B2B) for banks
• Clients of B2B banks
• Business-to-consumer (B2C) for small businesses
• Consumers

Trends toward mobile banking, increased information, data, more accurate analytics, and decentralization of access will create opportunities for all four groups to interact in unprecedented ways.

As for consumers, the younger you are, the more likely it will be that you are aware of and can accurately describe what fintech is. Consumer-oriented fintech is mostly targeted toward Gen Z and millennials, given the huge size and rising earning potential of these generations.

When it comes to businesses, before the adoption of fintech, a business owner or startup would have gone to a bank to secure financing or startup capital. If they intended to accept credit card payments, they would have to establish a relationship with a credit provider and even install infrastructure, such as a landline-connected card reader. Now, with mobile technology, those hurdles are a thing of the past.

Regulation and Fintech

Financial services are among the most heavily regulated sectors in the world. As such, regulation has emerged as the number one concern among governments as fintech companies take off.

According to the U.S. Department of the Treasury, while fintech firms create new opportunities and capabilities for companies and consumers, they are also creating new risks to be aware of. “Data privacy and regulatory arbitrage” are the main concerns noted by the Treasury. In its most recent report in November 2022, the Treasury called for enhanced oversight of consumer financial activities, specifically when it comes to nonbank firms.

Regulation is also a problem in the emerging world of cryptocurrencies. Initial coin offerings (ICOs) are a form of fundraising that allows startups to raise capital directly from lay investors. In most countries, they are unregulated and have become fertile ground for scams and frauds. Regulatory uncertainty for ICOs has also allowed entrepreneurs to slip security tokens disguised as utility tokens past the U.S. Securities and Exchange Commission (SEC) to avoid fees and compliance costs.

Because of the diversity of offerings in fintech and the disparate industries it touches, it is difficult to formulate a single and comprehensive approach to these problems. For the most part, governments have used existing regulations and, in some cases, customized them to regulate fintech.

What are Examples of Fintech?

Fintech has been applied to many areas of finance. Here are just a few examples.

• Robo-advisors are apps or online platforms that optimally invest your money automatically, often for little cost, and are accessible to ordinary individuals.
• Investment apps like Robinhood make it easy to buy and sell stocks, exchange-traded funds (ETFs), and cryptocurrency from your mobile device, often with little or no commission.
• Payment apps like PayPal, Venmo, Block (Square), Zelle, and Cash App make it easy to pay individuals or businesses online and in an instant.
• Personal finance apps such as Mint, YNAB, and Quicken Simplifi let you see all of your finances in one place, set budgets, pay bills, and so on.
• Peer-to-peer (P2P) lending platforms like Prosper Marketplace, LendingClub, and Upstart allow individuals and small business owners to receive loans from an array of individuals who contribute microloans directly to them.
• Crypto apps, including wallets, exchanges, and payment applications, allow you to hold and transact in cryptocurrencies and digital tokens like Bitcoin and non-fungible tokens (NFTs).
• Insurtech is the application of technology specifically to the insurance space. One example would be the use of devices that monitor your driving in order to adjust auto insurance rates.

How Technology is Disrupting Traditional Finance

A particularly intriguing feature of FinTech is its ability to close the gap in financial inclusion. Innovative solutions that empower those who were previously shut out of traditional financial systems have been made possible by technology. Peer-to-peer lending platforms, digital wallets, and mobile banking apps are making financial services accessible to people all over the world and facilitating prospects for economic empowerment.

Personalized Financial Experiences

FinTech isn’t just about transactions; it’s about tailoring financial experiences to the individual. Advanced analytics and machine learning algorithms analyze vast amounts of data to understand user behavior, preferences, and needs. This personalized approach ensures that financial services are not one-size-fits-all but are crafted to meet the unique requirements of each user. From budgeting apps that provide real-time spending insights to robo-advisors offering personalized investment strategies, FinTech is putting the ‘personal’ back in personal finance.

Redefining the Customer-Business Relationship

Traditionally, financial institutions were often seen as distant entities with complex processes and rigid structures. FinTech has changed the game by fostering a more transparent and customer-centric approach. User-friendly interfaces, quick decision-making processes, and 24/7 accessibility redefine the customer-business relationship. This shift enhances customer satisfaction and builds trust in an industry often perceived as opaque.

Democratising Investments

Investing was once a privilege reserved for a select few with access to brokers and extensive financial knowledge. FinTech has democratized investing, making it accessible to the masses. Whether it’s micro-investing apps that allow users to start with small amounts or crowdfunding platforms that enable investments in innovative startups, FinTech has opened doors for individuals to participate in the wealth-building process.