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FinTech or Financial technology is a line of business based on using software to provide financial services. FinTech companies are generally startups founded with the purpose of disrupting incumbent financial systems and corporations that rely less on software.
The National Digital Research Centre in Dublin, Ireland, defines FinTech as “innovation in financial services”, adding that “the term has started to be used for broader applications of technology in the space – to front-end consumer products, to new entrants competing with existing players, and even to new paradigms such as Bitcoin”.
As said by Nigel Verdon, FinTech entrepreneur, mentor and investor, the issue banks currently have is that customers have become completely dis-enfranchised through a combination of many things; a lack of understanding of the customer; a betrayal of trust; a customer experience that is completely out of sync with the brand values of a bank; and many more.
For a long time FinTech was an ignored part of the startup ecosystem since investors had been burned to a large degree in the past in the financial space. Prior to the 2008 global economic crisis, the financial industry was generally accepted as being one of the least open to innovation and disruption. In some cases, simple tasks like inquiring about your bank balance and withdrawing money were still being performed in a traditional, offline setting. The rise of FinTech in the last decade or so means this is all changing.
“We’re living in a transformational era for financial services. Our children will look back at these past decades and laugh at how we banked.”
Bradley Leimer, Mechanics Bank, California.
According to Accenture plc, a multinational management consulting, technology services, and outsourcing company, investment in FinTech rose to over $3 billion dollars last year from $930 million in 2008. This ever-expanding sector promises to disrupt the way all types of business entities operate, from multinational corporations to small-scale businesses, and even the way people manage their personal finances.
This entails major changes to payments, business and personal loans, fundraising, money transfers, investing, asset management and even currencies. FinTech comes in, offering new and fresh services, at lower costs, through well-designed platforms or mobile applications.
“Technology led rather than financial product led; a deep understanding of customer; exceptional customer experience; well thought through customer journeys; highly aligned product with customer; lean start-up approach to product development; transparency of pricing; simplicity of pricing; fair and reasonable pricing; clear terms and conditions; simple buying experience; simple on-boarding, frictionless ideals…”
Nigel Verdon, FinTech entrepreneur, mentor and investor.
In fact, the financial services industry is more focused on technological innovation than at any other point in its history. Driven by new digital technologies, stricter banking regulations, changing customer behavior and the need to reduce costs, Accenture expects investments in FinTech companies to have doubled to $8 billion in 2018.
The most disrupted sectors are payments and money transfer, represented by such companies as TransferWise and Square; crowdfunding, represented by Kickstarter, Crowdcube, Smart Angels; and peer-to-peer lending – LendingClub, Zopa, Prêt d’Union.
FinTech companies gather the 3 Ts needed to seduce targeted customers: Trust, Transparency, Tech. Responding to a trust crisis towards banks, startups offer services at a lower costs in a transparent way, through easy-to-use interfaces.
“They do technology, they do customer experience, they handle the money; they create niche financial products from the wholesale product; and are generally regulated firms themselves,” says Nigel Verdon.
The leading FinTech hub is London, followed by New York, and other cities fighting to get to the top: Paris, Hong Kong, Singapore, Tel Aviv.
Daniel McAuley, a first-year MBA student at The Wharton School and a Co-Founder of Wharton FinTech, considers that the fact the space has been dominated by big companies for decades can often be resistant to change.
However, overcoming regulation and institutional inertia, and gaining the public’s trust will be key to ensuring widespread adoption of new financial technologies. Besides, it is quite true that nearly all the major banks and financial services firms are either actively incubating or facilitating the development of startups and their technology in the FinTech space.