What is FinTech?

| Updated
by John Caroline · 6 min read
What is FinTech?
Photo: Shutterstock

One of the crucial sectors of technology that have been impacting the financial world scene immensely is fintech. Here is a beginner’s guide to help newbies get acquainted with financial technology.

Originally, when financial technology (fintech) was introduced at the beginning of the 21st century, it applied to the back office of established financial institutions like banks or trading firms. But since then, it has moved to more customer-oriented services and describes a wide range of financial activities including mobile deposit of a check, investment management, transfer of money, bypassing a bank branch in an application for credit, funding a business startup, etc.

Since the revolution of the internet, fintech has grown massively. The Financial Adoption Index of EY 2017 noted that at least two or more services offered by fintech were used by one-third of consumers.

Understanding Fintech

Fintech is an acronym for “Financial Technology”, a term for addressing new technology which aims at automating and improving the utilization and delivery of financial services. In other words, fintech is specifically a term used to generally address all forms of technology that are used to streamline, digitize or disrupt traditional financial services.

It also refers to any enterprise or platform that applies new technological advancements to promote finance-related services and processes for easy and enhanced customer experience.

Fintech can be applied in several financial industries, from insurance and mobile banking to investment, payment, and lending apps, not to exclude cryptocurrency.

The Evolution of Fintech

The concept of financial technology is not new. It has been in vogue for many decades but its operations were likely not extremely viral, not until the addition of the phrase to Merriam-Webster dictionary.

Financial technology can be traced back to the late 1950s when the earliest credit cards were adopted by the general public.

After the introduction of the credit card, several major milestones were introduced, such as ATMs, bank mainframe computers, online stock exchanges, and electronic stock exchanges. In the past few years, Fintech has evolved from simply being associated with startups to being a significant part of established financial institutions.

Today, some of the popular institutions in the world now have fintech operating under them.

For example, in 2016, Citi Developed Hub was launched by Citi to invite third-party programmers to test and share feedback on application programming interfaces (APIs). Another example is JPMorgan Chase & Co (NYSE: JPM) that invested $25 million in fintech startups in 2019.

In the face of the ravaging effect of the Covid-19 pandemic, fintech has been persistent in proving its value. Banks and credit unions in the US, for example, have been able to transact digitally, and also offer support for the Covid-19.

How Does Fintech Work?

To some extent, technology has always been part of the financial world, from the introduction of credit in the late 1950s, personal finance apps, and electronic trading platforms in the years following. Below is a quick grasp of how the fintech industry works in some areas.

  • The revolutionized payment process for products and services. Payment has been made significantly easy with fintech, given the different workable fintech platforms that support payment for goods and services with both mobile and digitized models.
  • Mobile banking. Mobile banking is a major part of the fintech industry. In areas of personal finance, consumers have largely continued to demand easier digital access to their accounts kept with banks, particularly with a mobile device. Some kind of banking feature is now offered by some major banks on mobile. This is seen especially with the emergence of Neobanks, which do not have physical branch locations but serve customers with checking, payment services, savings, and loans solely on mobile or digital devices.
  • Blockchain and cryptocurrency. Blockchain is the technology that allows the mining of cryptocurrency and the existence of marketplaces for cryptos. Advancements in cryptocurrency technology can readily be attributed to the blockchain, as well as fintech. Both blockchain and cryptocurrency, in theory, are essential to creating practical applications that enhance fintech.

Is Fintech Safe?

One amazing way in which fintech has greatly impacted the financial services industry relates to trust from consumers. It is, however, yet to be established if this trust is well-founded, or if the benefits to be received outweigh the risks involved. In other words, it can result in unwanted or unforeseen exposure to threat when consumers engage with fintech, most of which is largely unregulated.

The idea of fintech that is following some sort of higher moral standard compared to the big banks is eventually turning out as an illusion. Therefore, it is important to approach some, especially new fintech companies and their high-end promises with some level of skepticism so as not to fall victim to the potential risks.

To date, there is no certainty on exactly how safe or secure fintech solutions are. And such confidence will most likely be difficult to come by, considering the rate at which fintech is increasing.

Benefits of Fintech

The concept of fintech has proven to be exclusively advantageous to the world at large since its evolution. Its massive adoption can be attributed to its significant relevance in the financial space. Here are a few highlights of the benefits of fintech:

  • consumer access to fintech products is quick and easy because they are mostly delivered online with digitized infrastructures;
  • the remote delivery of fintech products and services makes consumers open to a wide variety of options;
  • there is hardly any need for investment in physical infrastructures like branch offices for fintech companies to be able to offer services to customers at cheaper rates.
  • consumers are better offered personalized products and services by Fintech companies as technology enables them to retrieve and store more customer data.

Potential risks of Fintech

As beneficial as fintech has become to individuals and institutions, it also poses certain risks for them. They may include the following:

  • It can be difficult to ascertain which fintech companies are regulated. Thus, you should know what your rights are if anything goes wrong, with the use of different models by new fintech companies to traditional providers.
  • Consumers may become overwhelmed and quick to buy products online without having physical contact with the marketer. Hence, they become vulnerable to falling into the nest of manipulators.
  • Providing personal data in the process of effecting a financial transaction online could expose consumers to becoming victims of cyberattacks.

Bottom Line

Fintech is rapidly developing, with traditional financial services providers looking to embrace new technologies. The growth of the sector is being driven largely by the increasing demands from consumers for faster and cheaper services. Meantime, the ongoing advancement of everyday technologies, like the widespread adoption of smartphones, has created ideal conditions for fintech development.

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FAQ

What is fintech?

Fintech is an acronym for “Financial Technology”, a term for addressing new technology which aims at automating and improving the utilization and delivery of financial services. In other words, fintech is specifically a term used to generally address all forms of technology that are used to streamline, digitize or disrupt traditional financial services.

How does fintech work?

Fintech can be applied in a number of ways which include payment of loans, management of investment, mining of cryptocurrency, transfer of money, etc.

How did fintech appear?

The concept of financial technology is not new. It has been in vogue for many decades but its operations were likely not extremely viral, not until the addition of the phrase to Merriam-Webster dictionary. Financial technology can be traced back to the late 1950s when the earliest credit cards were adopted by the general public. After the introduction of the credit card, several major milestones were introduced, such as ATMs, bank mainframe computers, online stock exchanges, and electronic stock exchanges. In the past few years, Fintech has evolved from simply being associated with startups to being a significant part of established financial institutions.

Is fintech safe?

Generally, fintech companies should be approached with a considerable amount of prudence.

Who can benefit from fintech?

There are four broad categories of users for fintech: B2B for banks, their business clients, B2C for small businesses, and consumers.

What are the advantages of fintech?

Fintech improves the quality of traditional financial institutions by increasing efficiency and productivity, reducing costs, offering convenience, higher speed, and a faster rate of approval. 

Are there any risks associated with fintech?

The most notable risks associated with fintech are regulatory noncompliance, unforeseen market events, cyber-attacks and data breaches, as well as the added pressure of competition and the need to engage third party services and partnerships to stay ahead.

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