So What Is FinTech And Why Is It Taking Over ?
Financial Technology or FinTech is the transforming of financial services with the use of disruptive technologies. It is the intersection of finance and agile technology with the real focus on consumer needs. Or for those more in the know, Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century.
It is about how technology is driving and how business transactions are done.For example Paypal is a well-established example of FinTech and millions of people use Paypal to transact with anyone in the world. Mobile banking is another example as you can practically do your bank transactions with the use of their app instead of of physically going to the bank branch.
Blockchain and DLT, both invented in 2008 actually provide the foundation for FinTech applications.
Current Landscape of FinTech
FinTech companies are not one-stop shops for customer financial services.They offer targeted solutions, and because they are tech-driven, they are based in cities conducive for tech startups like San Francisco, London, New York, Tel Aviv, Singapore, and Berlin. These firms hire people with non-financial backgrounds such as computer science and engineering.
A very good example of a FinTech company is Lenddo which is a lending platform that uses an alternative credit scoring service tapping the power of social media. Transferwise is the market leader when it comes peer to peer money transfer service of foreign currency. In the field of financial advice,there is Scalable Capital which uses algorithms to help people make decisions about when and in what to invest without the need to have an expensive face to face meetings with financial consultants.
Essentially non-bank FinTech companies do not take deposits and thus do not create their balance sheets like normal banks do. As a result, they are not heavily regulated like Banks and have the power to innovate quickly to meet the rapidly changing needs of consumers and businesses.
As a result, online and digital banks are being born. A good example of this is Fidor Bank which is a essentially a bank but not as we know it ie it is a not bricks and mortar bank. There is no building that you can go into to talk to your bank manager. It only operates online, and it uses a set of Application Protocol Interfaces (APIs) that allow programmers and software developers to partner with them using Fidor’s platform. As such Fidor can now offer services beyond the basic bank deposit account such as crowd finance, peer-to-peer lending, and crypto-currency services.
And this is where other FinTech companies are becoming more innovative literally each month in this highly competitive market as they are creating new products and services that connect nicely into current digital trends like e-commerce, the sharing economy, and big data analytics.
How people benefit from using FinTech
One of the leading ways people and businesses are benefiting is through the emergence of online platforms that connect individuals and businesses to lend and borrow between each other.
Consumers also get to have nonbank sources of finance as FinTech finance providers use alternative credit models and non-traditional data sources that are in line with the background of Millennials, a key population segment that uses smartphones to do lots of daily transactions, including financial tasks. When markets in the West get their heads around it, you then have the Asian and African market where the mobile market is becoming a juggernaut of investmenet potential for these firms. FinTech allows a wider access of financial services to society as it reaches those traditionally underserved by traditional financial institutions. Consumers also enjoy a reduction in prices as FinTech companies can intensify the competition in the financial services sector.
As FinTech firms provide access to financial services in developing and emerging countries, people from those countries now the opportunity to create their online businesses which can provide an economic boost by creating new demand for labor and more products and services created. Its very early days but the model is already working.
Consumers can also expect better customer services from financial institutions that adopt FinTech tools because of Big Data and analytics tools that can sift through unstructured customer service calls, email exchanges, and social media.
Disrupting the Landscape of the Banking and Financial System
Where the major changes are being disrupted to the old model is mainly in consumer banking, fund transfer and payments.These are the main segments of the financial system currently exposed by FinTech. FinTech companies have this huge opportunity to enhance financial inclusion by operating in developing and emerging economies where there the financial services are not yet well established. These countries are developing rapidly, and so with their rising disposable incomes this is allowing them to purchases smartphones wherein they can access the technologies that FinTech companies actually bring.
FinTech companies are now also seen to have the edge over traditional banks and financial services providers as they tap into big data to personalize their products for each of their consumers. This allows them to customize their offerings which can lead to a higher success rate for FinTech firms.
With virtual payment technologies available like Paypal and Bitcoin, brick and mortar banks and ATMs usage may be on the swift decline especially as smartphone and internet connectivity continue to improve tremendously.
The real key for the banks and financial services firms to remain relevant, is to capitalize on the existing financial technologies and make it work for them rather than have those technologies make them irrelevant.
The Future of Fintech
The future of FinTech is promising. According to Accenture, investment in financial-technology firms grew by 201% globally in 2014. In 2015, funding of FinTech start-ups reached $12.2 bn, up from $5.6 bn in 2014 according to consulting giant, PWC.
As data analytics and technology continue to rise in importance, FinTech will continue to innovate and provide new and beneficial technology to financial institutions and their clients as well as the regular consumer that is adaptive to the rapid changes in finance and technology.
Traditional banks are heavily invested in FinTech firms as some of them integrate the technology into their existing financial products and services. Among the banks, Citigroup is the one heavily backing FinTech startups while Goldman Sachs is financing many FinTech startups.
With Wall Street strategically invested into these FinTech firms, we can expect to see further exponential growth and innovations from this sector. According to PWC, there are still areas where FinTech companies can make their mark. These include marketplace lending, credit underwriting, digital cash, treasury functions and bills payment and even wealth management.
According to James D. Robinson, co-founder and general partner of RRE Ventures, a key supporter of New York’s FinTech Innovation Lab, “The number of FinTech companies serving financial enterprises will continue to grow dramatically due to the capacity of the cloud, web 2.0 and mobile to improve the way institutions do business.”
FinTech is here to stay and is clearly going to continue to be a game changer. It has and will have a major significant impact on lives in the years to come.