Fintech, also known as “financial technology,” is a term used to describe companies that use innovative technology to create more efficient, transparent, and cost-effective financial services. Read on to learn more about Fintech and its other use cases.
In this definition...
What Is Fintech?
Fintech includes mobile payments, digital currencies like Bitcoin, alternative lending solutions, crowdfunding platforms for small businesses, and robo-advisers that allow users to access professional financial advice at little or no cost.
Fintech represents a new wave of innovation in financial services. Through the creation of technology that supports various financial transactions, Fintech has emerged as an important subsector of the financial services industry.
Fintech differs from traditional financial services because its primary goal is to make things easier for consumers. From payment gateways to peer-to-peer lending platforms to Bitcoin exchanges and investment vehicles, Fintech aims to provide new consumer solutions within an existing services framework.
The driving force behind Fintech is to create better products that help people manage their finances. In addition, these products are designed with lower fees than legacy financial institutions. As such, they’re often more cost-effective than old-school financial products.
Fintech product examples
- Robo-adviser: Uses algorithms to help investors invest their money more effectively. These algorithms can be used to generate risk assessments and portfolio management strategies.
- Blockchain technology: Enables users to send funds across borders without third-party banks or government agencies involved in transactions. This is done through secure digital ledgers.
- Mobile payments: Allows customers to pay for goods and services using smartphones.
Other Fintech innovations include crowdfunding platforms, peer-to-peer lending networks, cryptocurrency exchanges, and data analytics systems.
What Do Fintech Companies Do?
Fintech companies provide financial services using technology; they specifically apply technologies such as machine learning (ML), big data, virtual reality (VR), and predictive analytics to revolutionize financial services. Fintech firms help banks and other financial institutions provide better customer service using advanced technology.
These companies use specialized software or hardware for banking, investment, insurance, online trading, financial management, or payments. Technologies such as artificial intelligence (AI) and ML are used in Fintech to automate core processes, personalize, and otherwise improve the customer experience.
The goal of Fintech companies is to disrupt traditional banking methods by offering cheaper, faster, and easier ways to bank and manage finances.
Top Fintech Trends to Watch
Fintech is revolutionizing how banks do business and how consumers interact with them. Here are some popular Fintech trends and use cases:
Artificial intelligence and machine learning
AI and ML technologies have been around for decades, but they’ve become increasingly relevant with computing power advances. Through artificial intelligence technologies, Fintech companies can create products that make automated decisions based on data analysis.
For example, users with an account at a bank that uses AI and ML tools can set up auto-payments, so their bills will be automatically paid every month without having to log into their account or write checks. Or, if an individual is looking at credit card offers online, AI can predict which one would be best for that person based on criteria such as annual fees or interest rates.
According to research by EY, the value of B2B, B2C, C2B, and C2C cross-border payments worldwide from 2016 to 2020, with forecasts for 2021 and 2022, is expected to surpass $156 trillion in 2022. As globalization expands and businesses look for new ways to grow internationally, cross-border transactions will increase.
Growth in embedded finance
With embedded finance, Fintech companies partner with large corporations to provide specialized financing options for customers buying specific goods or services. With the buy-now-pay-later option, embedded finance is becoming mainstream in 2022.
Shoppers can now buy something and spread their payments over several months. This gives them flexibility in purchasing while also making it easier for companies to sell because they know upfront when they’ll receive payment.
Web3 becoming mainstream
The third generation of the internet, or Web3, is a decentralized version of Web1 and Web2. It’s still in its early stages, but it is growing rapidly. One of Web3’s primary features is that it’s decentralized and open source, meaning there isn’t a single organization or government in charge of it.
Instead, anyone can use Web3 to communicate with others on a peer-to-peer basis. This puts users in control of their personal information and also supports the Fintech model for decentralized and demonopolized financial management.
Open banking allows banks to share their customer’s financial information with Fintech companies. If a user opts in, their bank will let a Fintech company access their data through an application programming interface (API). Fintech companies can then analyze the user’s spending habits and offer customized financial services based on those insights.
Blockchain and tokenization
Blockchain is a distributed ledger that helps users store and transfer data in a secure, decentralized manner. It’s most commonly associated with cryptocurrencies like Bitcoin, but it can be used for much more. Fintech companies in particular are exploring how blockchain technology can be applied to their services.
Tokenization is a subset of the blockchain trend that is gaining momentum in Fintech. It involves turning real-world assets into digital tokens on a blockchain network and can be used to tokenize physical assets like real estate or art. It can also be used to tokenize digital assets like video games. In all of these cases, tokens are created and stored on a blockchain network and can then be sold as units of currency.
Robotic process automation technology
Fintech companies are using robotic process automation (RPA) technology to help them streamline their operations and cut costs. RPA uses software-based robots that work alongside humans, mimic their actions, and perform simple tasks. This allows humans to focus on higher-level tasks that require greater critical thinking skills.
Enterprise Benefits of Working with a Fintech Company
Enterprises, especially those with financial management components, can save time or streamline inefficient processes with the help of the right Fintech company. Some of the benefits that come from working with a Fintech company include:
A Fintech solution can reduce costs for a company by eliminating unnecessary overhead, which allows the organization to focus on core processes, products, or services.
Optimized workforces and resources
Companies with no in-house finance department need staff members to become more self-sufficient when managing budgets, cash flow, and billing solutions for their clients or customers. Fintech services can free up time for these employees to focus on revenue-generating activities rather than administrative tasks.
Highly accessible information
The cloud-based systems that Fintech companies use allow their customers to access data from anywhere with an internet connection. This makes it easy for employees to manage finances while traveling or working remotely.
Customized business solutions
Fintech solutions are often designed specifically for each client’s needs, so there’s no need to worry about software that doesn’t fit into an enterprise’s existing business model.
Top Fintech Companies
Visa first came into existence in 1958, when Bank of America launched VISA credit cards as an alternative to carrying cash. In recent years, they’ve evolved their business model to include several Fintech capabilities.
Visa payWave is one solution that allows customers to make purchases with just a tap or wave of their card at checkout; there’s no need to enter credit card information or sign receipts. They also offer contactless payments through NFC technology using smartphones.
Launched in 1966 by an alliance of several regional bankcards, Mastercard operates much as Visa does. The company provides payment processing services to banks and merchants worldwide.
Affirm started by offering loans based on customer data. There was no minimum credit score requirement, but the company still performed a soft credit check. Now, Affirm provides installment loans for everything from furniture to vacation packages and even personal loans to help with everyday expenses like rent or groceries. Customers can apply via the mobile app and receive funding within minutes.
Founded in 2013, brokerage firm Robinhood lets customers buy and sell stocks without paying commission fees. Instead, users pay $5 per month to use the Robinhood Gold premium service. Since its launch, it has expanded into other areas, including options trading and cryptocurrencies such as Bitcoin.
Ant Group is a Chinese Fintech giant that operates Alipay, China’s largest third-party online payment platform. In 2018, Alibaba Group Holding Ltd., which owns Taobao Marketplace and Tmall Marketplaces, acquired a controlling interest of 33% in Ant.
Stripe handles billions of dollars in transactions annually, charging a small fee for each. It uses machine learning algorithms to reduce fraud, automate specific tasks, and detect suspicious activity across its platforms. In 2021, businesses using Stripe collectively processed more than $640 billion in payments.
Read next: Top Blockchain as a Service (BaaS) Providers