What is FinTech? How Does A FinTech Work?
Arthur C. Clarke, a science fiction writer, said that “any sophisticated innovation is almost like a miracle.” He was correct.
See, today, with advancements in technology, you can send money to friends and family almost right away.
If you want to invest, you can do it with just a few taps of your finger. With a self-service cash register, going shopping is easier and faster. Most people didn’t think this was possible before the Internet came out in the 1980s.
These transactions are made possible by financial technology breakthroughs brought by financial software development companies (e.g., TatvaSoft, Infosys, Wipro, etc.) with their sheer technical production.
FinTech continues to be a developing business, with a projected value of US$30 billion by 2022. However, as this article will demonstrate, this technology is already creating waves in various fields.
In This Article:
- Applications of FinTech
- Typical FinTech Users
- What Do FinTech Companies Do?
- Are FinTech Firms in Competition with Banks?
- Concluding Thoughts
FinTech has become one of the most often used terms in today’s startup environment, yet few understand how it has evolved or can adequately explain its reach.
Any FinTech company aims to enhance and automate the usage and delivery of its FinTech services. This startup category encompasses everything from mobile banking applications to Robo-advisors to cryptocurrencies.
When the word ‘FinTech‘ initially became popular, it referred to the back-end technological systems of financial institutions such as banks, which encompassed international money transfers and checking deposits via cellphones.
The term’s definition has evolved to encompass industries such as financial education, retail banking, fundraising and non-profit, and investment management.
Financial service institutions used to offer many different things under the same roof. These services covered many things, from traditional banking to mortgages and trades services.
FinTech separates these solutions into their different products in its most core phase. As a result, FinTech companies can be more efficient and cut down on the costs of each transaction when they offer simple products and use technology.
When it comes to traditional trading, banking, finance consultancy, and its services, the word “disruption” is an excellent way to describe how many FinTech innovations have changed how these things work.
In Robinhood, for example, there are no fees for trades. In addition, peer-to-peer lending sites like Prosper Marketplace, Lending Club, and OnDeck say they can lower interest rates by letting people compete for loans in a wide range of ways.
There are a lot of big funding rounds for FinTech businesses all over the world. Companies like Lendio, Accion, Funding Circle, and Kabbage make it easy and quick for small businesses to get working capital through loans. For example, Oscar, a company that sells insurance online, got $165 million in funding in March 2018.
Research says there are around 26 FinTech unicorns (startups valued at $1 billion or more). The global FinTech market was worth US$127.66 billion in 2018 and is expected to reach US$309.98 billion in 2022.
According to the 2016 PwC Global FinTech Report, 77% of financial institutions and 90% of payment businesses wanted to incorporate blockchain into their operations by 2020.
Within three to five years, it is predicted that total investment in FinTech would top US$150 billion. However, this projection may be impacted by the global Coronavirus outbreak.
Applications of FinTech
To help you better grasp FinTech, here are some instances you’ve probably heard of or used before:
Blockchain Technology and Cryptocurrencies
Blockchain and cryptocurrency are two of the most contentious FinTech applications, as they were among the first to demonstrate how technological developments can transform an industry.
Investment firms, banks, and technology firms have all expressed interest in cryptocurrencies, with Facebook even developing its own digital currency, Libra. FinTech is also driving the usage of blockchain to combat fraud.
Coinbase and other cryptocurrency exchanges connect buyers and sellers of Bitcoin and Altcoins. Blockchain and cryptocurrencies are instances of FinTech outside of traditional banking, yet they continue to be distrusted by many financial institutions and even non-financial groups.
Payment Systems for Online and Mobile
By enabling individuals to pay for items and services via computers and mobile devices, FinTech has changed the way people pay for goods and services.
According to Statista, roughly 950 million global mobile payment transaction users were reported in 2019, with that figure expected to climb to 1.31 billion by 2023. The increase is being fuelled by underbanked sectors in a number of Asian, Latin American, and African nations.
The use of mobile payment apps such as Apple Pay, Alipay, and Paytm has exploded in popularity during the last several years. All of these applications make use of advanced financial technology, and in certain cases, external factors hastened their acceptance.
For instance, Paytm and other cashless payment providers in India grew exponentially after the government invalidated over 80% of currency in circulation in a process dubbed ‘demonetization.’
Mint, Good Budget, and Personal Capital are all examples of budgeting applications that are considered part of the FinTech sector. These applications assist users, particularly customers, in keeping track of their spending and income, enabling them to maintain financial management.
Platforms for Crowdfunding
Prior to the advent of crowdfunding platforms, companies were forced to seek financing from banks. However, as demonstrated by organizations such as Kickstarter, FinTech enables Internet and mobile app users to send and receive money via the platform.
Additionally, it enables specific individuals or corporations to aggregate cash from several sources through a single platform.
Individuals may also utilize the same platforms to raise money for a variety of objectives, including paying healthcare bills, traveling, and seeking donations for charity causes.
Platforms for Investing and Trading
FinTech has eliminated the necessity for stock market investors to deal directly with a stock exchange in order to purchase or sell equities. Instead, investors may now perform trades on their mobile devices, thanks to the proliferation of stock trading apps.
Additionally, several trading apps have been built to appeal to investors on a shoestring budget.
FinTech has also transformed the way asset management firms operate. With the assistance of Robo advisers, businesses have started providing systematic management services according to portfolios.
Robo-advising enables individuals to benefit from systematic asset management suggestions and portfolio handling at a fraction of the expense of engaging with a finance manager. While some traders still expect personal experience when it comes to financing management, many others–particularly new-gen traders with minor portfolios–are prepared to function with Robo-advisory.
Insurtech encompasses a range of services, from automobile insurance to house insurance to data protection. Insurtech in India attracted $183 million in investments in 2019, up from $89.2 million in 2018.
Authentic FinTech Utilisers
Businesses utilize FinTech to access loans, funding, and other financial solutions with the help of smart devices. Cloud-based mediums provide access to manage financial data, with B2B finance-oriented startups such as Airwallex catering to firms’ international transaction-related requirements.
FinTech is employed in a variety of B2C services, such as PayPal, Venmo, and Apple Pay, that enable consumers to send and receive money through the Internet. In addition, users may keep track of their expenses with apps such as Mint. In a third category, businesses such as ZhongAn Insurance and Lufax offer insurance and credit services digitally.
What Do FinTech Companies Do?
In a nutshell, FinTech businesses increase the public’s access to financial services. Traditional financial transactions such as saving, investing, and loan processing are included in these services. However, it covers ground-breaking financial technology such as blockchain and cryptocurrencies.
With one-third of Americans still not using banks or other financial institutions, FinTech startups have a long road ahead of them.
Are FinTech Firms in Competition with Banks?
On the one hand, one may claim that FinTech ventures compete with banks. While this story is somewhat true, banks are also investing in FinTech startups. Banks in the United States, for example, invested US$3.6 billion in 56 FinTech firms in 2017.
For example, JPMorgan Chase invests US$11 billion annually in its internal staff of technology researchers and developers, which numbers 50,000 employees. Additionally, the corporation invested in other financial companies totaling US$600 million.
FinTech, like other forms of technological innovation, has fundamentally altered how customers handle their finances. Financial institutions such as banks and investment firms are responding by investing heavily in FinTech apps, with some committing a significant percentage of their budgets to research and development.