What Is Fintech or Financial Technology? A Beginner’s Guide
Since the mid-2010s, the role of fintech in our day-to-day private and professional life has been increasing exponentially. Think about a moment when you paid for your Uber ride with a credit card or even in crypto, split the bill with your friend using Venmo, or used your bank’s app to track monthly spending. Fintech is the main hero in all of these stories, and in many more that are so routine that you hardly remember them.
Ernst & Young’s 2019 Global FinTech Adoption Index shows that since 2015, the percentage of the world’s population using fintech has increased up to nearly two-thirds (64%) from the initial 16%. In other words, 3 out of 4 individuals are using technological solutions to address their money management and payment needs. This level of demand facilitated the popularization of fintech on a governmental level, causing countries to invest in national fintech innovation sectors.
However, some still find the term “fintech” ambiguous and struggle to understand what fits under this label. The fintech umbrella is quite large and encompasses various tools, platforms, and services. In this article, we will take a closer look into the industry, its key players, and trends. So, if you’ve been wondering, “What exactly is fintech?”, keep reading to find out the answer.
What does fintech mean?
Fintech stands for “financial technology” and is a term used to describe the technological solutions used to amplify, streamline, digitize, and disrupt the services offered by traditional players in the financial industry. More specifically, fintech refers to applications, both desktop and mobile, software, and algorithms, as well as hardware in certain cases. Fintech solutions aim at making personal and corporate money operations (e.g., transfers, payments, currency exchange, etc.) simpler and faster, and focus heavily on user experience and other benefits. The term also encompasses platforms that facilitate peer-to-peer lending, cryptocurrency exchange, insurance provision, and so on.
Businesses generally rely on fintech products and services for transaction processing, e-commerce facilitation, accounting, audit, payroll, revenue management, and other corporate needs. With the emergence of the Covid-19 pandemic, businesses around the world began leveraging contactless card payments and other fintech advancements to maintain continuous operations and retain customers.
How does fintech work?
Fintech enables individuals and businesses around the world to access traditional financial services through the digital channel. Previously, when brick-and-mortar financial institutions dominated the space, millions of users remained unbanked or underbanked due to their inability, for a variety of reasons, to access those. Today, when opening a current account is just a few clicks away, practically anyone can enjoy the freedom of managing one’s own finances. Online and mobile apps have enabled people to transfer funds, deposit checks, save and invest money, get a personal financial advisor, ask for a loan, and much more in a simplified manner. AI combined with massive amounts of data that fintech companies process daily has enabled them to offer tailored services and a personalized experience to every user out there.
What are the examples of fintech?
Since 2010, the fintech industry experienced a true boom, with billions invested by venture capital funds and unprecedented attention from media, consumers, and financial sector tycoons. Here is a list of some of the areas where fintech innovators are particularly active (among others):
Cryptocurrency along with digital tokens, such as NFTs, and digital cash mainly rely on blockchain, also known as distributed ledger technology (DLT), which is decentralized and stores records on computer networks. Under the blockchain framework, buyers and sellers use smart contracts to execute deals.
This concept promotes the democratization of access to bank data in order to develop applications that connect traditional financial institutions with third-party providers. This ultimately expands the market offering and allows for a higher degree of personalization and better user experience.
Insurtech companies apply their technological know-how to streamline the insurance industry and tailor insurance products to particular customer needs.
Regtech emerged to help financial service providers address the complexity of the regulatory landscape and make sure they are always operating in compliance with industry rules (e.g., anti-money laundering, anti-fraud, KYC, etc.).
Companies like Wealthfront and Betterment were born to lower the costs and automate investment advisory, making it more accessible to a wider customer pool.
These services are designed specifically to promote financial inclusion by addressing the needs of low-income or disadvantaged individuals that are out of traditional banks’ scope.
Although not directly linked to financial services, the innovative players in the cybersecurity industry work to prevent financial crime and disrupt adversaries before they commit fraud.
Types of fintech companies
Mobile Banking and Neobanks
Most often we hear the word “fintech” in the context of mobile & digital banking. It is hard to find a person that doesn’t use or has never heard of Revolut, N26, Monese, Satchel, or other digital banking providers and money transfer apps. These companies strive to address the ever-evolving needs of people and businesses, which include current accounts, BaaS, SaaS, card issuance, white label solutions, international money transfers, and other services. Mobile banking providers and neobanks usually operate online, with no physical branch locations, and deliver a vast range of services that can be tailored even to the pickiest user.
In recent years, several cryptocurrency platforms, such as Coinbase, have emerged, allowing users to leverage decentralized exchanges for crypto transactions. Along with those, there are numerous crypto wallets that have sprung up to make operations faster, smoother, and more efficient. Besides, other types of fintech companies have integrated blockchain technology for payment processing, digital identity verification, and secure execution of money transfers.
Investment and Savings
You’ve definitely heard of companies like Robinhood, Acorns, Mint, and eToro before. These are investing and savings apps that help users budget efficiently and eliminate the barriers to investing, which was previously reserved for wealthier members of society with access to financial advisory.
Machine Learning and Trading
In order to stay ahead in the finance game, you need to be good at predicting where markets and stocks are headed. Since the end of the 20th century, machine learning has been the Holy Grail for those looking to make billions of dollars through trading. Numerous companies emerged in this niche, providing the ability to analyze massive amounts of data and detect patterns and trends to subsequently aid investment decision-making.
The fintech industry has made daily payments simpler, faster, and safer for millions of users. Solutions like Venmo, PayPal, and Stripe are used for seamless payment processing, making it easier than ever to send money digitally no matter where you are located.
Fintech companies have created technology that streamlines risk assessment and makes the approval process faster, which has made the credit industry more accessible and transparent. Practically anyone around the world can now apply for a loan using their smartphone or another device.
Numerous fintech startups, like Lemonade and Kin, are partnering with traditional insurance institutions, which are slow technology adopters, to help accelerate automation and broaden coverage.
How has fintech evolved?
The term “fintech” was added to the Merriam-Webster dictionary only in 2018, but the concept dates back a few decades. Over the recent years, fintech has evolved from being exclusively associated with startups to getting integrated and adopted by many legacy financial institutions internally. A great example is Goldman Sachs, a finance industry giant, that developed and launched its own online bank called Marcus in 2016. While some companies are leveraging internal resources to accelerate fintech innovation, others, like JP Morgan Chase, do so by investing in third-party fintech firms.
During the Covid-19 pandemic, the fintech industry has proven its immense value by allowing people and businesses to keep their financial operations up and running despite severe lockdowns.
How does fintech affect me?
Since its birth, fintech has been promoting the democratization of financial services and improving financial inclusion through its user-friendly technological solutions. Thanks to fintech, today’s users can access most, if not all, financial services online. Whether it is paying for something online or in-store, applying for a loan, opening a bank account, or getting the right insurance product – fintech service providers make the process fast and convenient, eliminating heaps of paperwork and friction. Even when it comes to investment, humans are able to use a robo-advisor and leverage the power of AI/ML to make the best decisions for their portfolio. Today, anyone can manage their money in a smart way and enjoy lower fees and all kinds of perks, wherever they are. The impact of fintech on your life is only limited to how many services you choose to interact with.
How to get into fintech?
Creating a fintech company from zero can be pretty challenging, as it requires significant financial and time resources to get everything working. To simplify the process, you can look into BaaS and SaaS solutions and fintech consultancy services, which can help you leverage the expertise and experience of industry veterans and launch your venture in significantly less time.
Regardless of the path that you decide to take, you will need to follow a few standard steps:
1. Identify your target niche
2. Analyze the regulatory landscape
3. Define your target audience and USPs
4. Assemble a dream team
5. Define your MVP scope
4. Secure funding
5. Focus on business development
The fintech industry is evolving quickly, with newcomers continually bringing new ideas and innovative technology into the sector. Here are three fintech trends you should keep an eye on in the nearest future:
- Digital Wallets – The use of Apple Pay and Google Pay is currently on the rise, as it allows users to store their payment information directly on their smartphone and use it to pay for goods and services in seconds, both online and in-store.
- Blockchain – Despite the fact that the cryptocurrency market has been quite bearish lately, to say the least, blockchain will continue to play a central role in the fintech industry. After all, smart contracts are one of the best solutions when it comes to making transactions more secure and efficient.
- Embedded Finance – This term is used when a non-financial business integrates fintech solutions into their infrastructure to ultimately improve customer experience (e.g., a neighborhood store that sets up a payment terminal, an e-commerce that offers a buy-now-pay-later option at checkout, etc.).
Is fintech secure?
Fintech companies comply with extensive regulations, so it is very unlikely that you will experience unpleasant surprises when using the services of a fintech company that has been on the market for years and has a solid reputation. Yet, as in the case with any other business, we suggest you approach offers or companies that seem too good to be true with some healthy skepticism. After all, regardless of which provider you choose, you will be authorizing them to process and store your sensitive data and assets, and it’s important to make sure you have done your research instead of trusting blindly.
What is fintech banking?
Traditional banking institutions often integrate fintech solutions both into their back-end (to improve monitoring) and front-end (to enhance the user experience and amplify their market offering).
What is the difference between a bank and a fintech company?
Fintech companies emerged as a challenge and competition to traditional banks, offering more advanced features and a better user experience to the customers while delivering the same service range of traditional banks. They are more agile and embrace innovation faster than legacy institutions, yet the latter can boast solid networks and customer loyalty due to their established market presence.
Your path to fintech with Satchel
Satchel is a leading European EMI, with HQ in Lithuania, performing international money transfers, fintech consulting, currency exchange, BaaS, SaaS, and card services since 2018. From payment and financial infrastructure in your design in just a month to the management of transactions, fees, accounts, and users, while maintaining top-level security – Satchel will help you grow your business using cutting-edge technology and our industry expertise. Here are some benefits:
- Connectivity with major systems (SEPA, CentroLINK, SWIFT, etc.)
- Private and business accounts
- Multi-currency IBANs
- Payment gateway for card processing
- Custom tariffs
- Intuitive mobile app iOS & Android
- Customized payment cards
- Administrative panel and reporting
- AML, Compliance, Fraud-prevention
- Marketplace with a variety of services
- 300+ established APIs