Financial Technology, as commonly known as FinTech, has been all around us in 2019. This disruptive field is continuously disrupting financial services. FinTech has changed not only the way consumer interact with the offered financial services, but also how businesses interact together.
If you have ever received a wireless payment, online or through an app, or sent funds to friends or family, FinTech has touched your daily life. The driving force for the industry is the increasing demand of accessing financial services i.e. managing your financials and conducting financial transactions, through personal devices. This, in turn, induced heavy interest as well as investing in technology-oriented solutions for financial services.
The Fintech industry is expected to reach 305.7 billion USD by 2023 (ResearchAndMarkets) and FinTech companies are, now, a threat to the traditional brick-and-mortar businesses offering financial services, including banks. But, before we dive into the details about the industry we shall define it and discuss what Fintech encompasses as an industry.
What is Financial Technology?
At the start, financial technology alluded to any technology applied to the back-end systems of financial institutions. Nowadays, Fintech has grown to include a plethora of other applications; applications, as aforementioned, that are consumer-centric. As everyone would agree, it is now possible, quite easily, to manage your financials, trade, pay for your food through this technology; often through mobile phones thanks to a technology referred to as Near Field Communication.
In laymen terms, fintech engulfs any company that uses a combination of the internet, mobile devices, software or cloud technology to allow its customers to perform financial operations or access financial operations. Mainly, financial technology products are designed to link consumers' finances with technology, although the term is can also be applied to B2B technologies as well.
The tools provided by fintech are changing the way many consumers manage their finances. For instance, with fintech services, it is easier for consumers to track their money and facilitate funds transfer. For the estimated 1.7 billion people, worldwide, without an account in any financial institution (World Bank Group), fintech provides these individuals with a chance to participate in financial services through easy-to-use-technology. And, to a large extent, this is exactly why fintech, as an industry, has been developed- to make access to financial services and operations ubiquitous.
To better understand the landscape of fintech one needs to take a look at the most areas of fintech innovation. Most of these innovations orbit around the following areas:
- Blockchain technology
- Smart contracts
- Insurtech or Insurance Technology which aims to mainstream the insurance industry through easy-to-use-technology
- Robo-advisors for investments
In terms of its use, we can refer to four categories of users for financial technology:
- B2B for banks
- Business Clients
- B2C for small businesses
In what concerns consumers, as is the case with most technologies, the younger you are the more you will be able describe what fintech is- and be aware of its existence. As fintech’s products tend to be consumer-centric, this makes fintech products targeted towards millennials given the huge size of this segment. This is an important fact to keep in mind, as this interest in millennials has a lot to do with the size of the market more than the ability of baby boomers to use this technology. In truth, fintech cannot offer the later generation because it simply it cannot address the problems their facing.
As for businesses, prior to the adoption of fintech, a business owner would have to go to a bank or any other funding financial institution to secure financing or startup capital- the tradition funding road. If the business wants to accept credit card payments, they would have to establish a relationship with a credit provider and even install infrastructure. Now, with mobile technology, those hardships are a part of the past.
Fintech: How does the future look like?
We can safely state that the future of financial technology has become mainstream. But this comes with a price; an increased scrutiny from the regulators.
Initially, regulators were struggling in terms of dealing with fintech companies, since they are so different. It was argued, from traditional banks, that financial technology companies were under-regulated, however the landscape, in this regard, is changing.
Fintech companies that offer financial products that are the same as a traditional bank may be the subject to the same regulations as a brick-and-mortar bank which can be a challenge. In truth, it is hard for a startup lacking the expertise, knowledge and resources to stay compliant with these regulations.
Regulators have the mission of making sure that fintech companies stay compliant with the regulations without killing their innovation. This comes with the responsibility, for regulators, of keeping up with innovative technology without introducing regulations too early in the process which can prevent the early adoption of useful technology.
As a solution, some have touted the idea of a “regulatory sandbox,” an approach already tried in several countries where a fintech can experiment with pilot programs in cooperation with a regulator in a controlled environment. (Thompson Reuters).
In this current environment where fraud is spreading unchecked, cyber threats increasing, know your customer (KYC) compliance has become the essential focus for the financial services industry. Financial technology companies sometimes have quite of difficulties with the demands of compliance in these areas – on average, customers can send up to 100 documents to banks during the onboarding process. Fintech companies need to be equipped with the right tools to handle this massive volume in order to meet the standards.
Fintech is here to stay, so some of the challenges will perhaps only get more complicated as the industry continues to grow. It’s undeniable that Fintech has in many senses changed how consumers understand finance and how they conduct financial operations or transactions and made many things easier. It also has the promising potential to help reach much of the unbanked globally. It would be lackadaisical if regulators do not continue to keep an eye on fintech companies to determine how these new financial services companies fit into the broader financial landscape.