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What is FinTech?

Financial technology or Fintech as it’s commonly known refers to the integration of technology into offerings by financial services companies in order to improve their use and delivery to consumers. At its core, fintech is utilized to help companies, business owners, and consumers better manage their financial operations, processes, and lives by utilizing specialized software and algorithms that are used on computers and, increasingly, smartphones.

Fintech, the word, is a combination of "financial technology." The term's origin can be traced to the early 1990s with the “Financial Services Technology Consortium”, a project initiated by Citigroup to facilitate technological cooperation. the term was initially applied to the technology employed at the back-end systems of established financial institutions. ​Since then, however, there has been a shift to more consumer-oriented services and therefore a more consumer-oriented definition. However, only since 2014 has the sector attracted the focused attention to education, retail banking, fundraising and nonprofit, and investment management.

The crypto currency segment of fintech may see a lot of publicity, however the big money still lies traditional global banking industry.

Understanding FinTech

Consumers have become increasingly aware of FinTech as part of their daily lives. Fintech, which originally referred to the use of computer technology applied to the back office of banks or trading firms, now describes a broad variety of technological interventions into personal and commercial finance, these include money transfers, depositing a check with your smartphone, bypassing a bank branch to apply for credit, raising money for a business startup, or managing your investments, generally without the assistance of a person.

Broadly, the term "financial technology" can apply to any innovation in how people transact business, from the invention of digital money to double-entry bookkeeping. Since the Internet revolution and the mobile Internet/smartphone revolution, however, financial technology has grown explosively.

Up until now, financial services institutions offered a variety of services under a single umbrella. The scope of these services encompassed a broad range from traditional banking activities to mortgage and trading services. In its most basic form, Fintech unbundles these services into individual offerings. The combination of streamlined offerings with technology enables fintech companies to be more efficient and cut down on costs associated with each transaction.

financial products and services that were once the realm of branches, salesmen, and desktops move toward mobile devices or simply democratize away from large, entrenched institutions. If one word can describe how many fintech innovations have affected traditional trading, banking, financial advice, and products, it's 'disruption. many tech-savvy industry watchers warn that keeping apace of fintech-inspired innovations requires more than just ramped-up tech spending. Rather, competing with lighter-on-their-feet startups requires a significant change in thinking, processes, decision-making, and even overall corporate structure.

Fintech and New Technologies

New technologies, like machine learning/artificial intelligence (AI), predictive behavioral analytics, and data-driven marketing, will take the guesswork and habit out of financial decisions. "Learning" apps will not only learn the habits of users, often hidden to themselves, but will engage users in learning games to make their automatic, unconscious spending and saving decisions better. Fintech is also a keen adaptor of automated customer service technology, utilizing chatbots and AI interfaces to assist customers with basic tasks and keep down staffing costs. Fintech is also being leveraged to fight fraud by leveraging information about payment history to flag transactions that are outside the norm.

Since the mid-2010s, fintech has exploded, with both startups receiving billions in venture funding (some of which have become unicorns), and incumbent financial firms either snatching up new ventures or building out their own fintech offerings.

North America still produces most of the fintech startups, with Asia a relatively close second, followed by Europe. Some of the most active areas of fintech innovation include or revolve around the following areas (among others):

Cryptocurrency (Bitcoin, Ethereum, etc.), digital tokens (e.g., NFTs), and digital cash. These often rely on blockchain technology, which is a distributed ledger technology (DLT) that maintains records on a network of computers but has no central ledger. Blockchain also allows for so-called smart contracts, which utilize code to automatically execute contracts between parties such as buyers and sellers.

Open banking, which is a concept that proposes all people should have access to bank data to build applications that create a connected network of financial institutions and third-party providers. An example is the all-in-one money management tool Mint.

Insurtech, which seeks to use technology to simplify and streamline the insurance industry.

Regtech, which seeks to help financial service firms meet industry compliance rules, especially those covering Anti-Money Laundering and Know Your Customer protocols which fight fraud.

Roboadvisors, such as Betterment, utilize algorithms to automate investment advice to lower its cost and increase accessibility.

Unbanked/underbanked services that seek to serve disadvantaged or low-income individuals who are ignored or underserved by traditional banks or mainstream financial services companies. These applications promote financial inclusion.

Cybersecurity. Given the proliferation of cybercrime and the decentralized storage of data, cybersecurity and fintech are intertwined.

What Are Examples of Fintech?

Fintech has been applied to many areas of finance. Here are just a few examples.

Roboadvisors are apps or online platforms that optimally invest your money automatically, often for little cost, and are accessible to ordinary individuals.

Investment apps like Robinhood make it easy to buy and sell stocks, ETFs, and crypto from your mobile device, often with little or no commission.

Payments apps like Paypal, Venmo, Block (Square), Zelle, and CashApp make it easy to pay individuals or businesses online and in an instant.

Personal finance apps such as Mint, YNAB, and Quicken SimpliFi let you see all your finances in one place, set budgets, pay bills, and so on.

P2P lending platforms like Prosper, Lending Club, and Upstart allow individuals and small business owners to receive loans from an array of individuals who contribute microloans directly to them.

Crypto apps, including wallets, exchanges, and payments applications allow you to hold and transact in cryptocurrencies and digital tokens like Bitcoin and NFTs.

InsurTech is the application of technology specifically to the insurance space. One example would be the use of devices that monitor you’re driving in order to adjust auto insurance rates.

Does Fintech Only Apply to Banking?

No. While banks and startups have created useful fintech applications around basic banking (checking & savings accounts, bank transfers, credit/debit cards, loans), many other fintech areas that have more to do with personal finance, investing, or payments (among others) have grown in popularity.

How Do Fintech Companies Make Money?

FinTech’s make money in different ways depending on their specialty. Banking FinTech’s, for example, may generate revenue from fees, loan interest, and selling financial products. Investment apps may charge brokerage fees, utilize payment for order flow (PfOF), or collect a percentage of assets under management (AUM). Payments apps may earn interest on cash amounts and charge for features like earlier withdrawals or credit card use.

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