Whether you’re involved in the financial sector or an aspiring entrepreneur you’ve probably felt that disturbance known as Fintech. It’s only one of the hottest trends currently in the financial and payment industries that has experienced global investments skyrocket from $930 million in 2008 to more than $12 billion at the start 2015. By 2017, it’s even projected that bank spending on new technologies will reach almost $20 billion.
In short, the Fintech revolution is here and it’s gearing up to explode. That’s why now is the time to jump on board the wagon and seize the opportunity to become a part of the most disruptive force in the financial industry.
What is Fintech and What’s the Big Deal?
Financial technology, Fintech for short, was originally a term “given to technology applied to the back-end software of established financial institutions.” It is now simply defined by the Wharton School of Business as “an economic industry composed of companies that use technology to make financial systems more efficient.” These technology companies are disrupting a wide range of sub-industries that include:
- Crowdfunding (Kickstarter)
- Peer-to-peer lending (Lending Club)
- Algorithmic asset management (WealthFront)
- Data collection (2iQ Research)
- Payments (Xoom)
- Cyber security (iDGate)
- Credit scoring (ZestFinance)
- Digital currency (Coinbase)
- Education lending (CommonBond)
- Exchanges (SecondMarket)
- Working capital management (Tesorio)
- Quantum computing (QxBranch)
What’s interesting about financial technology is that this isn’t exactly a new development. As Falguni Desai points out in Forbes, that over the last 65 years technology has improved the banking industry with advancements like credit cards, ATMs, electronic stock trading, bank mainframe computers, and eCommerce.
Desai states, “What is striking about the last 65 years of development in these technologies is that while they became mainstream and widely used by banks and their customers, the banking sector was not threatened.” In fact, they grew. Today, however, “fintech services are not simple enhancements to banking services, but rather replacing banking services completely.”
Following the financial and credit crisis in 2008, Desai says that banks were slapped with regulations that “forced banks to pay more attention to their back offices and spend more on compliance and risk management programs.” This lead to “front-office, client focused talent pools, once happily employed and generously paid by banks are moving into the technology and startup arena.” The end result? “Fintech startups have been able to create business models which avoid the structural formalities of being a bank, while providing a more efficient means of serving customer needs.”
While Fintech startups have been emerging across the globe, Linda Dimyan says on CNBC that financial giants like JPMorgan Chase and Citigroup are also investing in Fintech like mobile payments and the blockchain in order to “to get ahead of the technology disruption unfolding in the banking industry.”
Both startups and established financial businesses are all eager to have a piece of the $4.7 billion in revenue that fintech hauls in. As more parties become interested in fintech, and technology continues to advance, fintech will not just become a profitable industry, it will also completely change the financial industry…and the world.
How the Fintech Revolution Has Impacted the World
Despite the various sizes of the companies jumping into the world of fintech, and the range of sub-industries that they’re involved with, financial technology has impacted the world in the following ways.
It Changed How Companies Do Business
Thanks to fintech, it’s never been easier to establish and manage a business. Gone are the days of walking into your local bank or financial institution to secure a loan for your small business idea. You can now pitch your idea onto crowdsourcing site or find a loan from a peer-to-peer lending site.
Fintech has also made it possible to accept multiple forms of payments from your customers, no matter where they live in the world. Instead of relying on relics like cash or checks, you can accept payments electronically on your mobile device. Not only is this convenient, it allows businesses to participate in the global market. Best of all, most of these payments like Due do not charge any transaction fees.
Reduced Costs and Improved Services for Customers
As noted in The Economist, “fintech disruptors will cut costs and improve the quality of financial services.” This is because “They are unburdened by regulators, legacy IT systems, branch networks—or the need to protect existing businesses.” The article goes on to say;
“Lending Club’s ongoing expenses as a share of its outstanding loan balance is about 2%; the equivalent for conventional lenders is 5-7%. That means it can offer better deals to the borrowers and lenders who congregate on its platform. Half of the loan applications Funding Circle gets from small businesses arrive outside normal business hours. TransferWise takes a machete to the hefty fees that banks levy to send money across borders.”
Introduced More Effective Ways to Assess Risks
There are now more ways to discover the risks involved in lending money to a business or individual. For example, lenders can look at social media reviews or data like financial projections before authorizing a loan. Even more interesting is that fintech removes prejudices like ethnicity, gender, or even age.
The Economist uses the example of Italian banks that charge female owners of small businesses more than male owners. Going online to find a loan has reduced these prejudices.
Helped Improve the Financial Lives of Individuals
Scott Saunders, the CEO of Payoff, tells Bloomberg Business;
“The credit card companies and banks are perpetuating the cycle of debt. We’re reinventing lending from the perspective of wealth management. We actually want people to pay off their loans, and we don’t want them to get a second, third, or fourth loan from us. We want to help people cross the chasm from a borrower mentality to an investor mentality, and paying off high-interest-rate credit cards is the best investment they can make.”
Fintech companies are giving individuals the opportunity to explore various financing options so that they can relieve themselves from debt.
Created Alternative Forms of Credit, Payments, and Lending
Cash, checks, plastic, and traditional loans are all rapidly being replaced. Fintech has paved the way for digital wallets like Google Wallet and Apple Pay, peer-to-peer payments opportunities with Venmo, and sending out invoices with Due. Square as allowed merchants to accept credit cards on their smartphones. Loans can be secured through Lending Tree. And, cryptocurrency like bitcoin and the blockchain are decentralized payment systems that allow you to transfer funds securely from anywhere in the world.
Even if you don’t have a bank account, startups like Circle now provide the chance for you to lend money to your friends or purchase goods from online merchants. And, you can even now automate investing opportunities with Betterment and and Wealthment.
Placed a Focus on Cybersecurity and Data Collection
If there has been hurdle holding the fintech industry back it’s been over security concerns. Thankfully, this has been addressed by a majority of fintech companies as they emphasize the importance of keeping their customer’s information secure by providing heavily guarded servers.
Additionally, companies are tapping into big data to not only strengthen security, but also being used to predict the future of markets. For example, Kensho is used to ask users how real-world events will affect markets by examining factors like news reports, company filings, and market data.
The Future of Fintech
Let’s be honest. Fintech won’t be replacing traditional financial institutions anytime soon. However, these startups and businesses are disrupting the industry by providing a better consumer experience, being able to effectively track and monitor budgets, how we make purchases, and to secure loans.
Even more interesting will be the fact this technology will extend beyond the financial sector. With the blockchain, for example, secure and transparent exchanges will be used for other assets like vehicle titles and diamonds.
With so many possibilities, the fintech revolution is going to continue to impact the everyday lives of business owners and individuals within the immediate future.