fintech

What is fintech?

Financial technology, or fintech, is a term for using technology to revolutionize how the world uses money in the digital age. Fintech enhances and automates the delivery and use of financial services, making them more accessible, efficient and secure for businesses and consumers.

Consumer adoption of fintech is spreading rapidly. A McKinsey study predicted that between 2022 and 2028, fintech revenues will grow almost three times as fast as traditional financial sector revenues.

How does fintech work?

Fintech encompasses digital payments and banking and advanced enterprise applications such as insurance and investment platforms. There is no single explanation for how all fintech works. But at its most basic level, fintech revolves around performing and analyzing money transfers between two or more parties.

Fintech software can consist of applications for desktop, web and mobile. These applications keep financial records, enable instant electronic communication between parties, and often use artificial intelligence and big data to analyze risk, forecast market changes, and predict consumer behavior.

Hardware is also an essential part of fintech. Businesses use near-field communication and QR codes to enable instant cashless financial transactions. Customers can provide payment data via credit or debit cards, mobile phones, smartwatches and digital wallets.

Different types of fintech

The broad scope of fintech includes, but is not limited to, the following:

Consumer banking

Credit cards and automatic teller machines are early forms of fintech, allowing customers to spend money, withdraw cash and deposit checks outside of typical banking hours. Modern banking tech improves these methods by providing web and mobile access to bank accounts so customers can manage their money anywhere and anytime.

Users can check and manage their account balances, open accounts, automate bill payments, and even deposit paper checks using a cellphone camera. Online banks forgo physical locations and might offer higher interest rates on savings, low or no-fee checking, or built-in automated budgeting tools.

Investing

Investing apps simplify and democratize the investment process, making it more accessible and user-friendly for the average person. These platforms allow individuals to buy and sell stocks, bonds and other securities while providing educational resources and real-time data analytics to help users make informed investment decisions. Robo-advisors use algorithms to provide automated investment strategies.

Mobile payments

With mobile payments, users can send money electronically to others without needing cash. They also allow smaller businesses and individual professionals to accept digital payments and tips at minimum cost. Mobile payments have tremendously impacted global financial inclusion by providing financial services to customers in developing economies that lack traditional credit infrastructure.

Insurtech

Insurtech helps customers find insurance coverage with specialized protection. Insurance companies use automation to streamline the claims management process while using big data analytics and machine learning to develop tailor-made insurance offerings grounded in real-time risk evaluation. With insurtech, the insurance sector is well-equipped to adapt to future demands, offering personalized services at more affordable rates and ensuring a customer-centric experience.

Examples of fintech in practice

There are several forms of fintech available. Below are four examples of fintech platforms from the Forbes Fintech 50, presented in unranked, alphabetical order. The writer selected those with products serving unique or unusual use cases or combining multiple forms of fintech.

• Carta manages capital tables for startups, provides bookkeeping services to venture firms and provides a platform for employees to sell shares.
• Coalition protects businesses against cyberthreats with cyber liability insurance and a suite of security tools that allow businesses to monitor and address threats actively.
• CoinLedger offers cryptocurrency investors tax reports on their digital assets. Cryptocurrency may not be issued by a government, but it is subject to tax law.
• Greenlight is a mobile platform for families to manage allowance distribution. Greenlight also provides educational material to help kids learn to manage their finances.

Fintech trends

In the rapidly evolving world of fintech, several key trends stand out for their impact on how we manage and interact with money.

Embedded finance

Embedded finance integrates financial services into nonfinancial companies' platforms or products, allowing businesses such as e-retailers to offer multiple convenient forms of payment or financing on their platform. Technology companies form partnerships with traditional financial institutions, leveraging APIs to embed these services.

Some payment services, such as PayPal and Venmo, allow customers to pay for goods online without exposing their financial information. These services also enable customers to have one payment account for multiple online retailers, increasing security and convenience.

Blockchain and cryptocurrency

Cryptocurrency is a unique currency not controlled or issued by a government or bank. Instead, it relies on a distributed electronic ledger called a blockchain, which records all cryptocurrency transactions. The ledger itself is open source, while the information about each transaction -- such as the parties' identifying information -- is secured via cryptography.

Digital wallets

Digital wallets replace traditional pocket wallets with devices such as mobile phones, smartwatches, computers or tablets. The software securely holds information on the user's bank accounts, credit cards, cryptocurrency accounts and even gift cards.

Digital wallets make online transactions safer and more accessible by allowing customers to connect all their varying payment methods to any online retailer with a single secure login. In brick-and-mortar stores, digital wallets enable contactless checkout with a single device.

Fintech regulations

Traditional financial institutions are already subject to numerous regulations. However, tech companies that partner with traditional financial companies to provide services are not subject to the same regulatory scrutiny. In this situation, a tech company might take too many unnecessary risks. At the same time, the finance half of the partnership assumes the risk of technical failures.

In 2018, the U.S. Office of the Comptroller of the Currency began allowing fintech companies to apply for special-purpose national bank charters. These charters ensure fintech companies adhere to the same regulatory standards and consumer protections as traditional banks, maintaining financial stability and consumer trust. Obtaining a bank charter can also create new avenues for fintech companies regarding funding, operational scope and market credibility.

Since fintech companies facilitate money transfers, it is vital to have regulations to prevent money laundering. In the U.S., the Anti-Money Laundering Act and Know Your Customer rules mandate that businesses confirm the identification of consumers before completing any transactions and keep an eye out for any questionable conduct.

Fintechs also have a responsibility to protect their customers' data privacy. The General Data Protection Regulation stipulates stringent guidelines for the management and processing of personal data, gives people control over their data and imposes severe fines for noncompliance. In the U.S., data protection is covered under separate regulations of multiple sectors. For example, the Gramm-Leach-Bliley Act and the Fair Credit Reporting Act (FCRA) regulate customer data handling. However, FCRA applies only to companies that use credit reporting.

Given the rapid growth and vast scope of fintech, modern financial regulations must adapt quickly to protect the stability of financial institutions and ensure that fintech treats customers fairly.

Equitable treatment is especially important with the largest tech companies such as Google, Apple and Amazon, which currently offer financial services. A tech company with an enormous existing customer base has a tremendous advantage in the fintech market due to the better data analysis potential of their current customers' data. This advantage can quickly compound and lead to a monopoly. Future regulators could address this problem by defining "big tech," developing regulations based on a company itself rather than its activities, and increasing regulatory collaboration across industries and locations, according to the International Monetary Fund.