Brick-and-mortar financial institutions might soon be relics of the past. Fintech is on its way to potentially replace them. Thanks to the advancements of fintech, we could well be on our way to a cashless society. In fact, 96% of consumers know of at least one alternative financial technology service they can use for making payments or transferring money. For traditional financial services companies (including banks, insurers and wealth and asset management companies), the risk of disruption is real. But how exactly is fintech poised to disrupt the way financial institutions and consumers do business? Read on.
Financial technology – fintech for short – is quickly changing the ways that homebuyers, entrepreneurs, and investors do business by making it easier to save, borrow and invest online or with a mobile device without ever visiting a traditional bank. More specifically, the fintech definition refers to the integration of technology into offerings by financial services companies in order to improve their use and delivery to consumers. While fintech has garnered the support of some and the disdain of others, it has caught the attention of many in the financial industry, from regulators and consumer advocates to industry veterans. Some wonder if a digitized financial-services industry will mean lower costs, more innovation and greater access for all. Others worry that the dominant players will ultimately stay on top, enacting hefty fees commissions and compensation, along with their gatekeeper roles. Regardless, it is clearly going to be an interesting few years as we observe who will come out on top in the fintech industry.
Fintech products and services fall within the categories of lending, personal finance, retail and institutional investments, equity financing, consumer banking, and several others. Fintech companies operate in a number of countries, providing access to products and services once available only through financial institutions. These types of companies fulfill what today’s customers want – easy access, convenience, efficiency and speed. People want to conduct transactions via mobile technology platforms and use applications for managing their financial lives, which might include tracking their overall spending, applying for a loan or optimizing their investment strategies. Unsurprisingly, many people prefer to use online apps or sites to manage their finances.
There are several examples of fintech companies. Fintech companies continue to grow as they provide both individuals and businesses with more scalable tools that are disrupting traditional business models with innovative ideas and software solutions. For payment getaways, PayPal typically is people’s go-to while Venmo is often used for mobile payments. Acorns is a widely popular app for budgeting and personal finance and consumer banking can be done through Green Dot, which offers affordable debit accounts.
While there is much speculation as to the future of fintech, regulation is slowly catching up. However, there still needs to be a transformation within the financial service ecosystem, as much of the laws currently applied to fintech are outdated and some are totally inapplicable. Fintech companies are regulated by the agencies such the U.S. Federal Reserve, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency, among others.
Fintech can be used in a variety of ways. According to Finances Online, some of the most active areas for innovation include or revolve around the following areas:
Mobile budgeting apps have taken the place of monitoring finances by building spreadsheets and navigating paper receipts and checks. Now, that process has become easier and more efficient. Budgeting apps allow anyone to conveniently and effectively closely monitor their expenses, income and other finances. Financial activities have become completely transparent for consumers, allowing them to manage their money in more responsible ways.
One of the most revolutionary aspects of fintech is the fact that it’s making access to banking possible for impoverished people. According to the Global Findex database, about 1.7 billion adults remain without a bank account or access to a mobile money provider. This is largely due to the fact that traditional banks operate in ways that marginalize impoverished people, such as charging hefty fees. This is why many people are turning to Fintech’s alternative consumer banking products and services, which are making financial products more accessible and affordable. From mobile banks to online digital banks, banking is transforming before our eyes.
The asset management sector has undergone a transformation thanks to robo-advising, which uses smart algorithm technology that provides intuitive asset recommendations. Robo-advising has achieved a multitude of advancements, which includes lowering its costs. Due to robo-advising, financial advisors can analyze a number of portfolio options 24/7, more efficiently and simultaneously. Additionally, stock-trading apps have proven to be a popular and innovative fintech contribution. Instead of having to physically visit stock exchange establishments to buy and sell stocks, investors today can trade via their smartphones. Investing has become incredibly easy thanks to cheaper and low-minimum stock-trading apps on the market. Further, stock-trading apps can be used anywhere without budgetary constraints.
Fintech also can distribute insurance. Similar to consumer banking, insurtechs are using innovative apps to insure more people, which includes those from impoverished populations. Conventional insurers are partnering with firms in this category to automate insurance procedures and extend coverage. Insurtechs are able to innovate in a variety of areas, including wearables, health insurance and mobile care insurance. With fintech-provided insurance, anyone can buy insurance such as car insurance within a few hours.
Out of all the other technologies listed here, blockchains and cryptocurrencies offer the most potential in terms of improving various industries. Blockchain is a series of blocks linked together in a chain, with each one storing records of economic transactions. As a result, they offer vast possibilities to disrupt and change conventional business models. Some significant benefits achieved by blockchain and cryptochurrencies include reduced costs, faster transactions, enhanced efficiency, better traceability, improved security and increased transparency. One blockchain application that has gained the spotlight is the smart contract. Smart contracts are digital, self-executing contracts that can electronically facilitate, verify and implement agreements. According to experts, these are likely to disrupt how future deals will be executed.
Raising money is now easier than ever before thanks to fintech, which is changing how equity financing is being done. There are a few different types of of fintechs in this category. One includes fintechs that work to align investors with startups. Others apply virtual fundraising to take on new business investments. Crowdfunding networks allow users to send or receive money online through mobile apps by enabling businesses or individual entrepreneurs to use one location to pool funding from numerous sources. Rather than trying to secure loans from a traditional bank, startups can now directly reach out to investors for support. Donor management apps can also be used to better handle P2P lending transactions.
Broadly, there are four categories of fintech users:
In the past, an existing and startup business owner would pay a physical bank a visit to personally enact his or her financial transactions. B2C applications like payment and lending services drive most of the banking industry’s initial involvements into fintech. Further, today’s mobile technology advancements have made it so businesses do not need to have good relationships with a credit card provider in order to be able to accept credit card payments. Outside of banks, B2B engagements are increasing further. Today, thanks to continuing digital innovations, businesses can easily access and secure financing and other financial services. Fintech B2B services allow companies to optimize productivity and overall bottom line by leveraging their financial transactions.
Business to client (B2C) applications are widely available thanks to fintech. For instance, anyone with a smartphone can easily transfer money and conveniently manage their finances through smart cash apps. The younger generation is flocking to these types of innovations. Consumer-oriented fintech applications today are primarily focused on millennials due to their large segment size and increasing purchasing power. Yet, Baby Boomers and Gen Xers are not far behind, and are continuing to register high fintech utilization rates. This is due to the fact that these generations have first-hand experience of the extensive benefits of fintech over traditional instruments.
Competition in the finance and banking industry is driving groundbreaking new digital solutions. From mobile payments to personalized services, customers now demand these technological interactions and exceptional customer experiences. The right technology partner can ensure you provide both and transform into a digital bank.
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