What is fintech?
Yes, the answer to that question is also worth refreshing;)
Fintech or FinTech is an acronym for financial technology. An established company or startup uses software and innovation to compete with and challenge traditional players such as banks, lenders, investment firms, brokers and finance in general.
Fintech companies seek to disrupt traditional ways of doing business in these key aspects by creating products and services that are easy to register, free or much cheaper, mobile, offer better terms and generally are much more convenient and appropriate for modern times.
How did fintech come about?
Technological development of finance (1886-1967)
You could argue that the history of fintech goes back to the 19th Century. From 1886-1967 investment in communications infrastructure, such as the telegraph and transatlantic cables, enabled the transmission of financial information across borders. The Fedwire, a centralized funds transfer service was established in 1918. The 1950s brought credit cards, reducing the need for people to pay in cash.
It can be argued that while such types of fintech may not be regarded as such today, they were, however, relevant to their time period.
Technological development of finance (1967-2008)
During the latter decades of the 20th Century, banks took charge in the development of financial technology, marking a major shift from analog to digital. The first handheld calculator and ATM were introduced in 1967.
NASDAQ, the first digital stock exchange and SWIFT (Society For Worldwide Interbank Financial Telecommunications) was established in the 1970s. During the 1980s, bank mainframe computers started to become popular and, in the ‘90s, the concept of making financial transactions online started to emerge.
Modern fintech (2008-present)
The 21st century started with banking services becoming digitized. The financial crisis coupled with the rise of smartphone usage had a massive impact on the fintech industry. The 2008 global financial crisis eroded confidence in traditional banking institutions, and together with the broad-based rise in digitalization, kickstarted what we now recognize as the fintech industry.
The introduction of Bitcoin in 2009 for example, had a significant effect on the financial world and many different cryptocurrencies were also introduced. Various fintech business models also started to emerge, some of which included alternate credit scoring, digital wallets, and small ticket loans.
What is an example of fintech?
Let's take a look at the phenomenon of fintech through the example of digital banking.
Although there were a few online banks in the early 2000s that allowed people to use the Internet to do some clunky banking without going to a bank branch, digital banking didn't really become popular until 5-7 years ago.
You could say that smartphones have driven the development of fintech and digital banking, and you'd be right. Without smartphones, there would probably be far fewer fintech companies and apps.
Cash App in the U.S. and Revolut in Europe are great examples of fintech companies using technology to change banking, investing, money transfers, payments, etc.
Since they don't have banking licenses, they have to work with existing banks using the BaaS model. Thus, a fintech company can enter the banking industry without having a banking license.
As a result, Revolut obtained a UK and EU banking license and was able to offer even more financial services directly.
These two fintech companies have tens of millions of users and, together with other digital banks, have disrupted the established banking industry.
What are the key areas of fintech?
The four key areas of fintech are considered to be:
- Artificial intelligence
- Cloud Computing
- Big Data
A handy acronym for this is ABCD, and it’s an impressive list of cutting-edge technologies that few people truly understand, yet, they’re utilized in the backend to usurp the traditional financial system and make our lives easier.
If you applied for a loan or mortgage recently or used a digital banking app, most, if not all, of these technologies were used in the background to fulfill the tasks.
Digital and traditional banks heavily rely on big data and artificial intelligence to analyze the applicant’s behavior and financial history, as well as their online footprint, social media, and much much more.
We are basically living in a sci-fi movie, and most people aren’t even aware of the fact.
What are the challenges of fintech?
As in any industry, we face countless challenges. However, fintech seems to have even more problems because of its disruptive nature.
Not only do fintech companies have to secure sufficient funding if they are starting from scratch, but they also have to find a gap in an ever-competitive market.
Then there is compliance with government regulations and rules, and developing a product either from scratch or, more commonly, on a Saas or BaaS platform. By the way, in one of our recent articles, we talked in detail about the differences between these platforms.
After the launch, you need to attract new users and fix bugs in the user interface and the system as a whole. Protecting users' privacy is also a major challenge in today's world rife with scammers, hackers, and ransomware.
Finally, satisfying investors by going public and making potentially huge profits are also paramount concerns for most founders.
Fortunately, it seems that profitability is not as important to fintech, as investors are more important to see the future potential of a fintech company (or a technology company in general) than short-term or long-term profitability.
What is the biggest fintech in the world?
Stripe, that’s dual-headquartered in San Francisco, the United States, and Dublin, Ireland and Ant Group from Hangzhou, China are two of the largest fintech companies in the world.
Valuations keep changing for the two well-known fintech behemoths. Both actually saw their valuations falter, and Ant’s even took a nosedive after a failed IPO in 2020.
Stripe’s valuation, as of 2022, is $74 billion. The company was valued at $95 billion before the internal value of its shares was slashed by 28%.
Ant had an incredible valuation of $280 billion pre-IPO, which was based on its stock pricing. However, the manifold regulations imposed over the past two years slashed its valuation to a fraction of that.
For instance, Fidelity Investments cut its valuation estimate to around $78 billion in 2021 (from $235 billion). In June, Bloomberg Intelligence analyst estimated that Ant is worth about $64 billion.
Stripe, Inc. is an Irish-American financial service and SaaS company that predominantly offers payment processing software and APIs for e-commerce websites and mobile applications. This fintech alone, processed more than $640 billion in payments in 2022.
Ant Group, formerly known as Ant Financial, is an affiliate company of the Chinese conglomerate Alibaba Group that owns the world’s largest digital payment platform Alipay, which serves over 1.3 billion users and 80 million merchants.
Why is fintech the future?
Financial technology is the future of banking, lending, investing, and finance in general. Hundreds of fintech startups emerge every year in an attempt to become the next big thing.
With a great product, business plan and proper investment, many of them have a realistic chance of success.
The market is hungry for innovative financial products that make life easier for users and make good money for investors and founders alike.
Fintech, along with smartphones, is bringing financial services to even the remotest corners of the world, enabling tens of millions of people to get a banking, credit or other financial product for the first time.
The revolution is happening in developed and undeveloped parts of the world, where people are opening their first bank accounts, but not at traditional banks, which are often unavailable or unwilling to take them on board, but at digital banks, free and open to all.
Micro, small and medium-sized businesses around the world are also affected, as opening a bank account or getting a loan is easier than ever.
Traditional "gatekeepers" are losing their influence, and fast!
Will fintechs replace banks?
Although fintech companies are on the rise, it is unlikely that they will completely replace traditional banks anytime soon. Or ever, for that matter.
In some cases, they have been around for hundreds of years and have gained a level of credibility that no startup will cancel in the near future.
People with a lot of assets will not trust fintech companies that have been around for less than a decade. They will keep their money and do other business with brick-and-mortar banks. They will use a mobile banking app, but it will be owned by their old bank.
On the other hand, there are millions of Generation Z and Millennials who trust digital banks and use them to store at least some of their money and use them daily to transfer funds, separate accounts, make purchases, etc.
When they get older and hopefully make more money and have more assets, will they continue to do so or will they start using traditional banks because they are considered safer? Only time will tell.
Traditional banks won't leave without a fight. Most of them already offer online and mobile banking and are upgrading their systems and financial products and services.
Attracting a younger demographic won't be easy with their current offerings. That's why they are also launching separate mobile banks aimed at younger people, with a simpler interface and fewer products that mimic popular digital banks.
Entering the banking space has never been easier, and we will see more and more digital banks emerge every year in an attempt to earn at least a couple of million customers locally or globally.
Is a fintech business usually a startup?
Startups are usually online or technology-oriented businesses that can easily reach a large market. Therefore, fintech companies usually start out as startups.
Fintech companies start locally, but often go global to attract even more users. Although it's more difficult because of different regulations in specific markets, it's not impossible if you put a lot of money into it.
Fintech start-ups attract investors with relative ease because the market is still wide open and hungry for new fintech products. That's why there is no shortage of fintech startups, as almost any of them could become the next big thing, at least in local markets.
What are some of the possible products for a fintech company?
There are many products that a fintech company could focus on. However, digital banks and mobile payment apps are arguably the most popular products of aspiring fintech companies.
This is not surprising. The pandemic has accelerated the adoption of mobile banking and mobile payments more than anything else. Governments around the world have themselves abandoned physical checks in favor of mobile payments, and that alone has led millions of people to open their first digital bank account or bank account at all.
Of course, there are other uses as well.
In recent years, there has been a boom in the insurance industry, where technology is making existing and fledgling insurance companies more efficient. They are redefining the customer journey by shortening lengthy processes, including underwriting, claims processing and more.
While cryptocurrencies are not at their best at the moment, as their value has collapsed almost overnight and numerous scams and frauds have cost millions of people money, they are another example of fintech.
Equity investing and trading has also become commonplace for millions of people because fintech companies like Robinhood have made it possible for ordinary people to invest in shares of stock without paying commissions.
We have answered the most requested questions about fintech and the fintech industry, as well as digital banking.
This should help you understand what fintech is, as the examples we presented are pretty straightforward and based on real companies from the Europe and worldwide.
Although fintech can be confusing to people first encountering it, once you dig a bit deeper, you realize that it’s cut and dry and easy to comprehend.