Definition – Fintech is composed of two words, namely ‘Fin (Finance)’ and ‘Tech (Technology)’, which combined together gives way to what is called ‘Financial Technology’. This refers to various types of companies, financial products, and services. In simple terms, the implementation of technology into financial services to improve the services offered to customers is called fintech.
Fintech could be any sort of technology that usually automates financial services while granting access to them. Most fintech companies provide financial products such as bank accounts, investments, loans, insurance, etc., which can be accessed entirely on an online platform. These services are easy to acquire and take no more than a few minutes of time in most cases.
For example, if you transfer money online with the help of an online banking app, then you are utilizing Fintech. Fintech services can be more complex than just transferring money, which includes settling an insurance claim or securing a loan with nothing but just a mobile application.
Fintech companies are the biggest rivals of traditional financial companies and have been providing a lot of competition. The main objective of fintech companies is to provide financial services for lower costs and lesser time than what is needed by brick-and-mortar institutions.
Rise of the Fintech sector – Based on research conducted by PWC (accounting company), most of the traditional financial institutions (88%) believe that they are losing a lot of money to these fintech companies. Consumers are also attracted to the utilization of fintech in contrast to their traditional financial counterparts. It has been estimated that there was a 5% growth in 2019 in the payments made with the help of the fintech sector.
The scenario of people paying more attention to fintech could be justified with the help of an example. Let us imagine that you need to pay for the groceries you’ve bought. In the olden days, you would have to pay via cash. To pay cash, you would be required to visit a bank, fill a withdrawal form, submit that withdrawal form, and get money. With the advancement in the technology sector, ATM machines emerged, where you can withdraw cash from a machine with the help of a card. Now, with the implementation of fintech, you can pay money without having to opt for any of the above-mentioned methods. This is because you can simply make a payment at the cash counter with the help of a mobile banking application integrated with your bank account.
How does it work? – As we know, the primary objective of fintech is to use technology for making financial transactions in an easy way. This is achieved by speeding up the transaction process and lowering the costs involved. Fintech can also refer to the usage of artificial intelligence, data science, or blockchain technology for improving financial products and services.
When a person or a bank has access to their funds all the time, they can make transactions in an easy way while not having to wait for a bank to open. This would generally save a lot of time for the individual/company as well as that of the bank. As fintech in banking implements technology for their services, the rules and regulations that oversee the banking also govern the technology implemented.
In the United States, certain regulatory authorities such as the Federal Trade Commission (FTC), Securities Exchange Commission (SEC), the Consumer Financial Protection Bureau, etc., supervise and regulate the financial activity that is carried out in the US. Banks and other financial institutions that are implementing fintech should make sure that they follow the federal and state regulations.
Types of fintech products/services – Given below are some of the sectors that implement fintech.
- Digital Payments:
The most common use for fintech is for making faster and hassle-free payments online. You might know about some online platforms such as PayPal, however, traditional banks are also opting for fintech so that they can improve the services offered. Some even collaborate with Zelle to provide the feature of digital payments. People can make use of mobile banking apps to send or receive money through the Zelle edition. These types of transactions are usually done within a few minutes.
- Online Banks:
Over the recent years, there has been a surge in the emergence of online banks, which are providing tough competition to brick-and-mortar banks. Online banks are advantageous when compared to normal banks because they have very minimal fees (sometimes no fees) and are known to offer higher interest. Some of the online banks such as Ally and Discover made it into the list of the top 30 banks in the US according to the assets under management in 2020. This would make it clear to understand the rise of online banks over recent years.
- Loans and Mortgages:
There was a time when people had to submit a lot of paperwork to a bank to know whether they would qualify for a loan. Those days are part of the past because today a person can simply check their eligibility with the help of a smartphone or a laptop. This keeps getting better because you can even secure a loan from an online lender without even having to visit a bank.
On the other hand, online mortgages make the process of buying a home way lot easier. You can compare quotes online and get a mortgage without having to spend a lot of time. The preapproval can also be obtained within a time as little as a few minutes.
Investments – If you don’t have enough time or experience to make all the decisions related to your investments, you can go for the Robo-Advisors. These are programs based on technical indicators and other factors, which automate and diversify the investment portfolio of an individual.
Bottom line – The fintech sector is emerging a lot and there are a lot of advantages of opting for them. However, they do come with a set of potential drawbacks such as having no physical branches, the requirement for internet, etc.
Nonetheless, fintech has been one of the major improvements in the financial sector and there is a lot of scope for it in the future as well. With the advancing technology, people would soon embrace the utilization of fintech rather than opting for traditional brick-and-mortar financial institutions.