Financial technology (Fintech) describes new tech competing with traditional financial services in delivering financial services.
This can include everything from simple software services apps to complex networks with encrypted transactions. Fintech was initially introduced as tech that worked at the back end of financial institutions, but its definition has evolved quite a bit since then.
This article discusses the how of Fintech, gives examples of its use, and provides insight into the technology that powers it.
Fintech 101: How Does it Work?
The basic concept of Fintech, while it seems relatively new, has been around for quite some time. Credit cards in the early 1950s represented the first fintech products as they eliminated the need for clients to carry physical cash around with them. PayPal, one of the first fintech products to operate primarily on the internet, was formed in 1998, and other fintech revolutions, and IT outsourcing, quickly followed.
Fintech is a way to simplify customers’ or businesses’ financial transactions, making them more affordable and accessible. In broad terms, Fintech streamlines financial transactions and eliminates unnecessary steps for all parties.
For example, mobile payment apps securely allow you to pay for goods and services anytime. Payment using traditional methods such as cheques or cash would require the receiver to deposit the money in a bank.
Examples of Fintech
Fintech has been used in several areas of finance. Below are some examples of how Fintech is revolutionizing the financial industry.
These are digital platforms that provide automated investment services with minimal human supervision. Standard Robo-advisors question your future goals and current financial situation and automatically use the data to invest for you and offer advice.
This industry has experienced tremendous growth, with an expectation 0f $2.9 trillion in client assets managed by Robo-advisors by 2025.
2. Peer-to-Peer Lending
Also known as ‘crowd lending,’ P2P is a form of financial technology that allows individuals to cut out the financial institution as the middle and get loans directly from others. It began as a lending system that offered credit access to those that would be turned away by conventional financial institutions but has expanded its reach today.
Mobile payment technology is a type of Fintech that has seen considerable growth and ubiquity. Apps such as Venmo, Block, PayPal, and Zelle make it easier to send money and pay online in an instant without the need for a physical wallet. They also offer safer transactions.
4. Personal Finance Applications
Applications such as YNAB and Mint allow you to see all your money in one place and plan how to manage it, including investing and saving. Such apps encompass banking, insurance, taxes, retirement, and estate planning.
This is using technology distinctively in the insurance space to detect efficiency and cost savings from the present insurance industry model. Insurtech uses devices and inputs to build more finely delineated risk groups to price products more competitively.
The Tech Behind Fintech
Present-day Fintech is mainly driven by emerging technology that has redefined how financial institutions think of digital currency. These technologies include:
- Artificial Intelligence (AI) and Machine learning: Artificial Intelligence has become an integral part of the financial industry. Together with Machine Learning, AI has been used in fraud detection software that generates alters whenever a potentially fraudulent transaction is spotted. AI also provides insights into customer spending habits and consumer behavior.
- Blockchain: This technology helps maintain secure, decentralized transaction records that guarantee the security of a data record without needing a trusted third party.
- Big data analytics: They help companies create new strategies and examine big data to uncover information such as customer preferences and market trends.