What is FinTech?

One of the most popular topics amongst our customers currently is fintech; specifically, what defines it and what they should know about it. Following on from our attendance at two of the biggest fintech conferences in Europe this month, MoneyConf in Dublin and Money 20/20 in Amsterdam, our quick guide will get you up to speed with the essentials of this fascinating and rapidly-developing branch of modern digital finance.

Certainly, fintech – which stands for financial technology – is one of the hottest subjects in the news today, with a burgeoning global industry and $17.4 billion of global investment in 2017 alone. And most of us are already using its solutions, even if we aren’t completely aware of doing so. The EY Fintech Adoption Index shows that 33 percent of consumers across the world use at least two fintech solutions and that 84 percent of financial customers now recognise the term, even if they don’t explicitly recognise the apps that they use as representing ‘fintech’. [1]

So what is fintech exactly?

Fintech is a catch-all term that describes any kind of technological innovation applied to the financial services industry. Fintech developers create digital solutions that are designed to disrupt more traditional forms of banking, and in doing so, bring greater innovation and competition to a market which has been accused of stagnation. (This explains why governments are keen to invest in the fintech sector and why the UK government has a dedicated fintech strategy designed to stimulate the industry’s growth and development in the UK [2]). Examples of this technology include payment apps and budget management apps at an individual level, through to big data and AI software applications at an enterprise-wide level.

Why is it needed?

Traditional banking has long been due for a shakeup, and the arrival of digitally-savvy generations of consumers are seeing customer needs change. As the population demographic shifts to millennials and beyond, consumers want to have greater control over their finances, with an emphasis on efficiency, easy access, speed and convenience. Today’s customers want to apply for banking or lending products online and then self-manage them, seeking out budgeting apps, online loan applications and investment optimisation software in the process. The demand for fintech services is therefore broad and spans the entire financial services industry, from individual areas such as personal banking, lending, saving and investment through to equity finance, retail investment, business banking and financial industry regulation.

Who is developing fintech?

Most obviously associated with nimble and creative digital start-ups, the technologies are also being developed by large traditional banks, such as Credit Suisse and HSBC.

Examples of fintech in action

Let’s turn now to look at some of the biggest areas in fintech right now, which regularly appear in the news and which offer plenty of interesting opportunity for the banking industry, investors, software developers and customers themselves.

Cryptocurrency

Often in the news and most readily associated with Bitcoin – is a digital, decentralised currency based on data encryption. This conversion process of data to code creates currency units and allows transactions to be independently carried out on a peer-to-peer basis and publicly validated and recorded on a permanent digital ledger called the blockchain, independent from any physical body such as a government or financial institution. Alongside Bitcoin, other cryptocurrencies to know about include Ether, Ripple, Dash and Litecoin, all of which offer exciting potential for a future cashless society. The Blockchain is a fascinating piece of technology in itself with tremendous potential in the field of smart contracts and other industry applications thanks to its unique features.

Open Banking

This is an emerging area and one which allows third-party developers to build digital financial services and applications using bank-held data, via API codes. These APIs allow varied financial software programmes to communicate and connect a range of third-party providers and financial bodies into an ‘open ecosystem’. The outcome is expected to be an increase in apps that give customers a higher degree of control over their personal financial management and banking data. Find out more about Open Banking in our recent blogĀ 

Robo-Advisor

These automated platforms use complex algorithms to automate investment decisions and allow investors to maintain a portfolio without the cost of traditional fund managers. They are efficient, cost-effective for confident consumers who want to make their own transactions and optimise self-service for more experienced financial customers.

Unbanked or underbanked consumer solutions

There are 2 billion people worldwide who do not yet have access to a bank account or financial services. [3] Fintech firms are also developing software solutions that address the needs of these individuals, often using mobile banking solutions which provide vital service access. This branch of fintech supports broader financial inclusion aims which are designed to offer affordable finance to people with low-incomes in particular.

Regtech

Fintech is all about disrupting the financial services industry to stimulate innovation, and Regulatory Technology is an interesting branch of the field which allows financial services providers to more easily meet increasingly stringent compliance rules. One key example is the digitisation and automation of Anti-Money Laundering regulations, as well as the verification processes of Know Your Customer regulations which are designed to prevent financial fraud. Regtech developers and the FCA are working in partnership to develop a range of applications which include machine-learning and AI to better financial services compliance, lessen fraud and improve efficiency.

Insurtech

Another interesting fintech sub-category, Insurtech applies technology solutions to the insurance industry to improve its efficiency and to simplify its operations.

Accelerators

Also called seed programs, these rapid development programs bring together fintech start-ups and larger financial organisations to forge ahead with new solutions. Many of today’s programmes are operated by the BoE, Barclays and other big banks, and accelerators are both public and privately funded.

Conclusion

So what is fintech? In a nutshell, this introduction to fintech gives you a brief insight into an industry which is rapidly-evolving and which offers fantastic promise for a more innovative, nimble and accessible financial future. Keep up to date with the latest happenings on our blog!

Sources:

[1] https://www.cnbc.com/2017/10/02/fintech-everything-youve-always-wanted-to-know-about-financial-technology.html

[2] https://www.gov.uk/government/publications/fintech-sector-strategy

[3] http://uk.businessinsider.com/the-worlds-unbanked-population-in-6-charts-2017-8