What Is Fintech?
Fintech is a term used to describe platforms that employ new technology to conduct financial services. The basic purpose of fintech is to help business owners and clients to manage their financial operations better. The word fintech is the short form of “financial technology.”
The fintech sector, which only holds a mere 2% share of global financial service revenue, is expected to become $1.5 trillion in annual revenue by the year 2030, which includes 25% of all banking valuations across the world. Robo-advisors, payment apps, and investment apps are all examples of fintech.
Fintech is designed to challenge and eventually replace traditional financial services by offering a better and more convenient service. They are software or algorithms that can be used both on desktop and mobile.
Businesses most often rely on fintech for payment processing, B2B transactions, and more. Nowadays, fintech is even used to help with government assistance efforts like the Payroll Protection Program (PPP).
According to Forbes, the biggest fintech companies of 2024 are Ant Group, Revolut, Rapyd, Plaid, Stripe, Inc.
Types of Fintech
As fintech is growing day by day, it is now turning into a threat to conventional financial institutions. It comprises various services and products to enhance and innovate the financial industry. Here are some of the major types of fintech:
Fintech Banks – The central component of the financial system, the banking industry, has been revolutionized by technology. The introduction of digital banks or neo-banks, that is, banks without any physical branch, is providing financial services remotely through digital platforms such as mobile apps and online portals. Individuals or businesses can open accounts and also do transfers with this advent in technology. They can also request and pay loans, manage money, or purchase insurance through digital banks. The estimated digital banking platform market size is USD 10.14 billion in 2024. This is expected to reach USD 19.56 billion in 2029, which is a CAGR of 14.04% during the forecast period (2024-2029).
Digital Payments – There has been an increase in cashless payments from the onset of the pandemic. Cashless payments have significantly risen after the pandemic; almost 41% of Americans now make purchases digitally. In this scenario, there is a rise in payment apps and services as technology is enhancing the payment process both for senders and receivers. Digital payment trends such as P2P payments and BNPL (Buy Now Pay Later) are transforming the payment industry. When it comes to the enterprise level, various tasks, such as payroll, taxes, accounting, etc., are done with digital payments. Some examples of top digital payment companies are PayPal Holdings, JP Morgan Chase & Co., Visa Inc., Mastercard Incorporated, etc.
Budgeting Apps – Personal finance management apps or budgeting apps are very important for handling your day-to-day expenses and setting an appropriate budget. One of the most used fintech offerings is a mobile budgeting app. Your everyday transactions are made easy with these apps as they consolidate all your financial information into a single dashboard. This makes it easier to stay up to date with your finances. Some examples of personal finance apps are Quicken, YNAB, Intuit TurboTax, etc.
Wealth Tech – For modernizing wealth management and investment processes, there was a rise in fintech wealth management. This includes robo-advisors, robo-retirement, micro-investing, and digital brokerage platforms.
- Robo advisors offer investment advice and manage finances by using algorithms and machine learning. Based on how the user configures a robo-advisor, they can automatically allocate funds to different financial instruments. For example: Wealthfront, Wealthsimple
- Robo-retirement is another version of robo-advisors; their services involve creating a portfolio for retirement plans such as 401(k), 403(b), and IRA. They also manage assets, recommend computer system-generated plans, and provide strategies for improving finances. For example, Robust Wealth
- Micro-investing solutions enable users to invest small amounts of money regularly without paying a commission. By making these small investments, you will be able to save large over the years. For example, Acorns, Stash
- Businesses can gain access to stock market information and investment opportunities by utilizing digital brokerage platforms. For example, eToro, Robinhood
Insurtech – The need for innovations in the field of insurance has given rise to Insurtech. It boosts both the insurance provider and customers. Insurtech uses technologies such as artificial intelligence, big data analytics, blockchain, and machine learning for improved services. Some common Insurtech applications are in the fields of home insurance, health insurance, life insurance, worker’s compensation insurance, etc. Wefox, Zego, Oscar Health, GoHealth, etc are some examples of Insurtech.
FinTech Lenders – Lenders often find it difficult to get an accurate picture of the applicants. This is where lending technology platforms revolutionize lending and borrowing. Even though banks, credit unions, and other financial institutions are the common lenders, Lendtech has bought P2P lenders and crowdfunding contributors to the front.
- P2P lenders help borrowers to connect with individual investors who finance loans. With companies like Upstart, SoFi, and Lending Club that operate online, borrowers can now secure loans without appearing physically.
- Crowdfunding contributors allow people to connect with individuals who need money. In this type of lending, the borrower agrees to pay back the money raised by investors collectively with interest within a certain period. There are debt crowdfunding platforms like Lending Club offering qualified borrowers personal loans up to $40,000 and business loans up to $500,000.
Regtech – To simplify regulatory processes, businesses, especially those in financial sectors, utilize regulatory technology. These technologies use advanced algorithms and real-time data analysis to track transactions. This helps to identify irregularities and non-compliant behavior. Businesses can meet reporting obligations accurately as Regtech automatically generates and submits regulatory reports. They also maintain up-to-date compliance and help in avoiding potential risks and associated penalties. Some examples are Chainalysis, BigID, Enigma, ComplyAdvantage, etc.
Is Fintech Safe?
Fintech is completely safe when you follow the given guidelines.
- Have an understanding of the provider and its security:
Before signing up for any fintech platforms, take some time to understand it. Most fintech companies would give details about the security features that they are offering. If there is no such information, they most probably might not be providing any. So, consider these situations as a warning and step back from signing up without a proper study. Multifactor authentication, encryption, antivirus, and malware scanning are some of the most basic security options that a fintech would provide. There are also financial institutions that offer compensation for any loss of funds if they are at fault. It is true that none of these can guarantee the security of your funds. However, platforms that offer you these services can give you confidence that you are working with a trustworthy platform.
- Check what all protection measures are offered:
Suppose you are using the fintech platform as a bank or brokerage; you must definitely look at the protection services it offers. For a bank, make sure that your funds are FDIC-insured. If the platform does not offer any FDIC insurance, take it as a sign to look elsewhere. For a brokerage, confirm whether there is SIPC coverage, which would offer protection for your investments if the brokerage failed. However, investments like cryptocurrencies cannot be protected with these measures. That is why it is always considered risky to invest in cryptocurrency.
- Share only limited personal data:
When you sign up for a new app, it is always better to share only the personal data that is compulsory. When you share details like your date of birth, address, and social security number, you are always at risk of information leak. Sharing unnecessary details can only harm you, especially when there are no fees for signing up. There is a very high possibility that the information that you enter will be shared in these cases.
- Think twice before sharing passwords:
Many fintech platforms would demand your financial information from all your accounts to consolidate everything in one. In those cases, you must be aware of how your accounts are connected. Most often, they are done by using application programming interfaces (APIs’) that connect with another platform rather than using your username and password. So, you must think before sharing your password with anyone since any financial loss that takes place because of this would be completely under your responsibility.
Fintech Regulation
Fintech is monitored by none. In fact, some fintech exists outside or on the borders of the current regulatory oversight. The rest of the fintech is monitored by a mix of local, state, and federal regulators.
State regulatory bodies typically oversee lending, insurance, and payment systems. For instance, PayPal should be licensed in every state and also should follow local payment transmission regulations. The federal regulatory body also monitors PayPal as it is under the purview of the federal Consumer Financial Protection Bureau.
Fintech licensed under banks by the Office of the Comptroller of the Currency comes under the control of the Federal Trade Commission and the Securities and Exchange Commission. Fintech companies that have partnerships with banks should follow the same regulations as their partners. Thus, depending on the type of bank with which they are partnered, fintech would be monitored by federal, state, and local authorities.
Fintech: Pros and Cons
Pros:
- Fintech services can be accessed from anywhere and everywhere. All you need is an internet connection. You can access them from mobile, laptop, or any other device. This makes it easier and more convenient for its users.
- Most fintech companies offer lower fees than any other traditional financial institutions since they have lesser overhead costs and do not need physical branches.
- Fintech companies also offer people the ability to access credit and loans.
- The automated tools and customized recommendations provided by Fintech allow users to manage their finances and investments more easily.
- Fintech provides advanced security measures such as biometric authentication and encryption that give users confidence that their personal and financial information is safe.
Cons:
- People who have limited digital literacy and have problems with internet connectivity find it difficult to use fintech.
- Even though fintech offers security, there is always a risk of cyber-attacks that could lead to the loss of your sensitive financial data and information.
- Since all of the work is handled by artificial intelligence, human demand is reduced. That is, there is only lesser manual intervention.
In conclusion, fintech offers ease, efficiency, and innovation that challenges existing financial institutions, transforming financial services delivery and access. Its digital payments, wealth management, and insurtech apps are making financial services more accessible and personalized. Security, regulation, and inclusion issues arise from this rapid change. Users must stay aware and vigilant as fintech grows to maximize its benefits and minimize its risks. Fintech’s success depends on balancing innovation, security, and accessibility to meet all consumers’ needs.