What’s all the fuss about Fintech?
Financial technology; FinTech for short; refers to an evolving intersection of financial services and technology. The term can refer to startups, technology companies, or even legacy providers. The lines are blurring, and it’s getting harder to know where technology ends and financial services begin.
The term FinTech is often tossed around in the media and in casual conversation. And while many use the term, its specific meaning often gets lost somewhere along the way. Startups use technology to offer existing financial services at lower costs, and to offer new tech-driven solutions. Incumbent financial firms look to acquire or work with startups to drive innovation. Technology companies provide payment tools. These can all be seen as FinTech.
So, what exactly is Fintech and why is there so much fuss about it? Let’s try to answer this by doing a Q & A session gotten from a variety of sources and materials on the subject.
Q: What is FinTech?
A: Broadly, the term ‘financial technology’ can apply to any innovation in how people transact business, from the invention of digital money to double-entry bookkeeping. Fintech is used to describe new tech that seeks to improve and automate the delivery and use of financial services. At its core, fintech is utilized to help companies, business owners and consumers better manage their financial operations, processes and lives by utilizing specialized software and algorithms that are used on computers and, increasingly, smartphones. When fintech emerged in the 21st Century, the term was initially applied to technology employed at the back-end systems of established financial institutions. Since then, however, there has been a shift to more consumer-oriented services and therefore a more consumer-oriented definition. Fintech has expanded to include any technological innovation in; and automation of; the financial sector, including advances in financial literacy, advice and education, as well as streamlining of wealth management, lending and borrowing, retail banking, fundraising, money transfers/payments, investment management and more.
Q: What does a typical Fintech company look like?
A: According to a 2016 PwC financial services report on Fintech, most people think of only startups when they refer to Fintech. The players in the FinTech ecosystem can be described as As, Bs, Cs, and Ds; which are described below:
- As are large, well-established financial institutions such as Bank of America, Chase and Wells Fargo sometimes referred to these as “incumbents” or “legacy financial institutions”.
- Bs are big tech companies that are active in the financial services space but not exclusively so, such as Apple, Google, and Amazon.
- Cs are companies that provide infrastructure or technology that facilitates financial services transactions. This broad group includes companies like MasterCard, Interswitch, Paystack, Fiserv, First Data, various financial market utilities, and exchanges such as NASDAQ.
- Ds are disruptors: fast-moving companies, often startups, focused on a particular innovative technology or process. Companies include Piggybank (savings & investments), Paga (mobile payments), Betterment (automated investing), Prosper (peer-to-peer lending), Moven (retail banking), and Lemonade (insurance).
Q: Where has the Fintech disruption been most “severe”?
A: FinTech disruptors started by offering products and services in payments and peer-to-peer lending. Because of this, these have been the most disrupted areas to date. We can think of this as “FinTech 1.0,” in which new market entrants have focused largely in the business-to-consumer (B2C) space
Q: What should legacy service providers do?
A: Incumbent banks, asset managers, and insurance companies will continually seek ways to play defense and offense at the same time. And that’s reasonable; they have to know how a disruptive FinTech development could hurt their business, even as they are looking for ways to take advantage of the technology.
The disruptors themselves take different approaches. Some target specific niche areas of the industry. Others are using new technologies, such as block-chain, in ways that will cross a lot of boundaries. For incumbent financial institutions to succeed, they’ll have to do three things well:
- Continuously scan the environment to identify new threats and opportunities.
- Quickly understand the effect that emerging trends and technologies could have on their business.3
- Come up with solid strategies to react—from acquiring or working with FinTech startups to building their own innovative solutions.