Fintech or Financial Technology provides financial products and services using technology and innovation, according to the U.S. Government Accountability Office (GAO), . Advances in technology and innovation are evident through the widespread use of the internet and mobile devices. The general use of the internet and mobile devices has fueled the growth of fintech products and services.
Fintech is any technology that delivers financial services through software, according to the U.S. Chamber of Commerce. The software includes online banking, mobile payment apps, and cryptocurrency. Fintech's primary objective is to change the way consumers and businesses access their finances, thus competing with traditional financial services.
The four categories of Fintech are digital lending, payments, blockchain, and digital wealth management. These areas have experienced a rapid pace of growth, technological disruption, and regulatory risks.
The first category of Fintech is digital lending. Digital lending refers to technology-driven nonbank lending. Technology-driven nonbank lending companies enjoy access to expensive data, sophisticated algorithms, and considerable computing power. These new companies are equipped to compete with traditional banks through new and appealing offerings to consumers and small businesses. Within the digital lending space, consumers and small businesses are the borrowers, whereas those providing capital are individuals and institutional investors. Digital lending offers consumer loans, student loans, small-business loans, equipment-financing loans, and lines of credit.
The second category of Fintech is payments. The payments industry is an indefinite system of banks, financial technology firms, social media companies, and retailers. This system has been experiencing a significant shift in payment initiation and processes through the emergence of mobile payments, and blockchain technology. This shift has unlocked innovation in the three areas of the payment system: person-to-person (P2P) payments, in-store retail payments, and credit and debit card transactions. P2P payments use an Automated Clearing House (ACH) system to process fund transfers between two people, which are cheaper than credit and debit card transactions. In-store retail payments are improved using near-field communication (NFC), quick reference (QR) codes, or barcodes to initiate payments.
The third category of Fintech is blockchain technology. Blockchain technology refers to a decentralized technology using a shared ledger of transactions. Transactions in blockchain are between three main components, such as nodes, digital ledgers, and third parties. The third parties are the ones submitting entries or payments to the ledgers. Entries or payments are approved or rejected by nodes that work together with no central authority. The central authority’s absence in blockchain technology eliminates the need to trust one party as the payment processor. The payments in blockchain technology are timestamped and protected by cryptographic signatures or complex algorithms for data integrity in transactions. Transactions are fully unchangeable and irreversible once submitted.
The fourth category of Fintech is digital wealth management. Digital wealth management or Robo-advisers are retail-focused, automated wealth management services. Automated wealth management services use algorithms that evaluate risk tolerance and manage assets in low-cost portfolios of exchange-traded funds. Funds are allocated and rebalanced automatically, which allows investors to manage portfolios at a distance.
Yes, Fintech will replace banks unless traditional banks can survive the challenge from Fintech, according to Forbes. Forbes mentions the first strategy to survive is to acquire fintech firms in order to enhance the efficiency and speed of banking. Banking institutions like JPMorgan have implemented this strategy.
Another strategy is making investments in fintech startups using venture capital (VC) investments. VC investments or funding rounds were used by Goldman Sachs, JPMorgan, Citi, Capital One, and others in acquiring equity stakes in several fintech startups in wealth management, capital markets, and cryptocurrency.
The third strategy is to enter a strategic partnership with a fintech company to leverage the expertise of both companies. Companies like Goldman Sachs and Apple have launched the Apple Card by entering a partnership. This partnership brought the financial and regulatory expertise of Goldman Sachs and the technological prowess of Apple.
The disadvantages of Fintech are challenging to both consumers and federal regulators. Federal regulators encounter difficulties in overseeing Fintech and protecting consumers. Consumers are faced with the benefits of Fintech as well as its disadvantages.
The first disadvantage of Fintech occurs in the lending industry. Fintech lenders are online, nonbank lenders that use financial technology to provide loans to consumers and small businesses. Consumers and small businesses can enjoy the expansion of their credit by using this type of lending. This type of lending has also evolved from peer-to-peer and marketplace lending business models to include partnerships with depository institutions and direct lending platforms by fintech lenders. Fintech lenders may use less traditional data and credit algorithms when it comes to underwriting loans. Underwriting loans can be a risk or a disadvantage because of fair lending issues or a disparate impact. Disparate impact refers to practices in labor, housing, and other areas like lending that adversely affect one group of people.
The next disadvantage of Fintech is in virtual currencies. Virtual currencies use distributive ledger or blockchain technologies. Blockchains secure and anonymously conduct real-time digital asset transfers, such as Bitcoin (BTC), without using an intermediary like the central bank. The lack of intermediaries makes it difficult to protect consumers from virtual currency thefts. Aside from virtual currency thefts, money laundering and other virtual currency crimes can be challenging to detect by financial regulators and law enforcement agencies. Virtual currencies are also facing tax compliance issues in many countries.
Another disadvantage of Fintech is the innovative use of technology by insurance companies (Insurtech). Insurtech offers an attractive package for improving customer experiences and lowering insurer costs for insurers. Some insurers have started using artificial intelligence (AI) to automate information gathering and risk assessment. Automating information gathering and risk assessment can reduce costs but comes with a challenge. The challenge is ensuring that factors like race are not used in the models that determine consumer premiums. Consumers also face potential risks in how insurers collect and use consumer data regarding data privacy, accuracy, and ownership. Another disadvantage is that some insurtech firms sell coverage in nontraditional insurance markets. Nontraditional insurance markets receive less regulatory oversight towards their policies and rates.
One more disadvantage of Fintech is in digital wealth management platforms. Digital wealth management platforms use algorithms based on consumers’ data and risk preferences. The consumers’ data and risk preferences determine the digital services to be offered, which include financial and investment advice to consumers. Consumers can benefit from these platforms through lower costs, but their complete finances and goals may not be captured, as well as answer clarifying questions like traditional wealth managers.
The last disadvantage of Fintech is through account aggregators. Account aggregators allow consumers to combine all their accounts from multiple financial institutions through their products. These products may offer convenience and other benefits but also the increased risk of cyber attacks. Cyber attacks can lead to fraud or data breaches.
Fintech makes money in different ways. The first way Fintech makes money is through subscription fees. Subscription fees are charged to consumers after they are satisfied with the free trial and avail of the full version of their product or service.
Another way Fintech makes money is through asset management fees. Asset management fees of around 0.25% are charged by Robo-advisors for the automated management, allocation, and optimization of assets.
Fintech also makes money through third parties. Third parties offer a percentage of their revenue whenever customers are reeled in and directed to them by Fintech.
Yes, Fintech is a good career option for tech-savvy developers and entrepreneurs. These tech-savvy developers and entrepreneurs must be able to think of new and creative methods of delivering financial products and services, must be open to keep learning new technologies, and must be able to work in an informal business environment that is similar to startups.
Different types of Fintech offer unique services to consumers. Consumers can experience innovations in paying other people, buying stocks, and accessing financial advice through the different types of Fintech
.The first type of Fintech is digital stock trading. Digital stock trading removes the traditional broker-client relationship and offers a fee-free trading platform and easily accessed online interaction. These easily accessed online interactions allow smartphone users to trade stocks more freely.
The second type of Fintech is P2P payments. P2P payments allow consumers to perform transactions through direct digital file-sharing. Direct digital file-sharing allows the framing of transactions through a social feed, which makes it possible to share and display payments with a friend list.
The third type of Fintech is e-commerce. E-commerce allows digital transactions in the form of direct payments, pay-after-delivery options, payments for online storefronts, and installment plans. It also allows consumers to purchase products using a buy now, pay later scheme with interest-free or low-fee installment plans.
Another type of Fintech is wealth management. Wealth management helps consumers by automatically investing their money and giving financial advice based on their goals. The consumers’ goals and needs are gathered by the special software. The special software automatically invests and rebalances investments based on the generated investment portfolio and market conditions.
The last type of Fintech is business payment. Business payment allows businesses to accept payments, print receipts, and other virtual gift cards using smartphones, tablets, or terminals. For more information on Fintech contact the professionals at iSotpull today.
