Fintech (Financial Technology)
The synergy between finance and technology that is used to
enhance business operations and the delivery of financial services
What is Fintech (Financial Technology)?
Fintech is a combination of the words “finance” and “technology.”
Although it’s a blanket term that can mean many different things,
broadly speaking, it describes the evolution of an industry where new
technology use cases are developed and deployed to streamline more
traditional-looking finance functions.
While the general public typically associates fintech with really cutting-
edge new concepts like blockchain and algorithmic trading, the term
applies to a very wide variety of much more “boring” applications. They
include but are not limited to, everyday banking, insurance, and other
back-office risk management functions.
Mobile banking – something that hundreds of millions of people
around the world take completely for granted – is actually technology
supporting the delivery of traditional banking services (aka fintech).
Even the Starbucks app is a form of financial technology in that it
facilitates payments and a proprietary rewards program using a mobile
device.
Understanding Financial Technology
Fintech is considered by many to be a relatively recent development,
which is not entirely accurate. While it has evolved very quickly over the
last decade, that’s mainly due to advancements in technology, more
generally, which are now being applied to the finance sector.
Financial institutions have sought to streamline service delivery and cut
costs by using technology for many decades, including the advent of
the first automated teller machine (ATM) as far back as the 1960s. Even
credit cards, which predate ATMs, were a revolutionary technological
advancement in the payments space relative to cash and cheques.
The technologies that underpin fintech business models vary
considerably. They include blockchain technology, artificial intelligence
(AI), machine learning, and other big data functions like robotic
processing automation (RPA). Each use case is unique, but the
underlying theme is a collective effort to disaggregate the financial
services sector, which, historically, has enjoyed a highly protected
status due to high levels of regulation.
How are Fintechs Impacting Traditional Financial Services Firms?
Traditional financial services providers (mainly banks and credit unions)
serve three core functions:
1. They hold money – including deposits and a variety of investment
products.
2. They lend money – including both secured loans (like mortgages)
and unsecured loans (like student lines of credit).
3. They move money – everything from simple, everyday payments
to international money transfers using global networks
like SWIFT (Society for Worldwide Interbank Financial
Telecommunications).
Cryptocurrencies, for example, have been a major development in the
payments space (moving money). And while there is much debate
about whether or not cryptocurrencies are actual currencies, there is no
doubt that they can serve as a medium of exchange.
The blockchain technology that underpins the various cryptos exists
with the principal purpose of decentralizing (the
historically very centralized) finance sector – bypassing traditional
banks, financial institutions, and payment channels – often called the
legacy financial system. The definition is itself a recent term and a by-
product of the fintech revolution. It’s a combination of the words
“decentralized finance.”
Countless other fintechs in the payment space have slowly started
chipping away at the legacy financial system, including apps that have
become everyday household names like Stripe, Venmo, Alipay, and
even Apple Pay.
The lending money component of traditional financial services firms is
being disrupted by fintech businesses as well. They include new
products and services like buy-now-pay-later (BNPL), peer-to-peer
lending platforms (P2P), and a variety of fast and highly automated
underwriting programs (using AI and RPA-driven algorithms) to drive
speedy credit decisions and fundings for both consumers and
businesses – eliminating the friction of borrowing from a traditional
financial services firm.
And finally, the financial services industry’s traditional function
of holding money is not immune to the fintech revolution, either. These
include altogether virtual banks, which hold charters and clear all
required regulatory hurdles within their various jurisdictions.
The business of investing has been particularly transformed, with the
democratization of trading effectively hollowing out the brokerage
industry as we know it. They were formerly very high-margin, fee-based
businesses, but online discount brokerages have forced many firms to
waive their fees altogether in order to remain competitive.
An entire generation of young consumers engage almost exclusively
with robo-advisors (like Wealthsimple) and savings apps (like Acorn); they
rarely set foot in a physical bank branch.
The fintech revolution has created a variety of important and growing
subcategories. They include the aforementioned “defi,” “insuretech”
(insurance technologies), and “regtech” (regulation technology), among
others.
Understanding FinTech Categories
These days, traditional banks and financial services companies have a lot of
competition. Innovative companies in the financial technology industry are
transforming many categories of the financial services market. As a CIO, you
need to be familiar with the many categories of financial technology. With
this knowledge, you can stay on top of trends and hire the IT professionals
you need to stay competitive.
Here are some of the major categories in the financial technology market.
Lending
Financial technology companies are changing the lending process. People
don’t need to turn to banks or credit unions to borrow money anymore. Many
FinTech companies are now making loans directly to consumers.
Consumers can request loans online and get approval quickly. FinTech
lenders assess borrowers’ credit worthiness quickly and automate the
underwriting process. These new models allow FinTech lenders
like Kabbage and Borrowell to offer loans to more borrowers.
Payments
Payments are another category of the financial technology market.
Companies in this category let people send money to each other without
needing to turn to banks. Banks tend to charge exorbitant fees for simple
payments like peer-to-peer transfers. FinTech companies let consumers
send money quickly and cost effectively. Technologies like blockchain are
making it possible for these companies to process payments more cost
effectively than banks can.
International Money Transfers
Traditionally, internal money transfers have been very expensive. Banks and
traditional money transfer companies charge up to eight percent in fees. For
large money transfers, these fees add up quickly. Worse, traditional transfers
are slow. Financial technology companies in this category are offering
faster, less expensive international money transfers. Ripple, a company in
this category, can send international money transfers in eight seconds,
according to Financial Post.
Personal Finance
Personal finance is another major category of the financial technology
market. In the past, people needed to talk to financial advisors at banks to
get personal finance advice. To budget, they needed to use spreadsheets or
an envelope system. Now, there are plenty of apps on the market that can
offer advice and help with budgeting. Consumers can get personal finance
advice anywhere, at any time. Companies like Mint help consumers create
budgets, while Level Money helps consumers save. There are also FinTech
companies providing retirement or investment advice.
Equity Financing
Financial technology companies are transforming equity financing, too.
Companies in this category of the FinTech market are making it easy for
businesses to raise money. Some companies work to connect accredited
investors with vetted startups. Others use a crowdfunding model and let
anyone invest in new businesses. These companies simplify the fundraising
process for businesses. Virtual fundraising is also easier for investors, since
everything can be done online.
Consumer Banking
Consumer banking is another category of the financial technology market.
Traditional banks charge high fees, so companies in this category present
an alternative for consumers.
These companies also have the opportunity to reach underbanked
consumers. Consumers who can’t get approved for a credit card—or don’t
want one—can get prepaid cards from FinTech companies. Companies
like Green Dot and Netspend are active in this category. Some companies,
like Moven, provide digital banking services. Consumers can use digital bank
accounts instead of using a traditional bank.
Insurance
Financial technology companies have recently branched out into the
insurance market, too. Many companies in this category are focusing on
distribution. They’re using new technologies like apps to reach customers
that are underserved by insurance. They’re also more flexible than traditional
insurers. For example, people who want to borrow a friend’s car can buy car
insurance for just a few hours. Since the insurance market is highly
regulated, companies in this category tend to partner with traditional
insurance companies.
What Is Digital Banking?
Meaning, Types and
Benefits
Revolut, Fidor, Simple, N26, and Monzo are just some of the well-
known digital banks that allow customers to open an account on
their phone in minutes, whenever and wherever they want. But
digital banking is not limited only to online banks. Over the past
decade, banks that have created internal digital bank spin-offs
optimized revenues and reduced operating costs by up to 70%.
But before we go any further, let us clarify the basics.
What is a digital bank?
A digital bank is a bank that operates online and provides its
customers the services that were previously available only at a
bank branch.
What is meant by online banking?
Digital banking involves the digitization of all traditional banking
products, processes and activities to serve customers through
online channels.
What are digital banking services exactly?
Most frequently, the include the following operations and
activities (all the traditional banking services that are available
24/7 on mobile phones, computers and compatible smart devices,
without the need for a customer’s presence in the bank branch):
• Obtaining bank statements
• Cash withdrawals
• Transfer money
• Checking/savings account management
• Opening a digital bank account
• Loan management
• Bill payments
• Cheques management
• Transaction records monitoring
Obviously, digital banking software makes all traditional services
easier to access, understand and manage.
This approach allows to test digital banking risk concepts before
moving parts of the old legacy business to the new system.
Notable examples include Goldman Sachs’ Marcus, RBS’ Bó, and
State Bank of India’s YONO, which gained more than 26 million
customers and reached profitability within 18 months. The stats
below proves the assumption that digital transformation will be a
top priority for banks in 2021.
Digital banking vs. online banking:
are they the same?
Although the two terms may seem interchangeable, there are
actually fundamental differences between digital and online
banking.
Online banking includes only some transactional functions of the
underlying core banking system. Online banking is typically
accessed via the Internet and provides basic banking functions
such as account management and statement access. The
capabilities of an online banking system are limited and cannot be
quickly expanded to provide additional banking services to
consumers.
Digital banking systems are much more flexible and allow banks
to add and expand features much faster than traditional systems.
Digital banking relies on high-level process automation, web-
based services and APIs to provide banks and their customers
with high levels of cost efficiency, security and flexibility. Modern
banking solutions enable a fully digital customer journey,
generating real-time data streams and accelerating key analytics.
There’s one more term frequently confused with online and digital
banking – mobile banking. It can be defined as a service provided
by an existing bank to its customers enabling them to perform
transactions via their mobile devices, without the need to visit a
bank branch.
So, out of the three notions, digital banking is a much broader one.
It is safe to say that it is made up of the combination of online and
mobile banking.
The benefits of digital banking for
consumers
As more and more digital banks enter the market, it is important
to understand how modern digital banking solutions enable them
to offer better and cheaper services than traditional competitors.
Here we highlight the most essential advantages of digital
banking:
Cost savings
Traditional banks invest a lot of time and resources in checking
and accounting. By eliminating redundant back-office
processes, digital banking software significantly reduces operating
costs. Digital banking systems remove a lot of work from banks by
automating the processes associated with daily financial
transactions. Digitization reduces the number of steps and people
involved in transactions, reducing the risk of costly financial errors.
Improved usability
Integrated KYC and AML protocols enable digital banks and
customers to open accounts within minutes from any internet-
enabled device. ID Verification systems and risk assessments
enable banks to serve customers quickly and easily, allowing
people who are not bank customers to access financial services. A
major advantage of personal banking is that it is available 24/7.
This means that customers can carry out any transaction from
anywhere and access a wide range of services.
Greater personalization
Digital banking software enables sophisticated personalization
strategies powered by artificial intelligence (AI) and machine
learning (ML). Banks can offer customers relevant financial
options, interactive tools, and educational resources at the right
time. Automated budgeting, spending analytics, savings
reminders, and many other tools help inform and engage
customers.
Wow-features
Digital banks already have many features that established banks
simply cannot offer, such as buying cryptocurrencies and gold or
investing in stock markets directly in the banking app. Mobile and
online banking customers can instantly change their security
settings, and transaction limits, and even specify whether or not
they want to enable NFC or magnetic stripe payments.
Check this article to get more information about the advantages
of digital banking.
The types of digital banks
While the terms “neobank” and “challenger bank” are familiar to
nearly anyone today, telling one from the other may be difficult, so
let’s dot all the i’s and explore the main types of digital banks.
Neobank
Neobank is a digital bank operating online, without any physical
presence, which provides its customers remote access to its
services via a mobile app. Many neobanks don’t hold a bank
license and partner with an existing bank for bank-licensed
operations (which means, their customers need to create an
account at the partner bank). Often, the range of services offered
by a neobank is narrower compared to the licensed banks.
Challenger bank
This term originated in the UK and refers to a recently launched
bank that “challenges” the traditional banking institutions. Being
more user-friendly and cost effective for an end-user, challenger
banks focus on the audience segments that are underserved by
the big financial institutions.
To get more info about building a digital bank read this article.
New bank
These are fully licensed neobanks that provide a full range of
banking services and their only difference from the brick-and-
mortar banks is the mode of operation – which is completely
online. The examples of the new banks are Revolut, Monzo, N26,
and Starling Bank.
Nonbank
Exactly as the name implies, these are non banking institutions
that provide financial services – for example, streamlined loans or
mortgages, but they don’t simultaneously accept deposits or offer
checking and savings accounts. Some of the nonbanks like
Monese operate on EMI license.
