What is FinTech?
FinTech is a phrase we have all been hearing over the last decade, and recently more increasingly as startups are very “hot,” and everyone wants to enter into the tech space. I hadn’t known what the term truly meant until this past summer, when I was introduced to the industry by my Dad who works as a consultant focusing on Information Technology. He introduced me to a few colleagues and I ended up spending May through July in NYC working on the Product team at a growing startup called AdvisorEngine. AdvisorEngine offers an integrated Web-based wealth management platform built on Roboadvisor technology to manage a firm’s assets and investments. This type of company, is just one example of a type of FinTech firm, and there are so many other types in truly all shapes and sizes. I became interested in the industry after working there and decided I would dedicate this blog to explaining what the term means and what other types of companies exist in the industry.
The term FinTech is a portmanteau, or blend of the words Financial and Technology(ies), referring to the emerging financial services sector. To define the term in a broad manner, FinTech companies refer to businesses that leverage new technology to create new and better financial services for both their consumers and other businesses. Right now, the industry is growing rapidly.
As we are now in a digital age, people want things to be faster, more convenient, and more efficient. This idea can pertain to just about everything, and certainly has entered in the financial services industry. That is why if there was one word to describe FinTech, it would be:
FinTech companies have taken traditional banks and institutions by surprise. Operations and transactions once exclusive to these banks or institutions are no longer exclusive. FinTechs are adding much needed competition to the financial services industry and are driving innovation and new technology forward.
This image, courtesy of Business Insider Intelligence, shows the many branches of the FinTech industry, and examples of companies that exist in each segment. I decided I would briefly outline each one below! As you can see, there are so many, and it would be impossible to include them all in this manner.
RoboAdvisors and Personal Finance
AdvisorEngine, the company I worked would fall into this category. RoboAdvisors are digital platforms that provide automated, algorithm-driven financial planning services with little human supervision. A typical roboadvisor collects information from clients about their financial situation or future goals through a survey, and then uses the data to offer advice and/or automatically invest client assets. These companies certainly have a lower cost burden than traditional banks, and with their new innovative technologies have changed the face of banking.
BlockChain and Bitcoin
Many blogs have been posted about BlockChain so I would suggest to check those out! Lizzy had a great one outlining it out, and Amy wrote one about its applications in the real world. I will provide a brief explanation of this category. Blockchain is a digitized, decentralized, ledger of all cryptocurrency transactions. Bitcoin is a digital currency that was created in 2009 and its balances are kept public on a ledger. The decentralized nature is certainly a threat for existing systems and it is unclear where this industry will be headed as it is extremely volatile.
Insurance is an old business, but more importantly it is one that can certainly be disrupted, or in a nicer form “transformed” by new innovation and technology. Insurtechs refer to the use of technology innovations to maximize savings and efficiency from the current insurance industry model. Issues that have arisen, and ones we touched on in class are that the Healthcare and Insurance industry are heavily regulated. The new technology, however, is going to simplify policies, increase customer service and hopefully overall make the industry more agile, efficient and streamlined.
Regtech companies use technology to help businesses comply with regulations efficiently and inexpensively. This refers to the blend of the words technology and regulation to address regulatory challenges. There is an ever increasing demand for compliance in the financial services industry. Companies are working to detect risk, regulate reporting, facilitate due diligence, and monitor transactions, among others. Deloitte has stated that “RegTech is the new FinTech.”
Digital Banks allow user to execute financial transactions via the internet. Millennials in particular are gearing towards online digital banking and they are going in person to banks less and less. One company called Ally, was the first digital-only bank launched in 2008 and now, many other players have entered the space. Being digital only allows the bank to avoid certain fees, gives them much more freedom from other restrictions and overall increased flexibility.
Payments and Remittances
Mobile payments refer to money rendered for a product or service through a portable electronic device such as a cell phone. The last five years has seen amazing growth in the innovation surrounding mobile payments and emerging new startups has disrupted the norms. Mobile devices are in everybody’s hands and companies are using this to their advantage to make processing payments easier and accessible to all.
As we have all heard, Chase acquired WePay, a company we are visiting with a deal valued up to 400$ million dollars. Check out Ashley’s blogpost to learn more!
Alternative finance refers to channels that have emerged outside of traditional systems where financing is from external sources rather than stocks or bonds. Examples include fundraising with funders on online platforms. Crowdfunding and online marketplace lending are the most predominant forms right now. Crowdfunding refers to pooling small amounts of money from many investors on Internet platforms. Online marketplace lending refers to platforms online that allow investors to give loans, either directly or indirectly to businesses.
- On average 1-3 apps are used to manage people’s financial lives
- Financial investment increased dramatically $930 million in 2008 to more than $12 billion by early 2015 (Accenture)
- Over 3,000 startups in the FinTech space
- Top FinTech accelerators include Barclays Rise and FinTech Innovation Lab
- Companies we are visiting such as WePay fall into this category!
- Silicon Valley and NYC, as well as London have played an integral role in the industry
Am I affected? What is the Future?
The short answer is, yes absolutely. We all will be affected. For starters, many of us are already using online banking, or mobile payment apps like Venmo in our daily lives. Technology is only going to continue to progress throughout the future and if companies are continuing to make consumers’ lives easier than there will be no going away from that. What may occur, however, is many traditional banks and companies reimagining themselves so they can continue driving their businesses forward. Well established players will need to adapt, be open to change, and incorporate the ever evolving technology, as opposed to watching the world go by and see the competition disintermediate them.
On a larger scale, global investment in FinTech is expected to increase over the next few years. Additionally, one contributing factor to the industries success, Artificial Intelligence, is a hot trend within the FinTech industry and it will be interesting to see how it is increasingly implemented going forward.
Thanks for reading!