Fintech Explained: A Comprehensive Guide to Financial Technology

Whether you know all about Bitcoin or the phrase “I’ll Venmo you later!” rings a bell, fintech is already playing an active role in your life. Understanding fintech, short for financial technology, is an important part of understanding both your financial situation and how it fits with the world around you. In this article we’ll define what fintech means, what fintech is used for, and what it can look like for you. 

Fintech Definition

Financial technology is the umbrella term that encompasses the ways the financial sector uses technology to make services faster and easier. Fintech is used by some companies to help automate and improve their financial operations, processes and services as a whole. As the technological landscape continues to develop, fintech has rapidly evolved into a successful industry with numerous innovations in digital money, bookkeeping and online banking. 

What Is A Fintech Company?

Fintech companies are an increasingly popular alternative to traditional financiers due to their accessibility and focus on a seamless customer experience. Fintech companies cut out the inevitable middlemen you run into when dealing with more traditional financial institutions, allowing the consumer to carry out transactions directly with businesses and each other, saving both time and money.

Fintech companies are also becoming increasingly popular for their user-friendly interfaces and the sense of ownership they give the consumer over their finances. Some well-known fintech companies, like PayPal or Cash App, make the most of technology by offering a user-friendly app to monitor and manage finances while other fintech companies prioritize education or security. Fintech companies are constantly innovating to fill the wants and needs of consumers, revolutionizing the way transactions, loans, credit scoring and stock trading are all carried out. 

How Is Fintech Used?

You can find fintech wherever there is a market for an easier, more profitable financial process, regardless of the industry. Here are some ways that fintech is being used today: 

Banking 

Banks and other financial institutions use fintech to streamline their processes and run more smoothly. Long gone are the days when every banking transaction must be carried out inside of a brick-and-mortar branch with an in-person teller. Even the introduction of the ubiquitous ATM – which debuted in 1969 – can be considered an early version of fintech. Today, it’s rare to find a bank that doesn’t offer most or all of their services online via web browsers and mobile apps.

Fintech has also introduced many contenders for the traditional bank in the form of neobanks, fintech companies which offer banking services through a mobile app or website. Neobanks perform their services exclusively online and do not require a physical branch. 

Cryptocurrency 

Since the first decentralized cryptocurrency launched in 2009 as the now sought-after Bitcoin, a wide array of cryptocurrency sites and currencies have emerged. While many other industries that use fintech are subject to government regulation and scrutiny, the regulation of cryptocurrency is significantly less involved.

For many, the appeal of cryptocurrencies lies in the peace of mind they can offer in the form of anonymity or strong encryption which secures every transaction. Crypto has also tapped into the international finance market because of the efficiency it offers. Unlike with standard currencies, cryptocurrency transactions across international borders aren’t interrupted by the wait for a currency exchange. 

Blockchain Technology 

Another recent advancement in the fintech sphere is blockchain technology. Blockchain technology refers to a decentralized ledger-like network which allows for more transparency and data integrity. The technology’s namesake comes from the way that information is stored in “block”-like structures, which are encrypted for security, and linked to each other throughout every step of a transaction.

Since users can see each step of a blockchain transaction, this system is favored by many for the transparency that comes with it. Not only are fees or unnecessary costs cut when transferring funds using blockchain tech, but this tech can also cultivate a sense of trust in peer-to-peer transactions. With identification authentication methods and digital contracts, blockchain technology is quickly becoming a fintech favorite for secure market transactions. 

Insurance 

As with many other spaces, fintech has already made its way into the world of insurance. Using primarily cloud-based technology, insurance fintech has modernized the paper-dominated world of insurance. Companies like Newfront and Hippo use autofill, AI, and other technologies to speed up the application process, and can offer almost immediate information on quotes and policies.

Many fintech insurance companies have also made a name for themselves by offering digital protection from ransomware and other cyber risks. One example is Coalition, a cybersecurity insurance company that helps protect and secure client information. 

Loans 

Thanks to advances in fintech, there are more types of loans available to consumers who may face roadblocks with traditional lenders or simply want a more convenient experience. Loan sites like Prosper, Upstart or Lending Club allow peer-to-peer personal loans and Kiva allows anyone to provide micro-loans – in their case to entrepreneurs in developing countries. 

Investments 

Some of the most well-known fintech companies specialize in investment management. Not only does fintech offer consumers new ways to invest, but it also makes investing more accessible to those without large sums of disposable income or the knowhow to get started.

Led by investment startups turned mainstays like Etrade, sites like Wealthfront and Betterment are just a few of the many investment apps which prioritize education and help you manage your money. Other apps like Acorns and Robinhood offer consumers micro-investing opportunities, and some fintech companies, like Public and TradingView, have made investing more social, letting users follow the expertise of their loved ones or experts.

Mobile Payments 

Payment solutions such as PayPal, Stripe and Venmo are perhaps the most notable examples of fintech, as they’ve made their way into our collective zeitgeist. These peer-to-peer fintech services make everyday transactions more convenient and timely than ever before. 

Crowdfunding 

Fintech has also revolutionized the way that the average consumer can raise capital and support the causes they care about. Now, instead of needing connections at a large bank, sites like Kickstarter and Indiegogo give passionate entrepreneurs the ability to crowdfund their ideas. Crowdfunding also gives ordinary consumers the opportunity to pool their funds for a share in a project or startup, or give back to the community instantaneously with sites like GoFundMe and Bonfire. 

Cybersecurity 

As the use of technology in finance continues to grow, so does the risk for cyberattacks. Fortunately, there are already fintech companies and software advancements tackling this challenge. Ongoing and thorough monitoring and risk auditing has led to the frequently employed DevSecOps cybersecurity model – shorthand for development, security and operations. 

Artificial Intelligence 

There are several types of fintech platforms that are using artificial intelligence (AI) to better serve customers. One example of this is robo-advisors, which use AI to take the emotion out of investing in the stock market. Many robo-advisors claim to provide equal or superior returns of traditional investment advisors at a fraction of the cost.

Fintech and AI are becoming increasingly more aligned, as fintech solutions like fraud detection, regulatory technology (regtech) and other areas become more advanced. 

Who Uses Fintech?

With fintech’s influence spanning across many industries, the amount of people and businesses using fintech continues to rise. Here are a few examples of who may be utilizing fintech and how: 

B2B For Banks 

While technological advancements for consumers sparked the initial wave of fintech, business-to-business (B2B) fintech has also become extremely common. Companies like Plaid connect banks with other financial institutions and allow users to give limited financial information to companies. Square, LendingClub and Bill.com are other well-known examples of B2B fintech companies. 

B2C For Small Businesses

Many small businesses have also been adopting fintech to keep things running smoothly. Small stores or restaurants which include digital payment options like Apple Pay or Venmo are just one example of utilizing business-to-consumer (B2C) fintech. 

Individual Consumers 

Individual consumers are perhaps the largest fintech adopters with online banking, crowdfunding and investing more accessible than ever. For many, fintech has woven its way into daily routine due to the direct and customer-oriented nature of financial technology. 

How Are Fintech Companies Regulated?

The same way that banks don’t have one single supervisor, fintech companies are also regulated in a variety of ways. The licensing and agencies that a fintech company is liable to, and whether they are supervised on a local, state or federal scale, can depend on the services that they offer.

In most cases, fintech companies must adhere to rules regarding lending and discrimination which are upheld by the Consumer Financial Protection Bureau (CFPB). The Federal Trade Commission may also have power over fintech firms, and companies which offer automated services – such as robo-advisors – may have to register with the U.S. Department of the Treasury’s Financial Crimes Enforcement Network or the Securities and Exchange Commission. 

Investing In Fintech Stock

If you’re interested in diversifying your stock portfolio, there are many options in the fintech sphere. Here are just a few fintech companies with anticipated growth to consider: 

• PayPal: As the parent company of Venmo and Honey, PayPal has paved the way for fintech companies and is on track to keep raising the bar.
• Chime: Beloved for its early access to federal stimulus checks and no-fee checking accounts, this banking alternative is valued at a whopping $14.5 billion. 
• MercadoLibre: Not only is this e-commerce giant making waves, but a recent partnership with PayPal has ensured rapid growth for this Latin American company.
• Square: Best known for Cash App, Square paved the way for phone-based credit card systems, and is quickly progressing as a small-business lending platform.
• Klarna: Best known for their buy-now-pay-later model, this fintech company has partnerships with IKEA, Etsy and numerous notable clothing brands and has been reaping the benefits of the pandemic’s boom in e-commerce.
• Kraken: This cryptocurrency exchange is the preeminent platform in Europe, with impressive numbers in the U.S. as well. 

The Future Of Fintech

For some, it’s hard to believe that fintech could possibly live up to its hype. But with a growing interest in AI and tailored financial products, not to mention the ever-growing demand for instant-gratification, the future of fintech is bright. 

The Bottom Line

Financial technology can improve the financial practices for everyone. From the average consumer to a large company, it typically reduces the time, money, and energy necessary with traditional financial transactions. Fintech has also grown to provide solutions in untapped markets, whether it be investment education or unique cryptocurrencies, and continues to do so.

Fintech has been around since the 20th century and its use has rapidly increased, with no stopping in sight. For more information or to learn about different financial services, have a quick browse through our resources at Rocket HQ^SM.