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What is 'Fintech'

Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century. Originally, the term applied to technology applied to the back-end of established consumer and trade financial institutions. Since the end of the first decade of the 21st century, the term has expanded to include any technological innovation in the financial sector, including innovations in financial literacy and education, retail banking, investment and even crypto-currencies like bitcoin.

BREAKING DOWN 'Fintech'

The term financial technology can apply to any innovation in how people transact business, from the invention of digital money to double-entry bookkeeping. Since the internet revolution and the mobile internet revolution, however, financial technology has grown explosively, and fintech, which originally referred to computer technology applied to the back office of banks or trading firms, now describes a broad variety of technological interventions into personal and commercial finance. According to EY's Fintech Adoption Index, one-third of consumers utilize at least two or more fintech services and those consumers are also increasingly aware of fintech as a part of their daily lives.

Fintech's Expanding Horizons

If one word can describe how many fintech innovations have affected traditional trading, banking, financial advice and products, it's 'disruption,' as financial products and services that were once the realm of branches, salesmen and desktops move toward mobile devices or simply democratize away from large, entrenched institutions. For example, the mobile-only stock trading app Robinhood charges no fees for trades, and peer-to-peer lending sites like Prosper Marketplace and Lending Club promise to reduce rates by opening up competition for loans to broad market forces.

New Tech in Fintech

New technologies, like machine learning/artificial intelligence, predictive behavioral analytics and data-driven marketing, will take the guesswork and habit out of financial decisions. "Learning" apps will not only learn the habits of users, often hidden to themselves, but will engage users in learning games to make their automatic, unconscious spending and saving decisions better.

The Fintech Landscape

Fintech startups received $17.4 billion in funding in 2016 and were on pace to surpass that sum as of late 2017, according to CB Insights, which counted 26 fintech unicorns globally valued at $83.8 billion. North American produces most of the fintech startups, with Asia following. Some of the most active areas of fintech innovation include or revolve around the following:

  • Cryptocurrency and digital cash
  • Blockchain technology, including Etherium, a distributed ledger technology (DLT) that maintain records on a network of computers, but has no central ledger.
  • Smart contracts, which utilize computer programs (often utilizing the blockchain) to automatically execute contracts between buyers and sellers.
  • Open banking, a concept that leans on the blockchain and posits that third-parties should have access to bank data to build applications that create a connected network of financial institutions and third-party providers. An example is the all-in-one money management tool Mint.
  • Insurtech, which seeks to use technology to simplify and streamline the insurance industry.
  • Regtech, which seeks to help financial service firms meet industry compliance rules, especially those covering Anti-Money Laundering and Know Your Customer protocols which fight fraud.
  • Robo-advisors, such as Betterment, utilize algorithms to automate investment advice to lower its cost and increase accessibility.
  • Unbanked/underbanked, services that seek to serve disadvantaged or low-income individuals who are ignored or underserved by traditional banks or mainstream financial services companies.
  • Cybersecurity, given the proliferation of cybercrime and the decentralized storage of data, cybersecurity and fintech are interlocked.

Fintech Users

Who uses fintech? There are four broad categories: 1) B2B for banks and 2) their business clients; and 3) B2C for small businesses and 4) consumers. Trends toward mobile banking, increased information, data and more accurate analytics and decentralization of access will create opportunities for all four groups to interact in heretofore unprecedented ways.

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