It’s Monday morning and the markets are open. You check your Robinhood account before you Venmo your friend for dinner last night. You head over to the local cafe and pay for your coffee using Apple Pay, which the store accepts with its Square terminal. Before heading off to class/work, your mobile banking app sends you a notification that you just got paid – today is going to be a good day.
Financial Technology, or FinTech, is the broad umbrella term for any type of technology that delivers financial services through software. At a high level, FinTech aims to disrupt existing financial services through automation and optimization. Think of the difference between going to a bank to cash a check and being able to cash it through your phone, and you will have the basic idea of how FinTech operates. In this example, the automation takes place in your phone, eliminating the need for a teller to process your check, while the optimization takes place in the sense that you cashed your check whenever and wherever you liked. This post aims to discuss the history, impact, and reach that FinTech has had and will continue to have on our society.
A brief history of FinTech
While the term “FinTech” became prominent over the last decade, the advent of financial technology dates back to the 1950s, when credit cards were first introduced. In the 1960s, ATMs replaced bank tellers, and the 1970s marked the beginning of digitization in the financial market. Leading up to the 21st century, FinTech was revolutionized by innovations in e-commerce, digital banking, and global financial markets. The pivotal years, 2006-2008, for the industry included two major events that would change the trajectory of financial services: the introduction of the smartphone and the Great Recession. Smartphones connected the general public to the internet and made financial services more accessible. The Great Recession caused a large distrust in traditional financial services that were meant to support the general public. This shift in mentality as well as the rise of smartphones created a demand for new players with more competitive services in the market – and FinTech started to blossom from an archaic industry.
Technological advances, like the widespread adoption of smartphones, have allowed archaic industries, such as finance, to reach mass scalability in just a short amount of time. Citibank is a behemoth with two hundred million clients, but it took them two hundred years to amass those two hundred million clients. Meanwhile, Alipay in China was established in 2004, and by 2018 it had eight hundred seventy million users. CreditKarma was established in the United States in 2007 and it currently operates with over one hundred million users. These FinTech firms have become giants like the incumbents but they have scaled but only in a fraction of the time the incumbents took.
Scalability brings about accessibility. It is commonplace for many of us to access our bank accounts, make trades on our personal online brokerages, and even pay with e-wallets through our smartphones. It is the ubiquity of smartphones and the customer-friendly UI/UX of mobile fintech apps that has allowed the FinTech pioneers to scale as rapidly as they have. These firms are even beginning to offer the same all-around functionality that banks used to offer all through mobile or web apps. This unbundling strategy, to offer one specific function and doing it well, then gradually rebundling with more offerings has yielded great results. For example, Robinhood, the popular investment platform, built its core business around being an easy-to-use trading application. However, the firm has started to introduce cash management products, including Robinhood debit cards, and access to cryptocurrencies as additional products.
The effects of this ubiquity are mutually beneficial for the FinTech companies and for everyday consumers. People living in poverty are faced with many barriers to banking access. Lack of transportation, illiteracy, and inaccessibility all stand in the way for those groups to join the part of the population that is banked. However, smartphones and easy-to-use applications offering e-wallets, with minimal regulatory requirements are allowing that part of the population to reclaim their financial independence.
Under the umbrella of FinTech fall many different verticals or niches where FinTech firms serve a specific set of needs. While there is no clear consensus about the number of verticals, firms can generally be grouped into the following verticals:
- Open/challenger banking: FinTech companies are establishing platforms that allow financial institutions to connect to the larger Application Programming Interface (API) ecosystem. These platforms improve the process of transferring and visualizing banking data. Example firms: Atom Bank, Monzo
- Artificial Intelligence (AI) and Machine Learning (ML) platforms: these AI/ML instruments help financial service providers analyze data, specifically providing structure for business operations like fraud detection and compliance. Robo-advisory and technology in apps like Robinhood use real-time analytics to offer personalized services for users to make informed and affordable decisions. Example firms: Zest AI, Kensho
- Personalized advice platforms, which focus on improving user experience by simplifying services that appear complex. These platforms seek to provide data-powered assistance at lower costs and are commonly used in wealth management and asset management industries. Example firms: Betterment, SoFi
- Insurance technology (“InsurTech” for short) companies, which are offering straightforward methods for users to receive coverage through apps. This sector has especially high barriers to entry, as it is heavily regulated, demands high capital buffers, and is difficult to scale across countries. Example firms: Gusto, Oscar
- Lending and crowdfunding platforms: new marketplaces are standardizing systems enhanced by data analytics and simplifying process steps from subscription to data collection to analysis. Example firms: Kickstarter, Patreon
- Security and identity, where some companies are creating products to streamline client onboarding, digital/cyber identity, biometric authentication, and innovate from traditional bank lending to establish efficient and safer solutions for mortgages and real estate. Example firms: Intertrust, Jupiter One
- Blockchain, where technology is being used to increase the speed and security of bank transfers, reduce security breaches, protect users’ online identities, electronically sign smart contracts, and more features in identity management and onboarding processes. Example firms: Circle, we.trade
- Payment technologies, where the FinTech industry has developed a range of smart, innovative solutions from mobile payments to online/digital lending to cryptocurrencies. Example firms: Flywire, Remitly
All of these breakthrough FinTech verticals are disrupting traditional industries and forcing them to adapt to these technologies. As the sector continues to mature and institutional players become more involved, it will be up to the most relevant FinTech companies to stay competitive and keep up with evolving consumer behaviors.