After the global financial crisis of 2008, fintech has evolved to disrupt and reshape the business world (Lucas Mearian, 2017). Fintech now describes a variety of financial activities, such as money transfers, depositing a check with your smartphone, bypassing a bank branch to apply for credit, raising money for a business startup, or managing your investments, generally without the assistance of a person. Furthermore, fintech also includes the development and use of cryptocurrencies such as bitcoin and Litecoin (Fintech, n.d.).
In today’s digital age, and with significant demographic shifts in the population, people are seeking easy access, convenience, efficiency, and speed. People want to conduct transactions via mobile technology platforms and applications, and such activities include managing their financial lives, whether that is tracking their overall spending, applying for a loan, or optimizing their investment strategies. Many people prefer to use online apps or sites for finances. On average, between 1 and 3 apps are used by people to manage their financial lives (Lenny Sanicola, 2017).
Fintech services mainly use the internet and technologies like cloud computing, data analytics, machine learning and artificial intelligence. For the consumer, fintech services are delivered through internet-enabled devices, including smartphones (Shaikh Zoaib Saleem, 2018).
According to EY's 2017 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, n.d.).
Some of the most active areas of fintech innovation revolve around the following areas (Fintech, n.d.):
- Cryptocurrency and digital cash
- Blockchain technology
- Mobile payments such as Alipay, WeChat Pay, AirAsia BigPay, PayPal, Apple Pay and Google Wallet.
- Smart contracts, which utilize computer programs to automatically execute contracts between buyers and sellers.
- Open banking, a system that provides a user with a network of financial institutions’ data through the use of application programming interfaces (APIs).
- Insurtech, which seeks to use technology to simplify and streamline the insurance industry. Users can compare the prices and features of insurance policies online.
- 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
Examples of Fintech
Fintech is changing the world of finance for consumers in a myriad of ways. For example, you can now open a bank account over the internet, without physically visiting a bank. You can link the account to your smartphone and use it to monitor your transactions. You can even turn your smartphone into a “digital wallet” and use it to pay for things using money in your account (What is “Fintech” and How, n.d.).
Fintech is also rapidly changing the insurance and investment industries. Car insurance providers now sell “telematics-based” insurance where your driving is monitored using data collected via your smartphone or a “black box” fitted in your car. This data can then be used to determine how much you pay for your insurance policy. In the future, it may be possible to buy insurance on a short-term or “pay as you go” basis (What is “Fintech” and How, n.d.).
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FinTech companies are businesses that leverage new technology to create new and better financial services for both consumers and businesses. It includes companies of all kinds that may operate in personal financial management, insurance, mobile payment, risk management, asset management, etc (Lenny Sanicola, 2017).
Fintech startups are shared the identical characteristics such as they are designed to be a threat to, challenge, and eventually usurp entrenched traditional financial services providers by being more nimble, serving an underserved segment or providing faster and/or better service (Fintech, n.d.).
For traditional financial services companies (including banks, insurers and wealth and asset management companies), the risk of disruption is real, as fintech companies invade their space (Lenny Sanicola, 2017).
Examples of Fintech Startups
1. Affirm seeks to cut credit card companies out of the online shopping process by offering a way for consumers to secure immediate, short-term loans for purchases. While rates can be high, Affirm claims to offer a way for consumers with poor or no credit a way to both secure credit and also build their credit histories (Fintech, n.d.).
2. Better Mortgage seeks to streamline the home mortgage process with a digital-only offering that can reward users with a verified pre-approval letter within 24 hours or applying (Fintech, n.d.).
3. GreenSky seeks to link home improvement borrowers with banks by helping consumers avoid entrenched lenders and save on interest by offering zero-interest promotional periods (Fintech, n.d.).
4. For consumers with no or poor credit, Tala offers consumers in the developing world microloans by doing a deep data dig on their smartphones for their transaction history and seemingly unrelated things, such as what mobile games they play. Tala seeks to give such consumers better options than local banks, unregulated lenders and other microfinance institutions (Fintech, n.d.).
5. The mobile-only stock trading app Robinhood charges no fees for trades (Fintech, n.d.).
6. Peer-to-peer lending sites like Prosper Marketplace, Lending Club and OnDeck promise to reduce rates by opening up competition for loans to broad market forces (Fintech, n.d.).
7. Business loan providers such as Kabbage, Lendio, Accion and Funding Circle offer working capital to startups to ease the their business establishment (Fintech, n.d.).
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 (Fintech, n.d.).
Fintech is also a keen adaptor of automated customer service technology, utilizing chatbots to and AI interfaces to assist customers with basic task and also keep down staffing costs. Fintech is also being leveraged to fight fraud by leveraging information about payment history to flag transactions that are outside the norm (Fintech, n.d.).
How Fintech Can Be Disruptive ?
According to Deloitte and the WEB, disruptive forces that have reshaped the FinTech industry include, but are certainly not limited to (Lucas Mearian, 2017):
- The growth of online shopping leading to the dominance of online, cashless solutions for transactions.
- A shifting balance of power that swings from banks and other financial services to those who own the customer experience. Banks are eliminating in-person services and looking to fintech companies for other ways to engage customers.
- New trading platforms that are collecting data to create an aggregated market view and using analytics to uncover trends.
- Insurance products, which are becoming more tailored to customers who are demanding coverage for specific locations, uses and time frames. That's driving insurers to collect and analyze additional data about their clients.
- Artificial intelligence, which is adopted to replace complex human activities. Transaction process improvement and middleware, both of which remain expensive. This is pushing traditional financial services firms to consider partnerships with marketplace lenders for fintech solutions that don’t require a full infrastructure overhaul.
The rise of fintech has forever changed the way companies do business (Jens Munch, n.d.).
Crowdsourcing, for example, allows people with big ideas to get funding quickly and easily from anywhere in the world from people they have never met. Instead of months of investor talks, entrepreneurs can thanks to the internet, pitch directly to the world (Jens Munch, n.d.). It has democratized the process of finding startup capital and shortened the timeline from perhaps months of meetings to as little as a few weeks (Bernard Marr, 2017).
Another example of financing is peer-to-peer or P2P lending, where online platforms help to match borrowers with lenders, and bypassing the banks. It has attracted the involvement of big names such as Goldman Sachs, and US-based Lending Club has made a name for itself in the P2P space as the world’s largest online credit marketplace, facilitating personal and business loans (Emmanuel Surendra, 2017).
It’s also now easier than ever for small businesses to accept payments. Small businesses can accept credit and debit cards with tools like Square and PayPal. And while there are fees, the entrepreneur doesn’t have to do a particular volume of business to qualify for an account. Anyone, anywhere can safely and easily accept credit card payments, making it easier to do business (Bernard Marr, 2017).
For international money transfers, TransferWise has turned the traditional and expensive banking solution to sending money across borders easily and enables small firms and individuals to transfer money far cheaper than was previously possible (Jens Munch, n.d.). TransferWise is streamlining international money transfers, disrupting that sector by offering a 90% discount on traditional bank transfer fees. Additionally, for smaller transactions, services like PayPal automatically convert currencies, so it’s easy for a customer in America to purchase goods from a maker in the U.K. or anywhere else in the world (Bernard Marr, 2017).
How Fintech Changed the Customers ?
The rise of the smartphone has massively changed the behaviour of consumers. Thanks to the ‘always online’ culture we live in today and the proliferation of services and apps that feed it. People can not only access information and data they had never previously been able to anytime and anywhere (Jens Munch, n.d.).
Taking China's Mobile Payment as an example.
China has adopted mobile payments at an extraordinary pace, quickly becoming the world’s largest user of mobile payment services (Mike Faden, n.d.). China has leapfrogged from cash to mobile payments, bypassing the payment cards system. Chinese consumers are increasingly using their mobile phones to buy goods and services (Wei Wang and David Dollar, 2018). Chinese spending using cash, however, is down around 10% over the last two years, according to The Wall Street Journal (Harrison Jacobs, 2018).
In 2016, Chinese consumers spent approximately $22.8 trillion through mobile payment platforms, far exceeding the volume of transactions in the United States ($112 billion). Over 90% of that sum stemmed from mobile payment apps that belong to China’s two biggest tech conglomerates: Alibaba’s Alipay (54%) and Tencent’s TenPay (encompasses WeChat Pay) (37%) (Wei Wang and David Dollar, 2018).
Both applications have other beneficial features that enhance the user experience. With Alipay, users can obtain consumer or seller loans, credit that is often unavailable via banks. Alipay can be used for offline or online purchases, particularly on Alibaba's e-commerce websites (Sara Hsu, 2018).
Meanwhile, WeChat Pay offers the convenience of allowing WeChat users the ability to send money to one another, even if they don't have a bank account. WeChat Pay can also be used offline and online (Sara Hsu, 2018). Additionally, Tencent’s WeChat now allows users to apply for uncollateralised loans of up to US$30,000 and get a decision in under a minute, while individuals can transfer money to each other (Economic Benefits of FinTech, n.d.).
Nowadays, a shopkeeper can display a code that customers scan with their mobile phone to initiate a payment, or a customer’s WeChat or Alipay account can generate a unique, transaction-specific code that a retailer scans to complete a transaction. In either case, the mobile phone acts as a kind of payment card. Money transfer between parties is also as simple as sending a text message (Wei Wang and David Dollar, 2018).
Mobile payment not only transforms the Chinese's payment method on domestic purchases but also overseas spending. According to a white paper released by Nielsen and Alipay, 65% of Chinese tourists have already used mobile payment while traveling overseas. 91% said they were more likely to buy from a merchant if they supported Chinese mobile payment services. The trend of marketing with payments is likely to catch up among foreign merchants in the near future (Masha Borak, 2018).
A recent study from accounting firm - Ernest & Young, revealed that Chinese fintech adoption rates to be the highest in a table of 20 major economies. It revealed that almost 90% of Chinese consumers have made payments or money transfers on their phones, almost 60% use fintech platforms for savings and investments while close to 50% have used fintech services to borrow money (Richard Cook, 2018).
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1. Speed and Convenience
Fintech products tend to be delivered online and so are easier and quicker for consumers to access (What is “Fintech” and How, n.d.).
2. Greater Choice
Consumers benefit from a greater choice of products and services because they can be bought remotely, regardless of location (What is “Fintech” and How, n.d.).
3. Cheaper Deals
Fintech companies may not need to invest money in a physical infrastructure like a branch network so may be able to offer cheaper deals to consumers (What is “Fintech” and How, n.d.). Additionally, fintech has allowed for more competition, in turn lowering the costs for consumers (GOW Team, 2018).
4. More Personalised Products
Technology allows fintech companies to collect and store more information on customers so they may be able to offer consumers more personalised products or services (What is “Fintech” and How, n.d.).
5. Innovative Technology
New technology allowed startup companies to enter a market that was once monopolised by large entities. For instance, Transferwise is a start-up designed to reduce the cost for customers looking to send money overseas. What once was solely controlled by large banks, using technology has allowed a startup access to the market (GOW Team, 2018).
The Risks of Fintech
1. Unclear Rights
Fintech companies may be new to the financial industry and use different business models to traditional providers. This can make it harder to ascertain which ones are regulated, and what your rights are if something goes wrong (What is “Fintech” and How, n.d.).
2. Making a Rash Decision
Financial products that are bought instantly online without ever meeting anyone face-to-face may make it easier for consumers to make quick, uninformed decisions (What is “Fintech” and How, n.d.).
3. Technology-Based Risks
Financial products bought online may leave you more exposed to technology-based risks. For example, your personal data could be misused or stolen by third parties for lucrative purposes or you could fall victim to cybercrime (What is “Fintech” and How, n.d.).
4. Financial Exclusion
While technology increases choice and access for most consumers, it can exclude those who don’t know how to use the internet or devices like computers, smartphones and tablets (What is “Fintech” and How, n.d.).
FinTech is just in its nascent stages. The rise of fintech has opened up a world of possibilities. The industry is changing rapidly, and savvy business owners will want to stay informed as a vital part of their business plan. Businesses will be able to offer more services at lower cost than ever before, but only if they stay on the cutting edge of what’s available and possible (Bernard Marr, 2017).
FinTech can also help drive improvements in traditional financial services and promote disruption through innovative new products and services, which can offer benefits to consumers and other sectors of the economy (Economic Benefits of FinTech, n.d.).
It is vital for businesses and consumers to embrace fintech technologies as they are the future.
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Edited by: 浪子
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What's Fintech And Why It Matters ?
Reviewed by 浪子
on
October 28, 2018
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Reviewed by 浪子
on
October 28, 2018
Rating:
