Fintech refers to technology and innovation in finance, focusing on digital solutions that improve efficiency, transparency, and security. American business executive William Mougayar coined the term to describe this emerging market sector, as it emerged from research into what his company, In-Q-Tel, had funded in the field.
Fintech is not new – money has always been about technology. What’s changed is our relationship with technology. Once we viewed technology through an ‘old school’ lens, there is now recognition of the potential benefits and advantages of using technology to help us manage our finances more efficiently. This approach to finance isn’t just confined to financial services either; tech companies are also exploring ways to bring banking and payments together.
In fact, according to a survey commissioned for the World Economic Forum (WEF) Global Agenda Council Digital Finance, by 2020, over half of all current payment services will be offered via mobile or Internet channels. With so many people choosing to bank online these days — both at home and abroad — banks are responding by offering their services digitally too.
This shift means businesses need to become familiarized with new concepts such as distributed ledger technology (DLT), artificial intelligence, machine learning, blockchain, and other technologies. Although not yet fully understood, blockchain seems to be the most promising solution to issues faced by traditional systems, particularly cross-border payments. As the WEF report suggests, DLTs offer the potential to create a new type of global currency that runs faster, cheaper, and without any central authority control.
The growth of fintech has resulted in an increase in venture capital investment into start-ups. According to the Global Startup Ecosystem Report 2018, assets in fintech have grown tenfold since 2012. It reported that $34bn (£23.5bn) was invested globally in the area between 2013 and 2017. By 2019, there is expected to be at least $58bn worth of investment flowing into the space.
According to Oxford Economics’ FinTech Insights 2016 report, based on interviews with over 100 senior executives from leading financial institutions, 90% said they believed the biggest disruptor in their respective sectors would come from a fintech firm. This was followed by a further 25% who thought a fintech might change their industry entirely within ten years.
As fintech becomes increasingly essential for businesses and consumers, it makes sense that government bodies are looking closely at how regulation can support and facilitate its development. This includes the European Commission, which launched a €2m competition last year to identify disruptive innovations in ecommerce, e-payments, electronic identity management, alternative data sources, and other areas related to electronic signatures.
Benefits of fintech
There are several benefits of fintech, this includes:
- speed – transactions take place much quicker than when we used paper and pen
- efficiency – costs are lower when using virtual or digital services over those involving physical products
- security – with the rise of cyber attacks, security breaches, and general distrust of organizations, it is vital to ensure personal information cannot fall into the wrong hands
- transparency – if something goes wrong, customers and users can see exactly what happened and where.
- accessibility – almost everyone has access to a smartphone today, allowing them to use the web and mobile apps instead of traditional methods
What regulations should apply to fintech?
At present, no specific rules exist regarding how fintech providers must operate. However, some countries have laws governing companies already operating under a banking license. For example, in the UK, the Alternative Business Structure (ABS) Regulations 2015 set out legal requirements for anyone entering the business of credit broking or advising on matters relating to finance.
Other countries, including France, Germany, and Italy, have adopted more specific and detailed legislation, each having different approaches to regulating fintech. At the EU level, however, things are less clear-cut. The Financial Services Union (FSU) has published guidelines for implementing the Markets in Financial Instruments Directive (MiFID II) for Europe’s exchanges. Still, it has not provided guidance specifically for the wider fintech sector. The same applies to MiFIR, which has been developed as part of MiFID II.
Although the FSU may have guidelines in mind for the future, current practices will remain valid until these become legally binding. There is still confusion about the exact relationship between fintech and traditional banking structures.
How regulators perceive fintech
This brings us back to whether fintech belongs in the banking world. In reality, most fintech solutions do not require full-finance licenses. For instance, a simple app designed to help people manage their finances could be classified as a “financial product” yet not necessarily need an FSA license. Therefore, it is up to individual countries and institutions to determine who needs to be licensed and regulated and how fintech fits with existing licensing schemes.
The US Securities Exchange Commission recently released a draft proposal titled Report on Regulation of Digital Asset Exchanges, which discusses the potential impact of cryptocurrencies on traditional financial markets.
Examples of fintech
The leading fintech companies of today include:
- Google Payments
- Apple Pay
- Amazon Payments
- Square Inc.
- Yandex Money
Challenges facing fintech
Some of the difficulties facing fintech include:
- understanding the risks involved and being aware of the potential dangers, fraud, security issues, etc. when designing new products
- ensuring they comply with consumer protection laws and regulations that protect consumers from poor service, high costs, fraudulent activity, etc.
- meeting regulatory and legislative demands around data privacy, anti-money laundering, reporting, cybersecurity, Know Your Customer (KYC), and other vital aspects of the business model
- responding quickly to legislative changes while taking into account customer feedback.
- keeping pace with technological developments by investing time and resources into research and development;
- supporting innovation through education programs and providing mentoring opportunities;
- exploring alternative funding techniques that take advantage of digital technologies rather than relying solely on banks
- establishing themselves in new markets while still making sure they provide quality service at affordable prices
- expanding into areas that conventional finance businesses are traditionally unwilling to enter (e.g., peer-to-peer lending, insurance, microinsurance, or remittance services).
Innovations in the fintech sphere
- Payments using cryptocurrencies and blockchain technology allow individuals to make instant payments without exchanging money first. In some cases, this also means avoiding third-party fees.
- Peer-to-peer lending is another example of an emerging concept – where individuals can borrow small amounts of cash from one person and lend it to someone else. This has been developed into more sophisticated online lending platforms such as LendingClub, Kabbage, Zopa, Funding Circle, Prosper, etc.
- Crowdfunding is a relatively recent phenomenon where individuals can raise funds for projects or ideas by selling shares in them. It is similar to crowdsourcing but involves using digital currency instead of physical goods or services.
- Insurance is a form of risk management whereby individuals purchase insurance policies covering specific events. These may include fire, theft, natural disasters, medical expenses, car accidents, home damage, etc.
- Microinsurance is a type of insurance that covers smaller amounts of loss, typically less than $10 000 per year.
- Mobile payment apps allow users to send and receive money via text message, email, social media, or even phone. They may use them to pay bills, transfer money between friends, pay for purchases, etc.
- Robo advisors offer automated investment advice based on algorithms.
- Robo-advisors are software applications designed to help investors manage their portfolios automatically.
- Robo-investors are people who invest in financial assets using automated trading software.
- Robo vendors are companies that sell automated trading software.
Future of fintech
The fintech industry is vast and is expanding rapidly. It is expected to grow to USD 1 trillion by 2020. The sector’s growth will continue to accelerate in the years ahead, and many exciting innovations will come.
Fintechs have already changed how we think about banking and how we do our day-to-day activities. They have also changed how we interact with each other and with organizations. This is because they provide us with better ways of doing things. For instance, you no longer need to go to your bank to get a loan. You can apply for one directly online. Similarly, you can now buy and sell stocks, commodities, and currencies through online exchanges.
There is no doubt that fintech is here to stay. It is predicted that the number of jobs created by fintech firms will exceed those lost in traditional banks and credit unions by 2017.
What are the main challenges facing fintech?
There are several key issues affecting the future development of fintech. These include:
- data security
- consumer protection
- fraud prevention
- access to capital
- customer experience
- gender equality
Fintech is a new field that is growing at a rapid pace. As a result, many opportunities are available for students interested in this area. There are many different career paths within the fintech industry. Some of these include business analysts, developers, etc. By leveraging advanced technology, fintech is empowering consumers and improving the efficiency of businesses.