Fintech, a combination of the words “financial” and “technology,” refers to software that seeks to make financial services and processes easier, faster and more secure. The fintech industry includes everything from payment processing solutions to mobile banking apps, all of which are designed to improve the financial lives of consumers and automate the financial operations of businesses.
What Is Fintech?
Fintech, short for financial technology, is a term used to describe the integration of technology into a financial service or process, with the goal of enhancing or automating it.
More broadly, the term fintech also encompasses a rapidly growing industry that serves the interests of both consumers and businesses in multiple ways. From mobile banking and insurance to cryptocurrency and investment apps, fintech has a seemingly endless array of applications.
What Is the Importance and Impact of Fintech?
The rapid digitization, automation and enhancement of financial services has led to greater convenience for consumers.
For instance, neobanks — banks that operate exclusively online — enable customers to complete actions like ordering credit cards and opening savings accounts online without charging the same fees as traditional institutions. Other fintech products, like digital wallets and peer-to-peer payment apps, have made it easy for people to simplify payment processes.
Fewer fees and online access have made fintech a viable alternative for communities that have been traditionally underserved by the finance industry. Over 90 percent of Hispanic consumers use some kind of fintech, followed by 88 percent of Black consumers and 79 percent of Asian consumers.
Businesses have also embraced fintech and contributed to its growth. Financial institutions provide 24/7 customer service with chatbots and robo-advisors, insurers use AI-driven fintech products to assess risk and offer accurate premiums and businesses connect to investors and other sources of capital through lending platforms.
Between 2019 and 2023, the number of fintech unicorns ballooned from 39 to 272, and the market capitalization of fintech companies doubled.
How Does Fintech Work?
Fintech works by simplifying financial processes for consumers and businesses. When it comes to fintech apps, this is typically done through application programming interfaces (APIs), which enable communication between two applications to facilitate data sharing. This makes it possible for fintech products to automate fund transfers, analyze spending data and perform other tasks.
Fintech apps can then leverage users’ data in different ways, depending on their purpose. Insurance apps can access policy details to provide personalized advice, banking apps can connect to checking accounts to send digital payments and personal finance apps can monitor credit histories to track financial health.
In addition to standalone apps, fintech companies partner with other organizations to provide embedded financial services. Embedded finance integrates financial services into non-financial apps. Take Apple Wallet, for example. Through the collaboration of Apple with different companies, iPhones store information like credit card details for users to access digitally.
Fintech Industry Overview
The global fintech market continues to show promise and is set to surpass $882 billion by 2030. However, there have been plenty of growing pains along the way, most notably the FTX crypto exchange scandal and the Silicon Valley Bank collapse. Amid recent tensions and fears, fintech funding has slowed. But there’s reason to believe a rebound is on the horizon.
Despite setbacks in 2023, customer growth rates have exceeded 50 percent across various industries and regions within the global fintech industry. The prospect of further combining fintech with artificial intelligence has produced even more excitement, expanding the possibilities for what fintech could look like in the years to come.
Types of Fintech
Fintech is reshaping every aspect of the traditional finance industry, including the following areas.
Banking
Mobile banking is the central focus of many fintech companies. In the world of personal finance, consumers have increasingly demanded easy access to their bank accounts, especially on a mobile device. Most major banks now offer some kind of mobile banking feature, especially with the rise of digital-first banks, or neobanks. Neobanks are essentially banks without any physical branch locations, serving customers with checking, savings, payment services and loans on completely mobile and digital infrastructure. Some banks also allow third-party software applications to access a user’s financial information, which is called open banking. Some examples of fintech banks or neobanks are Chime, Current, Aspiration and Varo.
Payments
Moving money around is something fintech is very good at. The phrase “I’ll Venmo you” or “I’ll CashApp you” is now a replacement for “I’ll pay you later.” These are, of course, go-to mobile payment platforms. Payment companies have changed the way we all do business. It’s easier than ever to send money digitally anywhere in the world. In addition to Venmo and Cash App, popular payment companies include Zelle, Paypal, Stripe and Square.
E-Commerce
Consumers can break up payments through a ‘buy now, pay later’ setup supported by companies like Klarna and Affirm. In this scenario, customers pay off products by making smaller, interest-free payments. On the business side, companies can compile purchasing data to understand their customers and send them targeted ads and deals.
Stock Trading
Fintech companies have made stock trading and investing more affordable. For example, Robinhood doesn’t charge fees for opening and maintaining brokerage accounts while Public.com lets investors purchase portions of shares — known as fractional shares — to avoid hefty stock prices. With AI’s ability to process massive amounts of data, investment tools can also track and organize trading data based on user requests. Users can then filter stocks based on their preferences for faster purchasing.
Wealth Management
Automation simplifies the investing process for less-experienced individuals. Many companies employ robo-advisors that provide recommendations and even select stocks after users answer questions about their financial interests and risk tolerance. If users prefer to build their own portfolios, robo-advisors can still analyze a user’s stocks to offer feedback on managing risk. Companies that provide robo-advisors and automated investing include Wealthfront, Stash and Acorns.
Fintech Lenders
Fintech is also overhauling credit by streamlining risk assessment, speeding up approval processes and making access easier. Billions of people around the world can now apply for a loan on their mobile devices, and new data points and risk modeling capabilities are expanding credit to underserved populations. Additionally, consumers can request credit reports multiple times a year without dinging their score, making the entire backend of the lending world more transparent for everyone. Within the fintech lending space, some companies worth noting include SoFi, Funding Circle and Prosper Marketplace.
Insurtech
Insurance is a somewhat slow adopter of technology, and many fintech startups are partnering with traditional insurance companies to help automate processes and expand coverage. From mobile car insurance to wearables for health insurance, the industry is staring down tons of innovation. Some insurtech companies to keep an eye on include Lemonade, Kin and NEXT Insurance.
Regtech
Regulation technology (regtech) tools track and analyze transactions to alert companies of suspicious online activities. Coordinating with regtech companies, institutions can then quickly identify issues and take steps to counteract fraud, cyber attacks and other problems. Regtech companies can also assess an institution’s data to determine the risk of failure and make relevant suggestions. Big names in this space include ComplyAdvantage, Forter and Chainalysis.
Cryptocurrency
Cryptocurrency and blockchain intersect with fintech in a number of ways. For starters, several crypto trading platforms have emerged that allow users to trade different kinds of cryptocurrencies and take advantage of decentralized exchanges. And to keep people’s digital currency safe, a number of crypto wallets have sprung up as well. In addition, several fintech companies use blockchain technology for payment processing, money transfer and secure digital identity management. Some examples of cryptocurrency fintech companies include Coinbase, Blockfi and Circle.
Fintech Company Examples
Here are a few more examples of fintech companies improving upon traditional finance with the help of technology:
- Intuit automates the tax process with individual-based products like TurboTax and small business-based products like QuickBooks.
- Shopify makes e-commerce more convenient for business owners with Magic, an AI assistant that can generate product photos, write product descriptions and more.
- Wealthsimple simplifies the investment process with its robo-advisor, which gathers input from users to match them with diversified portfolios that meet their criteria.
- Upstart enhances the loan process by using AI to pair lenders with borrowers who satisfy their requirements while also helping borrowers secure low-cost, fixed-rate loans.
- Clearcover speeds up the claims process with AI technology and introduces a generative AI tool to further improve the claims experience.
- Onfido builds trust between institutions and customers with its AI-driven platform, which uses biometrics, customer information and other data to prevent fraud.
Interactions between fintech companies and traditional financial players will continue to evolve as fintech regulations adapt to the latest technologies and strategies.
Fintech Regulation
The U.S. fintech regulation ecosystem consists of both state and federal laws. While different entities help develop regulations, the main federal bodies are the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency. Other notable groups include the Federal Trade Commission, the Consumer Financial Protection Bureau (CFPB) and the Security and Exchanges Commission. Fintech companies must remain compliant with laws established by federal groups, as well as any laws in states where they operate.
Fintech regulation is undergoing major changes, so companies need to stay up-to-date. The expansion of technologies like embedded finance has led federal regulators to take a stronger stance on fintech-bank partnerships, releasing a set of guidelines. In addition, the CFPB is seeking to supervise Big Tech companies entering the fintech ring to ensure a level playing field for traditional financial institutions.
