What is Fintech: Financial Technology Explained

The term fintech, or financial technology, refers to innovations and technologies used in the financial services sector. Although it seems simple, it is a collective term covering a huge number of services that continue to change in the new digital era.

This article will introduce you to what is fintech and how it is used in the financial industry.

What is fintech?

Fintech combines the terms “finance” and “technology” and refers to any technology that improves or automates financial services and processes. 

The term encompasses a rapidly growing industry that serves the interests of consumers and businesses in multiple ways. From mobile banking and insurance to cryptocurrencies and investment instruments, fintech has a seemingly endless array of applications. 

One of the driving factors in the fintech sector is that many traditional banks are supporting and embracing the technology by actively investing in, acquiring, or partnering with fintech companies. 

What is a fintech company?

A fintech company is an independent business that deals with business or personal finance and combines a product or service offering to business or individual consumers using technological or fintech innovations.

The technology behind these financial service providers can help with a broad range of aspects, including but not limited to:

• Anti money laundering;
• Transfer of financial information;
• Payment systems or payment apps;
• Any other service that takes traditional banking to a new and modern level.

Fintech businesses help most consumers gain access to financial inclusion when they engage in various types of financial transactions.

The impact of financial technology companies

Apart from financial inclusion, financial technology companies aim to offer a modern solution to traditional financial services. 

They are usually viewed as disruptors because their business models are more agile than traditional banks. As such, their fintech innovations — whether it’s a point-of-sale (POS) device for a merchant or a digital wallet —- introduce new and modern solutions to financial needs.

These financial needs may vary from person to person and business to business. Some may be looking for integrations of their financial systems with invoicing software. Other merchants, for example, may require support with payment processing for their ecommerce stores. For individuals, it may be possible to acquire financing or lending more easily or access accounts with more attractive interest rates.

These fintech firms, which operate in the realm of the financial services industry, also contribute to economic growth and job creation. By offering their services to merchants or individual clients, fintech companies’ teams, estimated at around 76,000 in the UK, account for a large portion of the labour force. 

Meanwhile, their contribution to economic growth is evident through tax obligations that they fulfil, thus giving back to society. This is in addition to solving daily challenges associated with financial transactions for individual clients, ranging from lending and borrowing to saving and transacting.

Fintech and new technologies

Fintech companies are innovators in the finance industry. They introduce new physical technologies as well as software solutions to help consumers in multiple ways. On the physical side, there are fintech providers offering POS devices. On the software side, there are multiple apps that help facilitate the opening of a new bank account for an unbanked individual.

These technologies also support business clients with access to financial advisors on the go and online. This technology is viewed as disruptive and is reaching millions of people at a rapid pace around the world where traditional banking services are either too slow to respond to market needs or where these banks have no presence.

How fintechs expand horizons

Because of their disruptive nature, fintech startups are offering solutions to modern problems that traditional banks and legacy financial institutions are slow to implement or introduce. Some common problems include the need for faster, more agile payment solutions. Others include the ability to make online purchases securely.

Furthermore, it’s becoming necessary to access finance at the touch of a button through the use of fintech technologies that help speed up financially-related transactions, introducing new solutions to daily challenges that both individual and business customers may have. 

For example, merchants that wish to cater to an increasingly cashless clientele can take advantage of tap-on-phone or POS devices to accept digital and card payments and help their business grow.

Regulations and fintech

Many fintech companies, if not most, are heavily regulated and must ensure strict compliance with anti-money laundering regulations, offer strict security for personal financial data and protect their customers’ privacy according to legislation in specific jurisdictions. 

Two examples of these regulations include:

• The European Union’s General Data Protection Regulation (GDPR), which deals with how customer data is handled, processed and used.
• The Payment Card Industry Data Security Standard (PCI DSS), which has strict requirements for the technologies and protections fintechs need to have in place to facilitate safe and secure online transactions. 

Other examples include 3D Secure, two-factor authentication requirements, etc.

Reasons consumers use fintech

Individual consumers use fintech for many reasons. 

These include:

• Opening more accessible savings accounts;
• Transferring money across borders in seconds;
• Reducing the need for long and arduous paper-based processes. 

Meanwhile, business customers may need expert assistance with various forms of financial instruments and the services of a fintech financial advisor are highly beneficial for them.

How does fintech work in practice?

Initially, fintech was recognised by technologies that were applied to the internal systems structure of banks or other financial institutions. More recently, the term has encompassed a host of other applications that are more consumer-facing. 

Through this type of technology, it is possible to manage funds, trade stocks, pay for food, or manage insurance. Fintech businesses, such as myPOS, allow you to accept payments through a variety of methods, some of which are: through a POS terminal or entirely online.

The tools provided by fintechs are changing the way many consumers keep track of, and are making it easier for them to manage their finances. According to data, in 2017 alone, investments in the financial technology tools field grew by 18%. 

For consumers who do not have bank accounts, fintech provides a flexible option to participate in financial services without the need to use a bank office. And to a large extent, this type of technology has been developed with exactly this goal in mind – to give consumers direct access to their financial world through easy-to-use tools. 

Fintech companies use a variety of technologies, including artificial intelligence (AI), big data, blockchain and robotic process automation (RPA).

AI algorithms can provide insights into customer spending habits, allowing established financial institutions to develop better strategies. Chatbots are another AI-driven tool that banks are using to help better serve customers.

Big data sets can predict customer investments and market changes in order to create new strategies and plans, analyse customer spending habits, improve fraud detection and create marketing strategies.
Blockchain, for example, is a new technology in finance that has sparked significant investment by many companies. The decentralised nature of blockchain can eliminate the need for a third party to execute transactions.

Examples of fintech products and services

Below you can see a few examples of fintech services and products and gain insights about their role in the financial ecosystem today. 

1. Crowdfunding platforms

Crowdfunding platforms are a fintech innovation that allows users to send or receive money from other users of the platform. They also enable individuals or businesses to pool funding from different sources in the same place. 

Instead of going to a traditional bank for a loan, it is now possible to connect directly with investors to support a project or company. And while the applications vary, the number of crowdfunding platforms has increased manifold in the past few years.

2. Blockchain and cryptocurrencies

Cryptocurrency exchanges are a perfect example of fintech in action because of the way they function. These platforms offer a secure way to buy, sell, and store your funds.

In addition to cryptocurrencies, blockchain services help reduce fraud by storing provenance or financial data on the blockchain, which uses distributed ledger technology. And while cryptocurrencies and blockchain technology may be seen as an atypical use of fintech, they have certainly taken over much of the investment world. 

3. Mobile payments

Recently, quite a few consumers with a smartphone have been using various forms of mobile payments, facilitated by fintech applications. 

Using increasingly sophisticated technology, services have emerged that allow users to exchange money and make payments online or on mobile devices – including the popular softPOS payment acceptance app, myPOS Glass. 

4. Insurance

Fintech in the insurance industry, or insurtech, includes everything from car insurance to home insurance and data protection. In addition, fintech solutions from insurance startups are increasingly attracting fintech funding. 

The main difference between traditional insurance and insurtech is that consumers can apply for and receive cover for their needs at a few clicks of a button on a mobile device or a computer. This is in stark contrast to traditional insurance companies that are weighed down by a large administrative, paper-based burden.

5. Robotic advice and stock trading

Robo-advising has entered the asset management sector by providing algorithmic portfolio management recommendations that increase efficiency and reduce costs. Following the advent of more sophisticated technologies that can analyse different portfolio options non-stop, financial institutions are adapting to offer robo-advisory services online.

Perhaps one of the most popular and major innovations in financial technology is the development of investment apps and stock trading apps. Instead of investors having to go directly to a stock exchange, they can now buy and sell stocks with just a tap on their mobile device. Ultimately, this makes investment management much more streamlined and efficient.

6. Budgeting apps

One of the most common uses of fintech is budgeting apps for consumers, whose popularity has grown exponentially over the years.

Before, users had to collect checks or navigate Excel spreadsheets to keep track of their finances. But since the fintech revolution sparked the development of financial services apps, consumers can easily and efficiently track their income, expenses and other budgeting tools.

7. Embedded finance

Embedded finance is used when banking as a service (BaaS) is used to install a checkout API into a site or application. The motivation for this is to coordinate monetary administrations across different environments and ecosystems.

This comprises brands or organisations “renting” access to the apparatuses and administrations that are presented by money providers and utilising them to build financial products.

The most important fintech terms

Financial firms that are disrupting the industry often use specific fintech terms that may sound confusing for those who aren’t familiar with them. 

A few examples of these include:

• Tokenization: Tokenization is the process of taking an actual value and converting it into something unreadable or unrecognisable to a third-party that may maliciously be attempting to access the value. It can refer to a customer’s personal debit or credit card information such as a PAN number or a CVV value.
• NFC (near-field communication): Near-field communication is the technology that enables contactless payments to take place so quickly and smoothly in in-person and in-store payments. Coupled with RFID technology, it speeds up payments while ensuring they are secure.
• API: An application programming interface (API) is a technological innovation that enables different computer programmes to communicate with each other with no hiccups.
• PCI DSS Compliance: An important directive in the fintech space, PCI DSS has expectations and requirements for how payments should be processed safely, with emphasis on safety and security. To protect consumers and businesses from fraud, fintechs are required to be PCI DSS-compliant and offer an added layer of assurance to their client base, while remaining compliant with the laws.
• Cryptocurrency: Cryptocurrency is a global phenomenon that does not have a tangible equivalent to money. Instead, the monetary value is in a digital form of money that can be accessed through certain apps and crypto wallets. The idea behind cryptocurrency is that it works based on a highly secure and immutable ledger system that makes tampering with transactions almost foolproof.

Each of these fintech terms has significant relevance in the industry, and familiarity with them will help you ensure you transact safer and more responsibly in the future.

The future of the fintech industry

It’s no secret that over the past decade fintech evolved tremendously, and the share of investments continues to contribute to fintech growth. Financial institutions that fail to go digital will struggle to survive in a highly competitive environment. 

Technology, machine learning and artificial intelligence are beginning to dominate the ways in which businesses are expected to operate, paving the way for the emergence of new fintech trends to keep an eye out for.

Conclusion

So now that you know what is fintech, consider the opportunity it gives small players to compete in the same playing field as traditional banks and financial institutions in the financial system. 

In this industry, it is not about who is the biggest, but who is the fastest and most responsive in effectively meeting the ever-changing demands of consumers. Furthermore, the solutions offered by fintech companies are no longer one-size-fits-all. 

Instead, they offer targeted – often niche – services that fill the gap of a specific financial need, sometimes at a much lower cost than those offered by traditional financial providers.

As consumers become even more inventive, successful financial businesses will be those that continue to innovate efficiently, in offering new solutions, to dynamically emerging problems.

Disclaimer: Please be aware that the contents of this article and the myPOS Blog, in general, should not be interpreted as legal, monetary, tax, or any other kind of professional advice. You should always seek to consult with a professional before taking action, since the particulars of your situation may materially differ from other cases.