Fintech is certainly mentioned a lot in business circles, but often without a clear understanding of what the term actually means, so it risks becoming just another technology buzzword. Not only that, when you consider that investment in fintech had grown from $4.05 billion in 2013 to $12.2 billion by the start of 2015, it’s clearly something that is worth having a understanding of.
As a portmanteau of financial technology, it is hardly surprising that fintech broadly refers to any kind of technology that relates to the financial sector. In that sense it isn't new as the finance industry has long been a pioneer in using technologies from the telegraph to the earliest business computers. More recently, however, the term has gained much greater traction due to the rapid adoption of the Internet, smartphones and mobile applications. So many aspects of our lives have been disrupted, enhanced and revolutionised by digital technologies, and the financial services sector is no different.
While fintech may have once been limited strictly to PCs and software being used by financial institutions, the term now has a much broader sphere of influence. Mobile payments, cryptocurrencies, crowdsourcing, and even social media platforms are part of the fintech revolution. And the new developments being driven by fintech promise to innovate and disrupt not only banks, but a host of other businesses too.
London has become a centre for the fintech industry thanks to its supportive regulatory structure. As a result the UK has now built a major pool of fintech talent.
One of the most prominent examples of fintech disrupting traditional ways of working is the rise of mobile banking. Previously, trust and security issues would have made consumers hesitant to make any transaction, no matter how small, using their smartphone. (What if my device is stolen? What if hackers steal my credit card details?) But now, smartphones are providing one of the foremost examples of fintech innovation. In the UK and other western countries, mobile banking has made financial transactions much simpler and efficient, improving the customer experience. In less developed markets, however, fintech is making an even more profound impact. Smartphones are enabling individuals that do not have access to a bank to send and receive money via their smartphone. In this respect, mobile banking is giving consumers greater independence and control over their finances.
Mobile banking is also not only about major players like Apple Pay and Android Pay, fintech startups are also launching their own mobile banking applications that offer unique features to differentiate themselves from more established brands. The UK-based app Pennies, for example, gives customers the option of donating a few pence to charity when paying for goods or services by card. With just a single click they can round up their purchase, giving the excess to a charitable cause. Many other startups are using digital technologies to offer services, like international money transfers, at much lower rates than more established competitors. It has also opened up opportunities like peer-to-peer lending from companies like Zopa and crowd funding of businesses through sites like Seedrs which allow individuals to become 'dragons'. Fintech, therefore, has opened up the financial sector to greater innovation by enabling new players to enter a space usually reserved for centuries-old institutions. It is not just about providing convenience to consumers, but also driving entrepreneurial spirit in the business world.
Bitcoin, particularly during its headline-grabbing high of 2013, can perhaps lay claim to be the best-known example of disruptive financial technology. While the future of this technology is less clear cut than that of mobile banking, businesses would still be wise to keep an eye on the impacts that it and similar cryptocurrencies are generating. Because of the way in which bitcoin is self-regulating, transparent and anonymous – essentially removing the bank as the middle-man in a transaction – it has gained many supporters. A number of physical and online retailers have begun accepting the currency due to its speed, ease of use and low transaction fees. Like mobile banking, bitcoin has also proved empowering for individuals that have traditionally been excluded from the formal banking sector. Women living in societies where they are not allowed to open bank accounts, for example, have used cryptocurrencies to gain a level of financial autonomy that would not otherwise be possible. There is of course a dark side here too, Bitcoin's ability to make transactions hard to trace has made it popular with cybercriminals.
Why is fintech important?
Because fintech does not refer to one particular piece of technology, its impact is being felt across a range of industries and in both the business and consumer markets. From an investor point of view, fintech is creating important changes to the way in which businesses secure funding. Peer-to-peer lending and equity crowdfunding, both enabled by digital technologies, are empowering startups to launch and SMEs to grow more easily by allowing them to secure alternative investment capital. Traditional investment options, like banks, are not always suitable for small, short-term loans, or may simply reject risky business propositions. However, modern investment platforms like Avant Credit and SeedInvest provide more flexible investment options. In fact, a recent Goldman Sachs report estimated crowdfunding to have a potential market value of $1.2 trillion, making it the largest fintech vertical.
Fintech has also changed the way in which consumers view financial services. Just like any other aspect of their lives, they now expect banking and transactions to be seamless, quick and secure. Inconvenience, delays and even transaction fees are no longer considered acceptable in the world of finance because digital technologies have shifted consumer expectations. Businesses that are unable to keep pace with these expectations are likely to be overtaken by a more agile competitor.
The future of fintech
While it is too early to sound the death knell for the banks that have been facilitating our transactions for centuries, fintech has made many of them sit up and take notice. They are no longer the de facto managers of consumer or business transactions. Whether it’s mobile apps, cryptocurrencies or social networks (Facebook launched money transfers earlier this year), fintech is bringing innovations to an industry that had long been in danger of stagnating.
In terms of 2016, other growing trends such as the 'always-on economy' and Internet of Things will continue to boost fintech growth. Also expect more financial institutions to utilise the power of big data to deliver services to their customers, and increased collaboration between fintech startups and traditional banks.
With further innovation and disruption surely on the way in the coming months and years, businesses must get on board with the fintech revolution if they are to remain relevant to their partners and customers.
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