Disruption is the new normal. Disruptive innovation challenges the status quo businesses to provide better offerings to customers. The fintech industry has been a game-changer and disrupted the traditional industrial sector, especially banking. According to Forbes, 68% of people trust financial instruments from non-traditional institutions. Moreover, it includes everything from online banking to recent blockchain technology.
The blog explains Fintech meaning, the categories of the fintech industry, and its advantages.
What do you need to know about Fintech?
The first question that comes to mind is, What is Fintech? Fintech is a combination of two words- “finance” and “technology.” Fintech is the integration of technology by a business to improve or optimize its financial services. Fin tech refers to desktop and mobile software, hardware, and algorithms. Moreover, it includes mobile payment applications to multi-functional blockchains. Examples of financial technology are mobile banking, automated portfolio managers, peer-to-peer payment services, and even cryptocurrencies (Bitcoin, Ether, etc).
AI, big data, and blockchain technology form the backbone of the fintech industry. They have revolutionized how organizations store, transfer, and secure digital currency. AI provides insights into consumer behavior and spending habits and, thus, improves the company’s services. Big data helps organizations discover market changes and mold their future strategy. On the other hand, blockchain is a burgeoning technology, creating a decentralized structure that operates without a central governing authority.
How has Fintech evolved?
Although technology has been a significant influencer in the financial industry. When did evolution start? We can divide the evolution of the fintech industry into five major eras:
Fintech 1.0: Infrastructure (1886-1967)
The invention of railroads and steamships led to the first rapid transmission of financial information across borders. The first trans-atlantic cable(1866) and Fedwire were the key events that started the evolution of the Fintech industry. Credit cards (1950) were the first significant fintech technology it eased the burden of carrying cash.
Fintech 2.0: Bank (1967-2008)
The paradigm shift from analog to digital revolutionized the traditional banking industry. Barclay’s first handheld calculator and ATM embarked on a new era in the Fintech industry. Furthermore, the 1980s brought the use of mainframes, online banking, and the e-commerce industry, reforming the industrial sector.
Fintech 3.0: Startups (2008- 2014)
The 2008 financial crisis shaped the need for a decentralized system, the emergence of new fintech startups, and – the emergence of Bitcoin. Furthermore, the penetration of smartphones shaped the fintech industry.
Fintech 3.5: Globalization (2014- 2017)
This era marks the expansion of digital banking around the globe and focuses on consumer behavior and how the world accesses the internet.
Fintech 4.0: Disruptive technologies (2018- today)
Blockchain technology and open banking were the significant events in the timeline. Further, machine learning transformed the bank and insurance sectors.
The growing evolution of the Fintech industry has reached all sectors. Recently, there has been a surge in the number of unicorns. With a customer base of 30 million, Rapipay is one of the fastest-growing payment services companies in the Indian Fintech industry. Its “NYE” App is an integrated platform for operating multiple bank accounts, loans, investments, and insurance.
Tenet fintech leverages AI and analytics to provide end-to-end solutions to businesses. Further, it uses technology to match businesses with credit offers, detect trends, predict outcomes, provide insights, and grow businesses. Fintech acquisition is a blank check company founded in February 2015 for mergers, capital exchange, asset acquisition, stock purchase, or restructuring of one or more business entities.
Besides the emerging fintech startups, there are rewards for potential startups in the fintech industry. And Fintech 250 is CB Insights annual list of 250 prospective fintech companies worldwide. These companies are shaping the future of the Fintech industry.
What are the 4 categories of Fintech?
The following are the four major types of Fintech:
1. Peer-to-peer lending (LendTech)
In peer-to-peer lending(P2P lending), an individual borrows money from others for a purpose. While in peer-to-business lending(P2B lending), an individual or a group of individuals lend money to a business. Moreover, lending money to borrowers with good credit scores helps investors obtain better returns than in traditional financial markets.
2. Insurance (InsurTech)
Insurance is a crucial sector of finance. With the advent of digital financial technologies, insurance companies are constantly grooving to render a better customer experience. Furthermore, insurance companies are integrating artificial intelligence(AI), the Internet of Things(IoT), drones, and machine learning to grow their business.
3. Payment (PayTech)
The payment sector is one of the primary sectors influenced by fintech technology. Banks usually charge hefty fees for handling transactions. Over the years, Payment Gateways have transformed the digital banking arena. Moreover, they help to pay for a service directly on the retailer’s website. The payment options are debit cards, credit cards, digital wallets, and cryptocurrencies. Further, mobile apps such as GPay and Paypal are also applications of fintech technology.
4. Online Trading and cryptocurrency (TradeTech)
Online Trading helps to reduce information costs, streamline trading operations, and increase transparency. Online trading platforms provide a better platform for client-broker communication. Also, such platforms eliminate undesirable fees for simple transactions.
Fintech cryptocurrency is a relatively new category of the finance industry. Blockchain technology is a game-changer that introduced a decentralized structure beyond the traditional banking industry. Decentralized Finance (Defi) provides financial instruments in a blockchain, eliminating the intermediaries, such as brokerages, exchanges, or even banks, through smart contracts.
A few other categories of Fintech are blockchain, mobile wallet, and personal finance.
What is Fintech and how does it work?
The goal of Fintech is to simplify financial processes. Moreover, simple financial strategies save time and resources. Furthermore, the companies leverage AI, big data, and blockchain to ensure secure transactions in their network. Fintech optimizes financial processes to eliminate the involvement of external parties in the process.
For example, consider mobile applications such as Google Pay and CashApp to help you transfer money to someone 24×7. On the contrary, paying a check requires you to visit the bank, thus increasing the time and effort.
What is an example of Fintech?
Let’s understand the examples from each fintech category.
The first one is peer-to-peer lending(P2P). Peer-to-peer lending sites, such as Prosper, Upstart, and Funding Circle, provide a unified platform for borrowers and lenders. And they deduct a charge from the amount borrowers pay to lenders.
Insurtech companies like Bright Health and Clover Health are transforming the traditional insurance industry by enabling companies to process vast data faster, catering to user needs and accessing policyholders’ risk profiles.
Payment Gateways like PayPal, Adyen, and Stripe accelerate the payment process for a specific service by allowing payment on the retailer’s website.
Robinhood is a popular online stock trading platform. It enables its customers to avail of a commission-free service, exchange-traded funds, and cryptocurrencies.
Benefits of Fintech
The following are the advantages of Fintech:
Easy Accessibility and Faster Approvals
As all the bank functionalities are accessible through wireless connectivity, there is no need to visit the branch. Moreover, with faster approvals, it is now easier to open a bank account within the comfort of your home.
Recently, the different industrial sectors have been swept by the wave of technology. Finance and technology lay the foundation of fintech companies. They constantly strive to attain efficiency with automation and customized services.
Automated customer service
The advent of artificial intelligence(AI) has enabled automated customer services that deliver a better user experience. Smart chatbots and virtual assistants are examples of automated customer services.
Security is one of the gravest concerns in recent times. And fintech technologies upscale the security of the existing systems, such as traditional banking systems, online payment, and insurance sectors, amongst others. As a result, they provide better solutions without compromising security.
Over the years, the fintech industry has developed rapidly owing to different trends. AI, digital banking, and blockchain are significant trends in the fintech industry. Although we consider banks and fintech startups opposing forces, the reality is that they complement one another. To conclude, fintech technology has reformed the financial sector to a great extent, creating ripples of transformation.