Brief Overview of FinTech: The Many Types of FinTech
FinTech is a shortened name for Financial Technology, where finance collaborates with technology for better products and efficient processes, and is a large and growing part of the 21st century’s new financial services market. FinTech denotes all products and companies that employ newly developed digital and online technologies in the banking and financial services industries. According to the PWC, there are four different FinTech ecosystems:
Category A refers to large and well-established financial institutions (also known as incumbents) including big banks such as the Bank of America or JP Morgan;
Category B refers to big technology companies such as Apple, Facebook or Google that are not into the financial industry per se but can be active in the financial services;
Category C includes companies that provide the infrastructure or technology for facilitating certain financial services. It’s in this category that you will find popular companies such as MasterCard or First Data;
Category D are the disruptors – companies that are focused on innovative technology or processes such as mobile payments, automated investing, retail banking or insurance
So why is FinTech such a big deal? That is because of how it revolutionized everyday financing in all aspects, personal, commercial and corporate wise. Here are a few examples of how FinTech has made finance so convenient now.
One of the things that FinTech companies do is gather data on the consumers, which they use later to improve the customer experience and offer a more personalized service. Of course, all of the consumers can check the privacy policies of the companies in question. In other words, FinTech companies follow and have insight into the interests of the consumers, thus providing them with offers they would be interested in in the future.
The processes can be completed very quickly. All the procedures for which, otherwise, consumers would have to wait a certain time, can be finished five times faster. For example, sharpen operational efficiency, lower costs, improve customer experience and heighten the appeal of their products and services. They’re also carving out new commercial possibilities.
Another reason for this speed is flexibility. Since the needs of the consumers are always evolving, banks might have difficulties responding to all of them. FinTech companies are smaller organizations and have leaner structures. On top of that, they use an API (Application Program Interface) system that helps them conduct business with technology providers in the best possible way. This results in all of the processes being completely transparent.
Security and convenience
Even though technology does not mean safety for some people, this way, a consumer can check the security of the certificate of each Fintech company, giving them 100% certainty that they’re safe. Apart from safety, convenience is a significant benefit as well. Not only can consumers deal with multi-currencies, but Fintech technology is also convenient because everything is mobile. This helps all consumers complete their transactions anywhere, no matter where they are.
Here are a few examples of FinTech and how they have helped with financial convenience.
Digital Banking: Venmo(US), Monzo(UK), Bigpay(Msia)
Digital Banking is the automation of traditional banking services. Digital banking enables a bank’s customers to access banking products and services via an electronic/online platform with 24*7 availability of access. Digital banking means to digitize all of the banking operations and substitute the bank’s physical presence with an everlasting online presence, eliminating a consumer’s need to visit a branch. Meanwhile, online funds transfer reduces the risk of counterfeit currency and circulation of black money as the fund movement can be traced.
Payment: Stripe(US), iPay88 (Msia)
Payment systems have evolved bringing ease, efficiency and speed. Fintech companies have been redefining the capabilities in the payment area driven by technology developments. Collaboration with traditional banks has increased and many banks have established their own innovative hubs to keep up the pace with changing technology. It has helped widening the access to the underserved banking population. Real time payment has become normal in many economies. Retail payments have already witnessed and evolved in the past few years while the corporate side, there is a lot of traction visible. Developing countries are experimenting with mobile message based payments which do not require internet access as well.
Currency Exchange: Transferwise (UK/Msia), MoneyMatch (Msia)
The currency exchange and international payment segment has always been traditionally expensive. You may or may not know this, but what makes international payments expensive (other than the fluctuating exchange rates, of course, supply and demand) is identity. Let’s say, you are a Malaysian who wants to make a payment in the UK, ever noticed all the fees you pay for it? That’s the fees for all the formal procedures FIs need to secure your identity, such as Customer Due Diligence, Anti-Money Laundering Schemes, and Know-Your-Customers investigations.
Blockchain & Cryptocurrencies: CoinBase(US), CoinGecko(Msia)
A blockchain is a decentralized ledger of all transactions across a peer-to-peer network. Using this technology, participants can confirm transactions without a need for a central clearing authority. Cryptocurrency is a digital payment system that doesn't rely on banks to verify transactions. It’s a peer-to-peer system that can enable anyone anywhere to send and receive payments. Instead of being physical money carried around and exchanged in the real world, cryptocurrency payments exist purely as digital entries to an online database describing specific transactions. When you transfer cryptocurrency funds, the transactions are recorded in a public ledger. Cryptocurrency is stored in digital wallets.
Blockchain and cryptocurrency serve as the most important examples of what FinTech exactly is. FinTech companies make it possible for users to buy or sell popular cryptocurrencies, such as Bitcoin or Litecoin. Another thing that is very important to mention here are blockchain services that keep the provenance data on the actual blockchain to reduce fraud.
Consumer lending: Klarna(Switzerland), Atome(Msia)
Although banks provide financing solutions to a significant share of the global population, large segments of consumers are underserved or not served at all. New-to-market lenders can identify the gaps in lending coverage and try to bridge them. Many potential customers would like innovative, tailored solutions that are not always cost-efficient for traditional banks. New entrants can design new offerings quickly and are unencumbered by legacy processes or infrastructure so called BNPL: ‘Buy Now Pay Later’. They can move from concept to fully developed offering in two or three months, compared with one to two years for incumbents.
Crowdfunding: Kickstarter(US), Fundaztic(Msia)
Crowdfunding is a financing method that raises money by soliciting small individual investments or contributions from a large number of people. There are 4 types of crowdfunding namely reward, debt, equity and donation.
Insurance: Lemonade(US), Vsure.life(Msia)
The efficiency and speed achieved using data analytics and app based consumer engagement products within the insurance sector have increased the awareness, reach and product innovation activities to a new level. Though, we are yet to see the flourishing and resounding business models based solely on Fintech provided platforms, the integration of Fintech firms and insurance giants have already started. Understanding data and utilizing it for new product offering and risk mitigation are two of the major challenges wherein start-ups are helping the insurance sector. Few of the start-ups are also working on blockchain based smart contracts which would make the claim process transparent and free of unnecessary legal issues.
Investment & Wealth Management: Robinhood(US), StashAway(Msia)
Fintech is giving wealth managers the opportunity to improve their service offering, and is giving rise to an entirely new toolset: wealthtech. Driven by artificial intelligence (AI) and machine learning (ML), wealthtech leverages complex algorithms to advise clients on the best choice of investment or savings plan, with minimal input from humans. This technology is being used in diverse ways such as robo-advisors, self-investment tools, and micro-investing.
HR Tech: Swingvy (Singapore), Kakitangan (Msia)
HR technology (human resources technology) is an umbrella term for software and associated hardware for automating the human resources function in organizations. It includes employee payroll and compensation, talent acquisition and management, workforce analytics, performance management, and benefits administration.
In short, the technology has made a massive impact in the finance industry. It has transformed our financial routine in some advanced countries namely the UK, US, China, Switzerland and so on. From our perspective, it has a bigger room of improvement for the growth of fintech in the developing countries.
In spite of that, though it is undeniable that the advancement has improved our tasks in terms of efficiency and adaptability, however there are a few areas of fintech that are still debatable and to be improved. The most concerned topics that we realized are safety, security, and privacy. Moving forward, we shall break each topic mentioned above into details and discuss.
That is all for now! To learn more about FinTech, drop by our website to read a full article at https://www.myfint.org/.
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Ong Chee Ching (Author)
Loh Reen (Co-Author)