In recent years, the combination of the two wealthiest sectors of the economy (finance and technology) has led to the creation of ‘fintech’, a term that has now become commonplace in modern financial discourse.
Through mobile wallets, blockchain or challenger bank apps, fintech has established itself as a rapidly transforming sector, where disruptive innovation has created a financial landscape in constant evolution, requiring industry participants to remain up to date with the latest developments and grapple with understanding concepts previously untouched by traditional finance. Through exploration of the key trends, benefits and obstacles, we can seek an understanding of how the fintech sector is already steering a new direction for the financial industry.
What is fintech?
Fintech, a shortened term for financial technology, refers to the integration of technology to provide and enhance financial services. With a goal of improving the efficiency, accessibility and personalisation of financial services, fintech has found itself at the forefront of disruption in traditional banking and financial systems. Fintech services aim to be more user-friendly, cost-effective and advanced than traditional alternatives. Examples of fintech today can be found in a wide range of applications, such as mobile banking, digital payments, blockchain and cryptocurrency, peer-to-peer lending, AI customer service and mobile investment platforms.
The evolution of fintech
The concept of ‘financial technology’ is by no means limited to the early 2020s. With the competitive nature of the finance industry, it has always been quick to integrate technologies that may increase efficiency. For example, the roots of ‘fintech’ can be traced back to the 19th century, with the invention of the telegraph and the first transatlantic cable, allowing rapid communication and inevitably the first cross-border financial transactions. The launch of American Express cards in 1958 marked a similar change in consumer relationship with money, particularly with the introduction of the magnetic strip in the 1970s. ATMs, computer-based ledgers, and the rise of online banking throughout the 90s are further examples of technology enhancing financial operations.
However, the term ‘fintech’ today is most commonly associated with innovations of the 21st Century, with the rise of smartphones and the convenience that comes with making transactions on the go. While all of these previous examples have simply been extensions of the traditional banking industry, integrating well with existing systems without ‘disrupting’ them or providing attractive alternatives, examples of challenges to existing systems can be found in the numerous developments of the 2000s and beyond. Peer-to-peer lending and crowdfunding, for example, paved the way for individuals and businesses to raise funds without the need for an intermediary bank. This peer-to-peer approach is epitomised by the invention of Bitcoin in 2009, created in response to the global financial crisis, introducing the world to cryptocurrency and blockchain technology. Bitcoin’s promotion of decentralisation is something that directly challenges the foundations of traditional banking and financial systems. New innovations continue to appear, most notably in the adoption of artificial intelligence, which can aid the personalisation of financial services, enhance risk management and detect fraud. Today, subsectors of fintech are appearing, including regtech (regulatory technology) and insurtech (insurance technology), transforming both sectors with digital innovation.
Responses from traditional banks
The disruptive impact of fintech has been made clear through the responses of traditional banks, making developments themselves in order to remain competitive in a rapidly evolving landscape. Traditional banks releasing digital-first platforms, such as Marcus by Goldman Sachs, or HSBC Kinetic are examples of heavy investment into a digital transformation strategy, adopting many of the same technologies that fintech companies pioneered. Some of the largest areas traditional banks are upgrading can be found in mobile banking apps, the automation of back-office operations and the integration of AI to enhance customer service through chatbots.
Failing this, the phrase ‘if you can’t beat ‘em, join ‘em’ is particularly relevant in this industry, with new partnerships appearing between banks and fintech companies – examples of this include Barclays’ collaboration with PayPal to enhance online payment services, and HSBC’s collaboration with Ripple to facilitate cross-border payments through the blockchain. Perhaps a more appropriate phrase for the financial industry would be ‘if you can’t beat ‘em, buy ‘em’ – acquisition being another avenue for traditional banks to quickly gain access to innovative technologies, saving the need to develop technologies in-house.
‘Open Banking’ is a further development from the fintech industry, referring to a traditional bank sharing customer data with authorised fintech companies through an API. This is an easy way for banks to offer enhanced services, without breaching regulatory frameworks. With the fast-moving nature of fintech, traditional banks need to focus more heavily on regulatory compliance, to maintain data privacy and adherence to anti-money laundering law, in addition to enhancing cybersecurity.
Benefits of fintech innovation
While rapid technological development can present new challenges for banks and financial companies, the potential benefits greatly outweigh the necessary regulatory hurdles required to implement the technology.
Enhanced customer experience
With customer experience being one of the primary factors within a bank’s control, the convenience of digital banking platforms and mobile apps provide customers with the ability to manage their finances from anywhere at any time. Real-time transaction processing, budgeting analysis and instant notifications make for a more responsive and transparent customer experience.
Financial inclusion
Through digital platforms, fintech is leading the way in providing banking services to underserved populations. Those who live in remote areas, miles from a physical bank branch can have the same access to services as those in more urban environments. Furthermore, microloans and P2P lending allows credit to be offered to individuals and businesses who may have been overlooked by traditional banks – particularly those in developing economies. Cross-border payments are now more accessible, of particular benefit to migrant workers and international businesses, who can do so more cheaply and efficiently.
Operational efficiency
Automation to traditional processes brings numerous benefits, reducing operational costs as well as minimising human error and speeding up service delivery. Blockchain is an example of innovation that enhances security and transparency through its decentralized ledger. A reduction in fraud improves reliability in banking operations.
Competition
The rise of challenger banks such as Monzo and Starling, operating without physical branches often come with competitive rates and innovative services, pushing traditional banks to improve.
The future of fintech
Continuous innovation is the driving force behind fintech and its impact on the banking sector. Whether it be AI-powered financial planning tools or biometric authentication, technological innovation is driving the financial world to become more efficient, secure and customer-focused. A term used in the fintech sector, ‘Banking 4.0’ envisions a fully digital, automated banking environment – the height of efficiency with technology involved in every step of banking operation. As technology evolves further, the boundaries between the financial and technology spaces will become further integrated – the ongoing fintech adoption is unlikely to slow down, moving towards a brighter financial future of accessibility, transparency and efficiency.
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Caleb Hinton
Caleb is a writer specialising in financial copy. He has a background in copywriting, banking, digital wallets, and SEO – and enjoys writing in his spare time too, as well as language learning, chess and investing.
