“Fintech” refers to any technology that automates and facilitates access to financial services. Companies in fintech provide people with bank accounts, loans, insurance, investments, and more, entirely online and often within minutes.
Learn about this expanding technology and how you can use it to your benefit.
What Is Fintech?
Fintech is short for financial technology. It’s an umbrella term describing several different companies, products, and services. If you’ve ever deposited a check using a mobile device or transferred money using an app, you’ve used fintech. But its uses can be more complex and substantive than that. These days, you can obtain a personal loan or settle an insurance claim entirely on your mobile device.
Fintech companies are trying to disrupt the entire financial services industry. And competitors hear the noise.
The mission of fintech is to provide access to financial services at a fraction of the cost and time required by brick-and-mortar counterparts.
According to a study by accounting firm PWC, 88% of legacy financial institutions believe they are losing revenue to fintech companies. Consumers are also riding the wave. Digital payments made using fintech worldwide grew by nearly 5% in 2019, bringing total global payments revenue to just under $2 trillion, according to a McKinsey study.
How Does Fintech Work?
At its core, fintech is the use of technology to simplify financial transactions. Using available technology speeds up transactions for people and businesses. Fintech is also a term used to describe companies that use artificial intelligence, data science and blockchain technology to secure and enhance finances.
When businesses can access their accounts 24 hours a day, they can enhance their operations by moving money around without waiting for a bank to open. Consumers that had to wait for the bank to open to cash a check can do it at any time, saving them and the bank time and money.
Since fintech uses technology to conduct banking, the laws and regulations that govern banking also govern what the technology you're using can do. The Federal Trade Commission, the Consumer Financial Protection Bureau, Securities Exchange Commission and others all regulate financial activity within the U.S.
Fintech companies specialize in providing the services needed to conduct financial transactions through technology.
Banks and financial institutions that allow the use of fintech must ensure that their platforms comply with federal and state statutes.
Types of Fintech
If it's related to your finances, there is an excellent chance you have used technology to facilitate your transactions or applications. To better understand how fintech works, here are some examples of fintech sectors and the companies that operate there.
One of the most common examples of fintech is apps that allow you to transfer money to another person or business seamlessly.
You’ve probably already used PayPal or Venmo to do this. But even traditional financial institutions are following suit with their versions. Many partnered with Zelle to offer digital payment. Now, you can use mobile banking apps to transfer money via the Zelle addition. Those payments are typically processed within minutes.
And traditional banks may keep flirting with fintech. A 2017 survey by PWC found that 82% of incumbent financial institutions expected to increase their partnerships with fintech companies in the next three to five years.
The use of any form of mobile payment by U.S. consumers increased from 48% in 2018 to 60% in 2019.
In recent years, online banks have emerged to compete with their brick-and-mortar counterparts by offering products with low-to-no fees and competitive interest rates. Chase, the biggest U.S. bank by assets under management (AUM), in late 2020 offered a savings account with an interest rate of 0.01%.
But even as interest rates have plummeted, the online entity Axos Bank offered an account with a rate of 0.61%. And even though juggernauts like Bank of America and Wells Fargo still rake in the most AUM, online banks like Ally and Discover also cracked the list of the top 30 banks by asset size in 2020.
Gone are the days when you had to bring a ton of paperwork into a bank to see if you qualify for a loan. Now, the entire process can be done on your laptop or smartphone. Online marketplaces like LendingTree, Credible, and SoFi provide you with multiple offers after entering some basic information. You can also bypass banks and lenders by borrowing directly from individuals online. This is called peer-to-peer (P2P) lending.
The P2P lending market is projected to grow from $43.16 billion in 2018 to $567.3 billion by 2026.
Online mortgage lenders aim to simplify the home buying process by allowing you to compare instant quotes online and close on a mortgage at a fraction of the time and possibly cost it would take with a traditional lender.
Some fintech companies like Better.com even claim to deliver a preapproval in as little as three minutes of your applying. Another well-known online mortgage bank is Rocket Mortgage by Quicken Loans.
Investing in the financial markets is no longer just for the wealthy. With investment apps like SoFi Active Invest, you can get started with $1 and trade stocks directly from your phone with no commission fees.
But if you don’t have the time for careful stock-picking, you can turn to robo-advisors like Betterment. These are automated and diversified investment portfolios designed for your risk tolerance and financial goals. You can start with as much money invested as you want (there is no minimum balance), and an algorithm does the rest.
Digital money, or cryptocurrency, is becoming increasingly popular. It’s an unregulated and decentralized form of currency used to buy goods or invest in through brokerages. And while you may have heard of Bitcoin, there are thousands of cryptocurrencies out there.
You no longer need to sit with an insurance agent to discuss policies, get a quote, or even file a claim. You can pull out your smartphone and do all that right now. Digital insurance companies are using technology to make shopping for coverage easier.
Whether it’s car, health or life insurance there’s a fintech for it. The website Policygenius helps you compare several different types of insurance types at once online. Just enter some basic info and the site matches you with offers.
Pros & Cons of Fintech
- Faster transactions
- Sometimes low or no fees for services
- Minimal paperwork
- Mobile access almost anywhere, often 24/7
- No physical branches
- Requires internet access
- May not be linked to widespread ATM network for cash access
- May lack a long, reliable track record
While many fintech companies offer a seamless, fast, mobile, and inexpensive banking experience that minimizes paperwork, they may fall short for some.
For instance, most online banks have no physical branches. If you lose internet connection, you can’t go to a physical bank and get access to your money. So make sure your online bank works with a big ATM network from which you can withdraw cash for no fees—if they offer a linked card.
And while many online financial services firms have fully staffed customer support centers, some people prefer discussing their matters face-to-face. This may be especially important when asking about issues as important as retirement savings, your child’s college fund, or a life insurance policy.
With fintech, most of this is done by yourself, on a screen. Plus, many fintech companies are startups or emerging companies with short-term track records. The biggest traditional banks are established and well-known.
Overall, the fintech world may better suit someone ready to embrace the digital revolution fully. For others, a traditional bank or a combination of both may be the best fit.
- Fintech is technology that facilitates access to financial services, often at a fraction of the cost of traditional institutions.
- Fintech companies offer bank accounts, credit cards, loans, insurance, and more—entirely online.
- Legacy financial institutions are noticing the fintech disruption, so many have partnered with emerging fintech companies to deliver a better digital experience for their customers.
- Financial technology may better suit people who are ready to fully embrace digital developments and manage their finances entirely online, without physical bank branch support.