‘FinTech’ is a loose term embracing a broad range of applications of technology in the context of financial services, including offerings that change pre-existing models of the relationship between the financial service provider and the customer. FinTechs (a term covering in particular start-ups but also other new entrants) tend to focus on very specific customer propositions (which may be neglected by incumbent financial services companies) and offer an efficient and compelling user experience that often cuts across traditional business models. FinTechs are often asset-light, low-margin, innovative, able to scale, and unburdened by legacy systems. They tend to be compliance-light, exploiting regulatory loopholes or otherwise minimizing the need for regulatory registration.
Why the ‘Fin’ in FinTech? Finance is an information business, susceptible to information technology. The finance sector is large, profitable and has pockets of inefficiency. Partly because of heavy regulation, in developed countries the pace of financial sector change is slow, giving rise to anomalies and disconnects from social needs. Agile FinTechs can exploit these anomalies, disintermediating incumbents who still have largely physical or paper-based offerings. In developing countries there are often insufficient financial services for large segments of the community, providing FinTech with a greenfield of opportunity.
The main segments of FinTech are generally regarded as finance including P2P (peer-to-peer) lending, crowdfunding, WealthTech/InvestTech (investment advice and trading activities including robo-advisory) and InsureTech (insurance technology); payments and settlement; data (including analytics, monetization, and cybersecurity); customer interface (like smartphone, social media and internet applications). RegTech (regulatory technology) and blockchain-related impact and interact across all of these segments.
- P2P lending is a form of debt crowdfunding in which money is raised from individuals or organizations, often via a public process (if exemptions from public offering laws are available), in the form of a loan for business or personal use. Unlike a bank, the P2P platform does not take a position in the loan itself or assure repayment; rather, it puts the lenders and borrower together directly (as ‘peers’), performing a kind of matching or brokerage service or quasi-securitization that bundles small loan amounts together to meet borrowers’ needs. The platform, which needs no or very little capital, and no physical presence, may also provide ongoing service support for the relationship by handling payments of interest and repayment of the principal. Borrowers’ creditworthiness is evaluated in an innovative manner using online sources, with the loan generally provided more cheaply as well as more quickly than a traditional bank loan. Primarily aiming to ‘democratize’ finance, many P2P platforms now source lending funds from banks and traditional financial institutions and investors.
- Crowdfunding is the raising of limited amounts of money from individuals or organizations and may take two forms: rewards-based and equity. Rewards-based crowdfunding typically involves the advance purchase of goods or services or even charitable contributions. Equity crowdfunding involves investment in equity capital by individuals or organizations, via a private or (where relevant exemptions exist) public process. The platform does not provide capital itself, nor does it usually guarantee or underwrite the offering, but rather sets some minimum requirements for disclosure and supports continuing disclosure and interaction between the fund-raising entity and its shareholders. Equity crowdfunding can be used to fund small projects or business start-ups. It helps fill a gap left by the public securities markets which are generally for larger and more mature companies.
- Robo-advisory. A robot investment adviser handles the management of an investor’s portfolio in response to input from the investor. Automated investment management tools have been in use for some time but were formerly available only to in-house personnel in the financial institution concerned, while services to the investor were bundled with a human adviser. Now, robo-advisers are available to the investor directly; their charges are lower and they handle lower minimum amounts than traditional advisers. Other attractions include consistency, reliability, accessibility, and the provision of an audit trail.
- Payment and settlement. Electronic payment and settlement of transactions are a major area of FinTech, including for startups. Payments FinTechs provide the infrastructure that supports individuals and enterprises making payments or money transfers (remittances). There are three FinTech payment models depending on the type of ledger (recording method) used – separate ledgers, central ledger, and distributed the ledger. The service is simple, often requiring just an email account, with the transfer authenticated by email ID.
- Big data and analytics. FinTechs use algorithms to trawl through online channels to detect patterns of behavior – velocity, volume, and variety – that can be actioned. FinTechs operate in the areas of credit scoring, customer acquisition, and customer retention, risk management, trading, and investment management. In the securities markets, algorithmic traders seek to profit from price and volume trends. Big data FinTechs may work for themselves or may help incumbents improve their offerings.
- Cybersecurity is a major concern of the financial sector, with online fraud and hacking at financial institutions replacing traditional theft of banknotes and bullion. The various dimensions of cybersecurity include threat intelligence, cloud protection, identity and access management, mobile security, web security, and anti-fraud. FinTechs in this space work with incumbents but also early-stage ventures to develop initially a culture of cybersecurity and resilience.
- Blockchain-related (distributed ledger-based) FinTechs seek to provide a secure, efficient proposition through the use of smart contracts, encryption and a ledger compilation dynamic that dispenses with the need to trust a central authority like a bank. The technologies together provide the capability to create and control digital assets and digital autonomous organizations, to trace individual transactions, and to trace and tag copies so that intellectual property is protected and royalties are paid. Examples of services include remittances, identity, and venture funding.
A distinction can be drawn between FinTech operators that seek to provide financial services to customers directly (B2C), and those which seek to help incumbent financial institutions and other financial services businesses improving their own offerings (B2B). FinTechs provide direct customer services tend to focus on retail and small and medium enterprise (SME) users, whereas in corporate and investment banking because of the need for sophisticated expertise, deep relationships, and capital, FinTechs more often partner with incumbents. Incumbents (including financial institutions as well as major IT, eCommerce, and technology firms.) are also establishing efforts to develop FinTech internally.
The impact of technology on financial services is not new; rather, the current FinTech trend is distinguished by the speed of technological change and the increasing range of new entrants.7 This FinTech trend is still relatively young – the ‘best’ of FinTech may be yet to come. Conversely, FinTechs have not yet completed the full business cycle and have yet to prove their ability to survive downturns. FinTechs are largely operating outside the main ambit of financial regulation, especially where they do not compete directly with incumbents and promote financial inclusion by targeting underserved groups.
However, FinTechs must eventually come within regulation and may thereby lose part of their competitive advantage. FinTech-enabled incumbents may prove resilient and beat off or absorb FinTech challengers. The eventual landscape of the coming FinTech-enabled world is difficult to predict.