Financial technology—frequently abbreviated as FinTech—can be defined as a technology used to provide a financial product or service to financial markets. But this broad definition is not entirely accurate. To truly be FinTech, a technology must be far more sophisticated than what is considered standard in a particular market. For this reason, financial practices that were ground-breaking when they first emerged (like ATMs, credit cards, centralized banking, and even double-entry bookkeeping) are not considered FinTech because they have become settled technology.
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What Makes FinTech Different From Financial Technology?
FinTech—also written as Fintech or fintech—possesses an element of innovation that separates it from standard financial technology. The defining feature of FinTech is that it goes far beyond the normal path of financial technology in agile, unexpected ways. FinTech is more sophisticated than existing financial technology—it is the next innovation on the horizon, rather than settled technology. Like other types of financial technology, FinTech helps businesses and individuals improve their financial operations and creates new financial products, services, and sectors. These innovations disrupt standard technological practices and have the potential to change existing business models. For instance, Paypal, the most valuable digital payment platform in the world, is widely considered a prime example of FinTech. As long as the company continues to stay ahead of the curve, developing new innovations and remaining agile, its designation as a FinTech entity holds true. The bar for what FinTech is and is not is always moving, based on the life span of a given technology in a particular market.
The four levels of the Tech Paradigm can increase understanding of what makes FinTech distinct in the field of financial technology. The Tech Paradigm can be identified on four chronological levels, from oldest to newest: obsolete, mature, status quo, and bleeding edge.
Many financial technologies could have been considered FinTech at one time, but have reached status quo, mature, or obsolete status. One example is EMV chips on credit cards to protect users from fraud. This practice is now status quo. Even earlier in FinTech history, the ability to electronically transfer money over a distance via telegraph or Morse code was considered revolutionary. These practices are now obsolete.
All FinTechs run their course through the Tech Paradigm. Some will fail at the bleeding edge. Those that succeed move to status quo or obsolete as they mature. Innovations become mainstream—that is the goal, according to Dan Green, a principal at Blackfin Group. "If an innovation is truly great it will be adopted by everyone and become the way things are done," says Green. "Meanwhile, those who created the innovation are often on to the next opportunity."
Five Characteristics of FinTechs
FinTechs tend to have the following characteristics, according to Green:
- FinTechs serve business-to-consumer (B2C), business-to-business (B2B), and hybrid (with B2C and B2B elements) organizations. By definition, FinTech solutions are typically "one-to-many" solutions—they can be applied to many organizations, rather than being custom-built and used by a single one. Those uses of technology belong in a different category.
- FinTechs are often variations on an existing product or process that make it better, faster, and sometimes less expensive, rather than something completely new.
- FinTechs tend to be built by people who work in financial services who see a better/newer way to do something or discover an entirely new solution within the industry. However, like everything, there are no absolutes; some FinTechs are created by individuals outside the industry. These FinTech pioneers are often joined by industry veterans who can provide insider knowledge of process, regulations, etc. The FinTech industry attracts and relies on individuals who thrive on creating and inventing, as opposed to operating existing businesses or working solely within existing or traditional businesses. The people who work in FinTech are entrepreneurs or intrapreneurs rather than business operators and they tend to be more comfortable with risk.
- FinTech is more about innovation than disruption. "Disruptive" is the most overused term associated with FinTech. While some FinTech operations truly are disruptive, disruption is not essential. Innovation is.
- FinTechs must focus on process in addition to technology. While technology is obviously essential to address the problem being solved or the opportunity being created, users will be required to change essential processes, whether the customer is an end consumer or a business. Successful FinTechs give thought to how the change being introduced will impact end users and how those end users will adapt.
Green says there is an important point that is too often missed by would-be FinTech creators: FinTech is not just the technology. The technology is a tool. Successful FinTechs teach customer bases how to put the tools to work.
Advantages of FinTech
- Improved transparency
- Increased access
- Increased speed
- Easier transactions
- Reduced costs or fees
- Simplified and streamlined
History of FinTech
The use of the term FinTech started in the 1990s. The reference was mostly limited to large-scale financial companies deploying technology to their backend systems. As the use of technology expanded, other sectors began to use technology to improve their own accounting and finance systems, to improve financial products and systems, cut down on operational costs, and save time. In the 2000s, FinTech expanded into consumer products and services. The rapid adoption of smartphones allowed FinTech to accelerate into services for individuals in addition to businesses. FinTech expanded to create new financial products and services.
In the past decade, use of the term FinTech has increased 25-fold. While FinTech combines financial services and technology in new ways, it is not limited to only the financial sector—any business can realize benefits to financial planning and operations by embracing the use of technology to make improvements.
FinTech Applications and Examples
The financial sector is full of start-ups and innovators who embraced the scaled use of technology to uncouple specific financial products and/or services from larger, established financial institutions.
FinTechs are created for five basic reasons:
- Opportunity. The phrase "There has to be a better way" is how most FinTechs start, says Green.
- Necessity. Financial services have become too complex to operate safely, efficiently, and compliantly without the use of sophisticated technologies. Many of the technologies that underpin financial services are in need of modernization.
- Compliance. Financial services are some of the most regulated in the consumer realm. In order to operate in accordance with mandated procedures, businesses need sophisticated technologies that can swiftly adapt to rapidly changing regulatory environments.
- Productivity and profitability. FinTechs and their offerings can enable both for their end consumers. Truly great FinTechs do, but not through technology alone. Attention to process and change management are extremely important.
- Accessibility. The best examples of FinTech over the past two decades have made traditional financial services readily accessible everywhere and all the time, often on the very edge of compliance with the regulations that govern the transaction or service. One example is online notary services.
FinTech Product and Service Examples
- Algorithmic trading
- Budgeting apps
- Mint.com Personal Capital
- Crypto apps
- Coinbase
Crypto.com FTX
- Coinbase
- Investment apps
- Robinhood Schwab Vanguard
- Payment and cash transfer apps
- Cash
PayPal Venmo
- Cash
- Peer-to-peer lending apps
- LendingClub
Prosper
- LendingClub
- Roboadvisors
- Tax apps and sites
- H&R Block TurboTax
FinTech for Social Justice
FinTech start-ups in developing countries are leveling the playing field, providing new forms of economic empowerment to underserved populations who need fast and reliable access to money using simple but cutting-edge tools.
Anyone with access to a smartphone is able to transfer money, apply for credit, accept payments, and conduct personal and business transactions, from receiving aid to trading on the stock market. Government and humanitarian agencies are seeing the value in programs and solutions tailored to a specific country or population's needs in helping to build resiliency, inclusion, entrepreneurial skills, and delivery of services. FinTech removes traditional barriers. But experts also caution that because of its fast-moving development, regulatory measures and safeguards may be hard-pressed to keep up with the rollout of new apps and other services.
The Future of FinTech
FinTech has expanded rapidly over the past decade. From billion-dollar start-ups to the modernization of entrenched banking leaders, FinTech has forever changed how we buy, sell, budget, and perform our daily financial transactions. Because of FinTech's position at the forefront of technological and transactional evolution, more changes are bound to continuously appear on the horizon.
FinTech and Cryptocurrencies
Cryptocurrencies such as Bitcoin, Ethereum, and Litecoins are, like more traditional types of money, a form of exchange for goods and services. However, no banks or governments are responsible for managing or administrating cryptocurrencies. They are decentralized and all information is stored digitally.
Crypto offers opportunities for existing FinTech companies like PayPal and Venmo to make financial transactions faster, more convenient, and—arguably—more secure.
As the 2022 FTX scandal illustrates, not all of the opportunities crypto presents seem beneficial for consumers and society. Cryptocurrencies have not reached mainstream consumer acceptance and the general public understands little about how they work. Paying for everyday purchases with cryptocurrency is far from the norm. However, crypto will play a role in the FinTech landscape for years to come, having already contributed to the development of blockchain technology, cybersecurity, and other evolving technologies. That's why so many students want to learn more about cryptocurrencies and how it factors into their careers in business and entrepreneurship.
FinTech, Machine Learning, and Artificial Intelligence
Machine learning and artificial intelligence (AI) are coming of age. A study reported by Bloomberg indicates that global AI is estimated to expand at a compound annual growth rate of 39.4 percent annually through 2028.
AI technology can automate complex, high-value processes, including customer/chatbot interactions and personalized service. Rapid advances in financial machine learning are also fueling a new realm of technological innovation.
The FinTech landscape will be impacted by predictive modeling and behavioral analytics. Financial advice, decisions, and the delivery of information will continue to become more advanced, accurate, and automated. Machine learning and AI tools are becoming available to help fight fraud, flag or halt suspicious activities, and help users avoid financial pitfalls like underbudgeting or overspending. People who are excited to establish careers in the financial industry or in businesses where leveraging the latest financial technology is key to success will need to figure out how to best use these tools.
FinTech and Cybersecurity
Digital financial entities require as much security and protection as brick-and-mortar institutions. But their safeguards, like FinTech itself, are technologically based and far more complex than installing heavy-duty physical locks and alarm systems. Cybercriminals are developing and adapting right along with the technology, and cybercrime is increasing as digital transactions and online financial planning grows. Cyber attacks increased by 55 percent in North America between 2012 and 2022. Some of the most common breaches include credit card fraud, fraudulent transactions, extortion, and denial of service attacks. Malware, cloud computing issues, and third-party access are among the most common vulnerabilities.
Increased use of the internet, remote working, and automation open the door to system breaches. The practice of keeping computer systems and electronic data safe is important to financial security, nationally and personally. Ensuring application, cloud, infrastructure, network, and connected device security is crucial to the development of the FinTech industry.
Regulations for new technologies to protect consumers, reduce fraud and malicious activities, and hold companies responsible for keeping personal, financial, and transactional data safe can help. The questions of consumer privacy and how large social and technological companies handle customer data, including sensitive financial information, is of increasing concern. RegTech, or regulation technology, is an important factor in both FinTech and the financial industry overall. While additional oversight, regulation, and standards can contribute to the overall framework of cybersecurity within FinTech, there is a general cybersecurity workforce shortage. Cybersecurity jobs in FinTech are expected to grow to meet increasing demand.
FinTech and Web3
Web3 (also known as Web 3.0) is known as the newest iteration of the World Wide Web. Web3 increases the possibilities for the use of decentralized technologies like blockchain. Blockchain, also known as distributed ledger technology, is a digital database shared among nodes of a computer network that strings together time-stamped chunks of data, such as ledgers for transactions. Data is permanently entered via a peer-to-peer network. No person or entity has sole control, and everyone can view it. Because they can't be deleted, edited, or destroyed, blockchains are thought to be well-suited to token-based economics such as NFTs (non-fungible tokens). These trends play a role in the continued development of FinTech and its benefits, which include faster ways to complete transactions, from money transfers to loan approvals, along with smart contracts and decentralized ledger technology.
Be Prepared for What Tomorrow Needs with a Minor in FinTech
Because of its importance to financial markets, industry, and all types and sizes of businesses, many students are preparing for careers in FinTech or associated fields. Michigan Tech is the only school in the Upper Midwest that offers a FinTech minor. FinTech topics Huskies will master include algorithmic trading, crowdfunding, cryptocurrency, digital banking, distributed ledger aka blockchain technology, machine learning, peer-to-peer lending, and roboadvising. Together, a Bachelor of Science in Finance with a FinTech minor from Michigan's flagship technological university will get you ready for what tomorrow needs.
