Financial technology, also known as FinTech, is an industry composed of companies that use new technology and innovation with available resources in order to compete in the marketplace of traditional financial institutions and intermediaries in the delivery of financial services. Financial technology companies consist of both startups and established financial and technology companies trying to replace or enhance the usage of financial services of incumbent companies.
Contents
Definition and key areas
The National Digital Research Centre in Dublin, Ireland, defines financial technology as "innovation in financial services", adding that "the term has started to be used for broader applications of technology in the space – to front-end consumer products, to new entrants competing with existing players, and even to new paradigms such as Bitcoin" or more generically speaking, Blockchain. Irene Aldridge and Steve Krawciw note several areas of Fintech proliferation, including automation of insurance, trading and risk management, just to name a few.
Looked at from a procedural perspective, the term 'FinTech' refers to new applications, processes, products or business models in the financial services industry, composed of one or more complementary financial services and provided as an end-to-end process via the Internet. The services may originate from various independent service providers including at least one licensed bank or insurance. The interconnection is enabled through open APIs and supported by regulations such as the European Payment Services Directive. These solutions can be differentiated into at least five areas.
- The banking and insurance sectors are distinguished as potential business sectors. Solutions for the insurance industry are often more specifically named "InsurTech".
- The solution with regards to their supported business processes such as financial information, payments, investments, financing, advisory and cross-process support. An example is mobile payment solutions.
- The targeted customer segment distinguishes between retail, private and corporate banking as well as life and non-life insurance. An example is telematics-based insurance that calculates the fees based on customer behavior in the area of non-life insurance.
- The interaction form can either be business-to-business (B2B), business-to-consumer (B2C) or consumer-to-consumer (C2C). An example is a social trading solutions for C2C.
- The solutions vary with regard to their market position. Some, for example, provide complementary services such as personal finance management systems, others focus on competitive solutions such as e.g. peer-to-peer lending.
Global investment in financial technology increased more than twelvefold from $930 million in 2008 to more than $12 billion in 2014. The nascent financial technology industry has seen rapid growth over the last few years, according to the office of the Mayor of London. Forty percent of the City of London's workforce is employed in financial and technology services.
In the United States, there are numerous FinTech companies and startups, including Debtbench, Affirm, Betterment, Behalf, Birch Finance, Clearwater Analytics, Fundera, IEX, Kabbage, Lending Club, Money.net, Nomis Solutions, Plaid, Prosper, Robinhood, SoFi, Square, Stripe, Think Finance, Wealthfront and GreenSky LLC.
In Europe, $1.5 billion was invested in financial technology companies in 2014, with London-based companies receiving $539 million, Amsterdam-based companies $306 million, and Stockholm-based companies receiving $266 million in investment. After London, Stockholm is the second highest funded city in the EU in the past 10 years. Europe's FinTech deals reached a five-quarter high, rising from 37 in Q4 2015 to 47 in Q1 2016.
In the Asia Pacific region, the growth will see a new financial technology hub to be opened in Sydney, in April 2015. There is already a number of strong financial technology players like Tyro Payments and Stockspot in the market and the new hub will help further accelerate the growth of the sector. A financial technology innovation lab is also being launched in Hong Kong to help foster innovation in financial services using technology. A leading online lending platform that operates in Hong Kong and China is WeLab, which has raised the second largest Series B fundraising in FinTech globally. In 2015, the Monetary Authority of Singapore launched an initiative named Fintech and Information Group to draw in start-ups from around the world. It pledged to spend $225 million in the fintech sector over the next five years. A leading online platform that operates in Singapore is Smartkarma, which has raised $4.7 million in funding to expand its investment research platform. and VMoney from the Philippines.
In India , Visakhapatnam (Vizag) is being developed as fintech hub and the local government of Andhra Pradesh, had opened fintech Valley Tower to promote the investments in this area.
Within the academic community, on the technology side the Financial Data Science Association (FDSA) was founded with its first event organized by members from the artificial intelligence, machine learning, and natural language processing domain. The FDSA aims to build a research community around computer science and investment statistics. On the business side, Wharton FinTech was founded at the Wharton School of the University of Pennsylvania in October 2014 with the objective of connecting academics, innovators, investors, and other thought leaders within the FinTech industry to each other and to the ideas that are reinventing global financial services. The University of Hong Kong Law School in conjunction with the University of New South Wales have published a research paper tracing back the evolution of FinTech and its regulation.
Awards and recognition
Financial magazine Forbes created a list of the leading disrupters in financial technology for its Forbes 2016 global Fintech 50.
A report published in February 2016 by EY commissioned by the UK Treasury compared seven leading FinTech hubs. It ranked California first for 'talent' and 'capital', the United Kingdom first for 'government policy' and New York first for 'demand'.
The role of FinTech in increasing customer satisfaction in financial services was recognised in December 2015, with customer satisfaction of FinTech 8% higher than banking.
Industry context
In the financial advisory sector, established players such as Fidelity Investments have partnered with financial technology startups such as FutureAdvisor (recently acquired by BlackRock), allowing new technology to work within a prominent custodian. Even celebrities including Snoop Dogg, Jared Leto, and Nas are beginning to put their resources into the nascent FinTech space by investing in financial technology startup Robinhood.
Outlook
Finance is seen as one of the industries most vulnerable to disruption by software because financial services, much like publishing, are made of information rather than concrete goods. In particular blockchains have the potential to restructure the cost of transacting in a financial system. While finance has been shielded by regulation until now, and weathered the dot-com boom without major upheaval, a new wave of startups is increasingly "disaggregating" global banks. However, aggressive enforcement of the Bank Secrecy Act and money transmission regulations represents an ongoing threat to FinTech companies.
Challenges and solutions
In addition to established competitors, FinTech companies often face doubts from financial regulators.
Data security is another issue regulators are concerned about because of the threat of hacking as well as the need to protect sensitive consumer and corporate financial data. Leading global Fintech companies are proactively turning to cloud technology to meet increasingly stringent compliance regulations.
The Federal Trade Commission provides free resources for corporations of all sizes to meet their legal obligations of protecting sensitive data. Several private initiatives suggest that multiple layers of defense can help isolate and secure financial data.
Any Data breach, no matter how small, can result in direct liability to a company (see the Gramm–Leach–Bliley Act) and ruin a FinTech company's reputation.
The online financial sector is also an increasing target of distributed denial of service extortion attacks.
Marketing is another challenge for most FinTech companies as they are often outspent by larger rivals.
This security challenge is also faced by historical bank companies since they do offer Internet connected customer services.