Financial Technology (Fintech) : A Practical Introduction
Author By Dr. Varin Khera
Introduction
The accelerated adoption of digital transformation and the increased usage of Internet of Things (IoT) devices worldwide have led to increased dependence on technology to conduct and improve financial operations. Fintech (Financial technology) is a broad term used to describe an emerging technology used to automate the delivery and processing of financial services for both companies and individual customers.
Under this definition, FinTech includes all software programs, algorithms, mobile apps, blockchain systems, and anything used to incorporate digital technology to enhance financial services. A simple example of FinTech is using your smartphone app to check your bank account transactions instead of going “physically” to the bank and requesting your balance statement.
When the FinTech term was first introduced years ago, it was used to refer to the technologies applied to the back-end systems of financial organizations. However, as digital technology progressed, FinTech has become widely used to support customers services, such as online banking, online money transfer, and online trading, to name only a few.
Who use FinTech?
FinTeh technologies are commonly utilized by two user groups:
B2B (Business to Business)
A B2B FinTech Company will sell financial services or provide the needed technologies to help automate other firms’ financial services (e.g online payment processing). For example, many banks worldwide are using services offered by companies such as OFX and Western Union to help them move money worldwide faster and in a cost-effective way.
Another modern example of B2B FinTech is the banking-as-a-service (BaaS). In his model, the digital bank or other non-bank firms connect with conventional banks systems via an API to provide their offering. For example, a furniture company can allow customers to purchase its products using a loan offered from a specific bank without acquiring a banking license. Examples of BaaS providers: solarisBank and Bankable.
B2C (Business to Client)
This is the most noticeable business model of FinTech companies. In this model, a company provides digitized financial services to individual customers. This includes financial institutions and any company facilitating financial operations via the internet. PayPal and Venmo that simplify sending/receiving money online are both examples.
Practical Applications of Fintech
FinTech applications are everywhere around us. Here are the most notable examples :
Insurance industry
Using FinTech technology has revolutionized how insurance companies conduct their business operations. For instance, many car insurance companies leverage FinTech to charge customers based on the distance they drive. A small device containing a GPS sensor is installed in the client’s car that measures driving distance, monitors car health, and record critical facts if an accident occurs. This allows customers to reduce their insurance bill significantly compared with regular auto insurance which is based on paying a flat rate.
Online Banking
Banks are leveraging FinTech technology in a variety of ways. From entirely online banking to sending and receiving money online and reaching to using virtual assistance when requesting most banking services are examples of leveraging FinTech technology in the banking industry.
In the past, opening a bank account required the client to visit the bank physically. Now, by using FinTech, clients can open a bank account over the internet and use it to conduct transactions online (send/receive money online, buy products and services from online merchants). Clients can also install an application on their smartphone or laptop to remotely monitor their balance.
Blockchain and Cryptocurrency
Maybe blockchain is the most notable example of leveraging FinTech in the financial sector. Blockchain allows one person to send money to another person online without passing through a central bank or other proxy financial institutions. This revolutionized how online money transfer worked and opened the door to moving a large amount of money digitally without any governing entity.
Cryptocurrencies are digital money traded via blockchain, Bitcoin’s most notable one. FinTech technology facilitates trading Bitcoin and other cryptocurrencies between people worldwide without even revealing their real identity.
There are numerous cryptocurrencies exchange providers ; the most popular are : Coinbase, cash.app and bisq.
Mobile Payment
Mobile payment refers to any payment performed using a mobile device, such as a wearable device, a smartphone, or a tablet. This payment type is more secure than using a traditional credit card or paying using conventional cash. For example, many stores are now accepting payment by scanning a barcode using an application installed on a customer’s smartphone, this allows the store to bill the customer and withdraw cash instantly from a client-attached bank account. The most famous applications that allows such payments are: PayPal, Apple Pay, and Samsung Pay.
The number of users worldwide using mobile payments are expected to intensify ; according to Businessofapps, mobile payments are currently utilized by more than two billion user worldwide.
Stock Trading Apps
FinTech technology has facilitated how people invest in stock markets, including cryptocurrencies trading. For instance, instead of going physically to the NYSE exchange market, investors can now install an application on their smartphone to view stocks and the market, buy and sell stocks and follow trends and quotes. Examples of stocks applications are: Robinhood, SoFi Active Investing.
Budget Apps
Budgeting applications have become a norm these days; it allows individuals to track their spending, monitor their spending habits, categorize their spending into groups, and suggest other means to reduce spending on various products and services. By using a budgeting application, users can connect all their financial accounts into one app to have a comprehensive financial picture.
Popular budgeting apps are Mint and Zeta (designed for couples).
FinTech and Regulations
The FinTech industry is considered the most subject to regulations, considering the number of laws a FinTech company needs to comply with. For example, a FinTech firm working in different USA states is subject to different rules, such as a law for dealing with digital currency, transferring money, and a law for lending money to clients.
Moving to the global landscape, FinTech firms work environment is even more regulated. For instance, when an Asian FinTech firm wants to provide its services to European clients, it needs to comply with the GDPR regulations to ensure clients’ personal data security, without counting the relative national laws that need to comply.
The World Bank has a database of legislation and regulations concerning FinTech companies implemented in 200 countries worldwide. The database can be accessed at : https://www.worldbank.org/en/topic/fintech/brief/global-fintech-enabling-regulations-database
Summary
FinTech technologies have revolutionized how financial services are offered for companies and individual customers. All statistics show that there is a steady growth in the near future for FinTech services to cope with the accelerated digital transformation, especially in the wake of the COVID19 pandemic and the massive shift to remote working. According to Statista (November 2021), the number of FinTech startups in the Americans reached to 10,755, while the number was 9,323 such startups in the EMEA region (Europe, the Middle East, and Africa) and 6,268 in the Asia Pacific region.
This article introduced the concept of FinTech and mentioned its most used applications. in the next series of articles, I will move forward to talk about the most prominent cyber threats FinTech companies will face when operating in cyberspace and discuss the future trends of the FinTech industry.
