July 23, 2024

Advancing Digital Growth

Pioneering Technological Innovation

How Is FinTech Affecting Businesses?

11 min read

Financial technology (fintech) describes innovative technology solutions that allow financial institutions of all shapes and sizes to do business better and thrive. 

All financial institutions use technology — what is different about fintech is that it is generally more inventive and disruptive than legacy systems. It provides a business with the scaffolding and tools to rethink the way they use data, manage processes and provide their service. 

What is fintech?

As a rule, fintech companies rely on modern technology and cloud services. They are less concerned with physical locations and devices, such as hard drives and data centers. They provide the technology for fundamental functions provided by financial services, affecting how users store, save, borrow, invest, move, pay and protect money and more. 

The roots of fintech lie in data and process management. Early use cases were largely in the payments industry where tech was used to move money around more easily and to get away from physical banking. Square is a good example. Founded in 2009, it allowed small companies to accept credit cards using a mobile device. 

Today, fintech is everywhere: chatbot, “next best actions” for advisors when dealing with customers, process automation, communications, data management, report and audit creation, onboarding and more. If you can think of it there will likely be a whole host of fintech solutions for it.

Fintech’s goal is to make the world of finance easier, more cost-efficient and more profitable to operate in.

Why has the fintech industry grown so quickly?

The fintech industry has evolved and grown rapidly from being niche and exploratory to becoming a transformative force in the evolution of the financial industry. The global user base is forecast to exceed $3.5 billion in 2024, according to Statista.

Here’s why: 

  • Outdated legacy systems: Many, if not most, financial institutions are grappling with outdated legacy systems that are no longer fit for purpose. This, combined with newer technologies like software as a service, cloud and application programming interfaces, allows data to flow much more easily across workflows and between institutions. Expect to see progress quicken in this area as artificial intelligence (AI) is rolled out across the financial sector.
  • Competition: Legislators in the United States and around the world have enacted new laws and regulations to stimulate competition between financial institutions. This push, combined with an influx of investor capital, has leveled the playing field between incumbent and startup financial service businesses greatly. This, in turn, has led to greater innovation and differentiation between providers as they compete for specific use cases within the market.
  • Lack of customer loyalty: The rapid pace of change within the finance industry in recent years has also made for a competitive marketplace where customers are not loyal. People now want a Netflix-like experience when dealing with financial institutions. The race to get and keep customers shows no sign of slowing.

This combination of factors means that survival of the fittest is very much the norm. Firms need to take a more innovative and customer-centric approach to retain customers and attract new ones. They also need to tighten up their operational efficiency — reducing the cost of doing business and upping productivity levels.

Doing all of this well relies heavily on the use of technology. This can be in any area — from upping data quality, improving and streamlining processes, providing a digital and hybrid customer experience and leveraging AI in all its guises to boost efficiency and productivity. 

How is fintech changing business?

Fintech startups and established companies serve various audiences with myriad technologies and services. While fintech benefits a broad spectrum of customers, its tech offerings prioritize two essential elements: accessibility and speed. 

This is what fintech brings to businesses: 

  • Fast access to powerful financial tools: Fintech is an equalizer, allowing businesses of all sizes and across all industries to access robust financial tools instantly. Using speedy, always-on internet connections, big data and mobile connectivity, businesses can easily access complex, feature-rich financial software suites and managed services. In the past, such setups would have cost millions of dollars in fees, equipment, licenses, trained technicians and dedicated information technology teams. [Read related: What Is Big Data and What Does It Mean for Your Small Business?]
  • Unparalleled business insights: Fintech has created smart information displays with real-time updates and data analytics. With this information at their fingertips, business leaders gain unparalleled business insights. They can update their marketing on the fly to take advantage of favorable conditions or pivot to a new strategy.
  • Customer accessibility and convenience: Fintech offerings help businesses bring new access to their customers. Businesses can provide customers with intuitive software interfaces, positive user experiences, fast internet bandwidth and more. Customers can access financial information and transactions in real time on mobile devices or computers. These innovations have spurred omnichannel payment processing, mobile banking, peer-to-peer (P2P) payments and new ways of evaluating credit applications.

What industries are being disrupted by fintech today?

Today’s fintech players are revolutionizing industries like payment processing, wealth management, cryptocurrency and more. Here’s a look at how businesses are using fintech to fine-tune and bolster their offerings to serve customers better.

1. Fintech is revolutionizing payment processing.

Payment processing has long been ripe for improvement due to the vast quality of data needing to be received, stored and sent out consistently and in one format. Consumers want transactions to be as straightforward as possible while maintaining the highest security standards. The best payment processing companies use cutting-edge fintech to make transactions seamless and secure. The number of digital payments users is forecast to grow gradually reaching $4.8 billion in 2028, reported Statista. [Read related: How to Accept Credit Card Payments: A Beginner’s Guide]

  • PayPal: PayPal is probably the most well-known payment processor and is used by businesses and individuals alike. It provides comprehensive payment services, including online payments, mobile payments and P2P transfers, with strong buyer and seller protection mechanisms.
  • Square: Square is arguably the most recognized fintech company in the public eye. Square made mobile payments ubiquitous with its innovative smartphone card-swiper technology. Read our in-depth Square review to learn more about the fintech behind the service. 
  • Stripe: Stripe is Apple’s official partner for mobile payments via Apple Pay. It’s also a leader in mobile-optimized and app-based checkout systems. Stripe’s technology meshes with Apple’s iOS-based biometric security and digital wallet tech, allowing millions of consumers to check out in various apps and mobile sites via Face ID or Touch ID on their phones. Read our Stripe review to learn more. 
  • Payfirma: In 2011, Payfirma became the first company to bring mobile smartphone card reader technology to Canada. The company has since expanded into a global omnichannel merchant account services processor that helps businesses accept credit cards and debit cards online, in stores and on mobile devices.
  • Adyen: This global payment company supports a variety of payment methods and provides a single platform for managing payments across different channels and geographies.
Touchless processing, including mobile wallets like Apple Pay, became a popular fintech advancement during the COVID-19 pandemic when consumers began opting for contactless payments.

2. Fintech is disrupting alternative lending.

Alternative lending services provide novel approaches to personal loans, bringing lending options to more people with faster, easier application experiences than traditional financial institutions can provide.

Buy Now Pay Later (BNPL) is the most obvious example of this. It provides customers with a way to delay payment for goods and services they wish to purchase now. BNPL has been successful when it comes to younger consumers making smaller retail purchases such as clothing. By 2026, BNPL services will hit $995 billion, reported Juniper Research.

Here are a few examples of fintech-driven alternative lenders:

  • PayPal Credit: PayPal Credit is one of the most widely used BNPL services in the U.S., with a large user base due to PayPal’s established reputation and extensive merchant network. It can be used online and in-store and often has promotional financing options.
  • Klarna: Klarna has a large presence in the U.S. as well as Europe with extensive merchant partnerships. It provides flexible BNPL payment options including paying in four installments, paying in full after 30 days or financing over a longer period.
  • Prosper: Launched in 2005, Prosper was the first P2P lending marketplace. It’s weathered many changes and industry regulations to grow into a well-regarded alternative lender. 
  • LendingClub: LendingClub launched in 2006, soon after Prosper. LendingClub also began as a P2P lending marketplace and experienced many of the same trials and industry regulation challenges as Prosper. It is now the largest marketplace of its kind.
  • Upstart: Upstart is a unique personal loan service founded by former Google employees. It considers your education and occupational history in addition to your credit score to provide a more accurate lending rate. Consequently, it extends lending opportunities to more people than traditional services do.

3. Fintech is making its mark on investing.

Automated investing services, also known as robo-advisors, use machine learning algorithms and vast amounts of data to make investing easy and inexpensive, cutting out the costly human advisor element.

Here are four examples:

  1. Betterment: One of the first automated investment services, Betterment offers a website with an easy-to-follow, transparent process to help novice investors begin their wealth-building journey. Betterment features low fees and no account minimum.
  2. Wealthfront: Wealthfront has a $500 minimum and charges a 0.25 percent annually on its automated investing accounts. It’s an attractive proposition for first-time investors.
  3. Vanguard Digital Advisor: This offering combines a robo-advisory service that leverages its low-cost index funds. It has goal-based planning, automated portfolio management and personalized advice.
  4. Schwab Intelligent Portfolios: This robo-advisor integrates Schwab’s extensive resources and investment options to feature automated investment management, financial planning tools and access to human advisors.

4. Fintech is fueling cryptocurrency.

Many competing fintech-driven cryptocurrency exchanges would gladly take your money, but these services are among the most established. They all share features that put them ahead of the crowd but they also all differ slightly:

  • Kraken: Kraken is a feature-rich crypto-trading marketplace that combines typical exchange features with forex-like trading and management. Kraken is also known for having some of the tightest security in the industry and is one of the few exchanges to run a “dark pool.” Kraken was the first bitcoin exchange to have trading price and volume displayed on the Bloomberg Terminal and the first to pass a cryptographically verifiable proof-of-reserves audit.
  • Coinbase: Called the PayPal of bitcoin, Coinbase is a cryptocurrency exchange and a comprehensive digital wallet. Coinbase bills itself as the world’s most popular way to buy and sell bitcoin. It exchanged more than $830 billion in crypto in 2022, reported Business of Apps.
  • Binance: One of the largest cryptocurrency exchanges globally, Binance is known for its extensive selection of cryptocurrencies and low trading fees. It also has advanced trading options, futures, staking, lending and its own native token, the Binance Coin.
  • eToro: eToro is a social trading platform that allows users to trade a wide range of cryptocurrencies as well as traditional assets. One of its features is copy trading, where users can mimic the trades of successful traders and a comprehensive trading platform with various analytical tools. Its mobile app is user friendly which makes it popular.
Fintech has driven paperless financial solutions, including the implementation of electronic signatures and secure document management systems. [Learn how to create a paperless office]

How fintech is revolutionizing how financial services firms operate

Fintech is also changing the way financial services firms from banks to wealth managers work. Four key recent developments include:

  • Wealth technology (wealthtech): Wealthy clients tend to be very demanding, seeking personal, high-quality service delivered through a mix of channels and in real time. Wealthtech is software designed specifically to help organizations like investment banks and family offices manage client wealth better and provide the high level of service these clients require.
  • Insurance technology (insurtech): Insurtech uses analytics and AI to make better pricing decisions, evaluate risk, assess claims and underwrite policies, reducing the need for manual intervention. It also helps with fraud detection by using advanced algorithms to detect unusual patterns and potential fraud in claims. 
  • Regulatory technology (regtech): Regtech plays an increasingly important critical role in the risk and compliance space — automating data analysis, reporting and compliance. Its purpose is to prevent money laundering and terrorist financing by using technology to automate internal data collection and analysis as well as compliance with know-your-customer, anti-money laundering and counter-terrorist financing regulations. 
  • Supervisory technology (suptech): Suptech is a relatively new extension of regtech. By adopting suptech tools, regulatory bodies gain better oversight of their financial system, fostering stability and innovation. Suptech also helps regulators and other official bodies to reduce the burden of compliance for companies it supervises by providing better reporting, monitoring and overall compliance mechanisms. This leads to lower costs and improved supervisory resource allocation.

The future of fintech

Overall the expectation is that fintech will be a long-term success. Fintech’s ability to enhance customer experiences, reduce costs, innovate rapidly, broaden financial inclusion and ensure security means a growing acceptance and adoption of digital financial solutions by both consumers and businesses is set to continue.

It makes sense for the finance industry to invest in technology for its own success. “Every company is a tech company” is a phrase that reflects the reality that technology has become integral to virtually all business operations. 

To that end, the financial services industry supports the fintech industry’s development and several incubators and sandboxes have been put into place to support growth.

Here are two examples: 

  • DBS Bank in Asia has one of the best-known incubators. It is on a mission to re-architect its own infrastructure and instill an innovative company culture; it supports and collaborates with startups and the broader fintech community to “reimagine, inspire and create the future of innovation.”
  • The UK Financial Conduct Authority Sandbox allows firms to test new products live in the market with real consumers. It is particularly keen on AI and quantum, financial inclusion, open finance and tokenization. 

Fintech’s applications are also still developing. It already has a role in giving access to banking services to underserved and underbanked markets and communities. An early example of this was M-Pesa which facilitated online payments in Kenya, a country where access to physical branch locations is limited but mobile use is commonplace. It has since been extended to other African nations.  

Using fintech software in this way for digital payments and microfinance is expected to grow. Use cases could include offering credit in the form of small working capital loans — sometimes called microloans or microcredit — insurance and saving accounts.

The role of fintech in financial literacy will also be important. Using an app that has an element of gamification is far easier than attending a workshop or reading a leaflet. The use of fintech in this way will likely be encouraged by governments eager to increase levels of financial literacy and encourage their populations to be financially responsible and save for their old age. 

Ryne Landers and Kimberlee Leonard contributed to this article.

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