Robert Steinadler, 5 months ago
The term Fintech is a portmanteau of terms “finance” and technology”. It means that new and advanced technologies are applied to advance products and services of the financial industry. In this article, we are going to explain what Fintech is, how it works, and which companies in der crypto industry are prime examples of Fintechs.
The term encompasses a rapidly growing industry in which most businesses focus on banking and investment apps, insurance, and last but not least cryptocurrencies. While these are typical examples, there is a vast array of services available that exceed these applications. One thing that all Fintechs have in common is focusing on customer needs as well as related businesses. This allows them to eliminate pain points that traditional finance cannot overcome.
The Fintech industry is very huge and has seen tremendous growth over the last couple of years. The global market was worth roughly $112 billion in 2021 and it is estimated that it is going to reach about $332 billion in 2028. A driving factor for the industry is that banks and other more traditional businesses rather adopt Fintech than try to compete with it. This is often done by forging partnerships or the acquisition of promising Fintech startups. It is easier for well-established players to adopt new technologies and give digitally-minded customers what they want. This way they can stay relevant and don’t have to fear losing customers.
Fintech companies usually focus on integrating new technologies like AI, blockchain, or data science into traditional financial products. In effect, these products become faster, safer, and way more efficient. Because of that innovative approach, Fintech is one of the fastest-growing tech sectors. Stock trading, payments, loans as well as credit scoring are innovated through their activities and business models.
The Fintech industry itself is not new but it has evolved very quickly at a fast pace. New technologies were always a part of the financial world. In the 1950s credit cards were introduced and replaced cheques. Other innovations that were introduced over the last few decades are ATMs, high-frequency trading, electronic trading floors, and financial apps.
Some technologies that are introduced through Fintech focus on customers and meeting their service needs by offering low-cost products that are usually accessible as mobile applications. Newer advances are utilizing blockchain technology, data science, and machine learning to optimize what’s happening behind the curtain and are not getting in touch immediately with retail customers. Such as the processing credit risks or automated hedge funds. There are also businesses that focus on the regulatory aspects of financial products and especially those problems that arise when Fintech is innovating the space without having a regulatory framework at hand.
One of the major concerns regarding the Fintech industry is cybersecurity. With such a massive growth on a global scale and many businesses and technologies being somehow intertwined, more risks arise. Apparently, this structure is making the sector more vulnerable to cyberattacks. One way to tackle these problems is blockchain technology which makes certain financial products more resistant to manipulation attempts.
Many people are left under the impression that Fintech only involves startups and startup culture. As we already discussed this is not entirely the case. Insurance companies and banks are adopting new technologies and sometimes even the ventures developing them. Let’s take a closer look at which industries are profiting from Fintech and also give some examples of blockchain-related projects in those fields.
One of the largest sectors involves mobile banking which focuses on customer experience. These products typically just come as a smartphone app and offer banking as a lifestyle product. Banks that are driven by Fintech are called “Neobanks” and one of the biggest advantages is that they don’t rely on local branches which come at a high cost for the traditional banking sector.
Neobanks typically offer access to bank accounts, loans, and credit cards at low costs with a digital first strategy. Some are even open to crypto like Revolut or Nuri. Other prime examples are Chime, Finom, Simple, N26, and Varo.
Cryptocurrencies and especially Bitcoin are challenging the traditional banking system. This is why many people perceive the underlying technologies not as part of Fintech. But nothing can be further from the truth. Bitcoin alone offers dozens of use cases and business cases that can be built on top of its blockchain.
There is even more that can be done on smart contract platforms like Ethereum, Solana, and Cardano. Each is offering a lot of opportunities for single protocols that can change so many things, including identity management, finance, decentralized insurances, lending, yield farming, and more. Cryptos and blockchain are often perceived as this speculative bubble, while it actually offers solid Fintech to the masses. Examples of successful protocols are Aave, Coti, Mango, and dozens more.
Investment is maybe one of the sectors that got disrupted the most in the last couple of years. Due to low interest rates, it was impossible to gain any income by saving. With investment apps like Robinhood, Stash, or TradeRepublic things changed drastically. They allowed retail investors to have the stock market available at their fingertips and to invest small amounts with low costs.
Another aspect is saving accounts offered by Neobanks even though these products were a lot less attractive due to the situation on the market during the last two years or so.
Let’s say you’d be able to predict where the market is going during the next few weeks. Sounds sweet, does it? With machine learning and AI, this is absolutely possible for retail investors as well as for institutional investors. A massive amount of data is analyzed by these Fintech technologies to predict the outcome for a certain period of time. Of course, the algorithm is not always right but depending on the technology it has an impressive success rate.
Payments are the most important financial aspect of everyday life. This is also why many Fintech businesses are focusing on improving this sector. It is easier and faster to send money and depending on where you live or travel it is also cheaper. You can transfer a payment almost instantly. Successful platforms in this sector are PayPal, Venmo, Stripe, Zelle, and also Square.
Lending and credit are basically all about risk management from a business perspective. Fintechs usually focus on speeding up the process of assessment and approval to make things easier for the banks and companies who are lending out to consumers or business customers. Another big factor is Fintech that is focusing on consumer credits making them available within a few minutes only using a smartphone and an application.
With Fintechs running the credit scores in the background consumers can access their scores which makes this type of business more transparent. Banks and lenders on the other hand gain access to more reliable data. Credit companies that make good examples are Petal, Tala, and Credit Karma.
While insurance is not necessarily a financial product they still fall under the umbrella of Fintech. Again, risk management plays a huge role in this branch because insurance can only be successful if the income outweighs the risk that is insured. This means that insurance can profit from machine learning and data science as well as optimize internal processes through innovative technology.
Another important factor is offering insurance as a self-servicing application to digital-minded customers. No matter if it’s car insurance, health, or life insurance. All these sectors can gain a huge advantage by using Fintech to improve their business models.
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