What is ‘Fintech’?
Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century. Originally, the term applied to technology applied to the back-end of established consumer and trade financial institutions. Since the end of the first decade of the 21st century, the term has expanded to include any technological innovation in the financial sector, including innovations in financial literacy and education, retail banking, investment and even crypto-currencies like bitcoin.
BREAKING DOWN ‘Fintech’
The term financial technology can apply to any innovation in how people transact business, from the invention of money to double-entry bookkeeping. Since the internet revolution and the mobile internet revolution, however, financial technology has grown explosively, and fintech, which originally referred to computer technology applied to the back office of banks or trading firms, now describes a broad variety of technological interventions into personal and commercial finance.
Fintech’s Expanding Horizons
Already technological innovation has up-ended 20th century ways of trading and banking. The mobile-only stock trading app Robinhood charges no fees for trades, and peer-to-peer lending sites like Prosper and Lending Club promise to reduce rates by opening up competition for loans to broad market forces. Technologies being designed that should reach fruition by 2020 include mobile banking, mobile trading on commodities exchanges, digital wallets (like Apple (AAPL) and Google’s (GOOG) developing mobile wallet systems), financial advisory and robo-advisor sites like LearnVest and Betterment, and all-in-one money management tools like Mint and Level.
New Tech in Fintech
In the olden days, individuals and institutions used the invisible hand of the market – represented by the signaling function of price – to make financial decisions. New technologies, like machine learning, predictive behavioral analytics and data-driven marketing, will take the guess work and hocus pocus out of financial decisions. “Learning” apps will not only learn the habits of users, often hidden to themselves, but will engage users in learning games to make their automatic, unconscious spending and saving decisions better. On the back end, improved data analytics will help institutional clients further refine their investment decisions and open new opportunities for financial innovation.
Who uses fintech? There are four broad categories:
1) B2B for banks and
2) their business clients;
3) B2C for small businesses
Trends toward mobile banking, increased information, data and more accurate analytics and decentralization of access will create opportunities for all four groups to interact in heretofore unprecedented ways.
The pursuit of making financial services accessible at affordable costs to all individuals and businesses, irrespective of net worth and size respectively. Financial inclusion strives to address and proffer solutions to the constraints that exclude people from participating in the financial sector.
Also called Inclusive Financing.
BREAKING DOWN ‘Financial Inclusion’
The financial sector is continuously coming up with new and seamless ways to provide services to the global population. The increase in the use of technology in the financial industry (fintech) seems to have filled the void of inaccessibility to financial services. The advent of fintech has created a way for all entities to have access to all financial tools and services at reasonable costs. Examples of fintech developments that have increasingly been embraced by financial users include crowdfunding, robo-advisors, digital payments, peer-to-peer (P2P) or social lending, and insurance telematics. While these innovative services have disrupted the financial world by including more participants in the money sector, there is still an untapped portion of the world population that remain unbanked or underbanked.
In 2016, the World Bank stated that around 2 billion people worldwide don’t use formal financial services and more than 50% of adults in the poorest households are unbanked. The unbanked population consists of adults who have no easy access to banks in their regions or who have developed a deep mistrust of the financial system. An initiative by the World Bank Group called Universal Financial Access 2020 is taking measures to ensure that the aforementioned unbanked community has access to traditional platforms like checking accounts by the year 2020. People who have basic transaction accounts are classified as the underbanked. The underbanked are adults that have secured the traditional tools for conducting transactions (such as a bank account), but are not privy to the digital incorporation of these transactions (such as digital payments). Because having a basic bank account is the foundation on which disruptive innovations are built, fintech offers the underbanked a ticket to financial digital inclusiveness.
With little access to banks, especially in rural geographies, underbanked users mostly carry out transactions in cash or checks making them vulnerable to theft and street frauds. Even access to bank locations for conducting transactions like cash deposit, check cashing, money order, and funds transfer may come at high costs in terms of banking fees. Fintech, telecommunication, and banking institutions are working hand-in-hand to create mobile payment and micro lending facilities for financially underbanked users. Numerous online payment and commerce systems incorporated with cell phones have been built to facilitate the ease with which this underserved population can immerse themselves in the digital economy. Examples of popular apps that have been created to foster financial inclusiveness include China’s AliPay and India’s Paytm Wallet serving 450 million and 122 million users in 2016, respectively.
There is a sizeable global market opportunity for Fintech. However, access to a lot of markets is impeded by the unbanked group who have a deep mistrust of financial institutions and choose to conduct all-cash transactions. To alleviate this challenge, Fintech companies have come up with innovations that promote transparency in their dealings with customers. Examples of these innovations include telematics insurance technologies that provide policy owners with premium rates based on number of miles used; digital currency transactions that use blockchain ledgers to reveal nature of dealings and identities of players in the online sphere; roboadvisors that openly disclose and offer low fees for customers who have limited access to traditional financial advisors due to high costs; and peer-to-peer (P2P) lending sites that promote financial transactions where individuals lend and borrow from each other. P2P lending is particularly beneficial to emerging market participants who have no way of getting loans from financial institutions due to a lack of financial history and credit record for each individual.
With the rise and rise of fintech, financial inclusion seeks to promote the betterment of the world’s population through the use of financial services and tools available in an increasingly digital-based economy.