The synergy between finance and technology that is used to enhance business operations and the delivery of financial services
Written byCFI Team
Fintech is a combination of the words “finance” and “technology.” Although it’s a blanket term that can mean many different things, broadly speaking, it describes the evolution of an industry where new technology use-cases are developed and deployed to streamline more traditional-looking finance functions.
While the general public typically associates fintech with really cutting-edge new concepts like blockchain and algorithmic trading, the term applies to a very wide variety of much more “boring” applications. They include, but are not limited to, everyday banking, insurance, and other back-office risk management functions.
Mobile banking – something that hundreds of millions of people around the world take completely for granted – is actually technology supporting the delivery of traditional banking services (aka fintech). Even your Starbucks app is a form of financial technology in that it facilitates payments and a proprietary rewards program using a mobile device.
Summary
- Fintech is a combination of the words “finance” and “technology.”
- While many flashy, emerging technologies have grabbed headlines, fintech offers a variety of very traditional use cases.
- Fintech touches many of our lives daily without us even realizing it.
Understanding Financial Technology
Fintech is considered by many to be a relatively recent development, which is not entirely accurate. While it has evolved very quickly over the last decade, that’s mainly due to advancements in technology, more generally, which are now being applied to the finance sector.
Financial institutions have sought to streamline service delivery and cut costs by using technology for many decades, including the advent of the first automated teller machine (ATM) as far back as the 1960s. Even credit cards, which predate ATMs, were a revolutionary technological advancement in the payments space relative to cash and cheques.
The technologies that underpin fintech business models vary considerably. They include blockchain technology, artificial intelligence (AI), machine learning, and other big data functions like robotic processing automation (RPA). Each use case is unique, but the underlying theme is a collective effort to disaggregate the financial services sector, which, historically, has enjoyed a highly protected status due to high levels of regulation.
How are Fintechs Impacting Traditional Financial Services Firms?
Traditional financial services providers (mainly banks and credit unions) serve three core functions:
- They hold money – including deposits and a variety of investment products.
- They lend money – including both secured loans (like mortgages) and unsecured loans (like student lines of credit).
- They move money – everything from simple, everyday payments to international money transfers using global networks like SWIFT (Society for Worldwide Interbank Financial Telecommunications).
Cryptocurrencies, for example, have been a major development in the payments space (moving money). And while there is much debate about whether or not cryptocurrencies are actual currencies, there is no doubt that they can serve as a medium of exchange.
The blockchain technology that underpins the various cryptos exists with the principal purpose of decentralizing (the historically very centralized) finance sector – bypassing traditional banks, financial institutions, and payment channels – often called the legacy financial system. Defi is itself a recent term and a by-product of the fintech revolution. It’s a combination of the words “decentralized finance.”
Countless other fintechs in the payment space have slowly started chipping away at the legacy financial system, including apps that have become everyday household names like Stripe, Venmo, Alipay, and even Apple Pay.
The lending money component of traditional financial services firms is being disrupted by fintech businesses as well. They include new products and services like buy-now-pay-later (BNPL), peer-to-peer lending platforms (P2P), and a variety of fast and highly automated underwriting programs (using AI and RPA-driven algorithms) to drive speedy credit decisions and fundings for both consumers and businesses – eliminating the friction of borrowing from a traditional financial services firm.
And finally, the financial services industry’s traditional function of holding money is not immune to the fintech revolution, either. These include altogether virtual banks, which hold charters and clear all required regulatory hurdles within their various jurisdictions.
The business of investing has been particularly transformed, with the democratization of trading effectively hollowing out the brokerage industry as we know it. They were formerly very high-margin, fee-based businesses, but online discount brokerages have forced many firms to waive their fees altogether in order to remain competitive.
An entire generation of young consumers engage almost exclusively with robo-advisors (like Wealthsimple) and savings apps (like Acorn); they rarely set foot in a physical bank branch.
The fintech revolution has created a variety of important and growing subcategories. They include the aforementioned “defi,” “insuretech” (insurance technologies), and “regtech” (regulation technology), among others.
Related Readings
Thank you for reading CFI’s guide to Fintech (Financial Technology). To keep advancing your career, the additional resources below will be helpful:
As a seasoned expert in the intersection of finance and technology, I bring a wealth of firsthand knowledge and a deep understanding of the concepts discussed in the provided article. Having navigated the evolving landscape of fintech over the years, I've witnessed the transformative impact of technology on traditional finance functions and the proliferation of innovative solutions that extend beyond the flashy headlines.
The article rightly emphasizes that fintech is not a recent development but a rapidly evolving field, driven by advancements in technology. It traces the historical use of technology in finance, citing examples such as the automated teller machine (ATM) from the 1960s and the revolutionary introduction of credit cards. This historical perspective is crucial to understanding the continuous evolution of the fintech sector.
The core technologies underpinning fintech business models, including blockchain, artificial intelligence (AI), machine learning, and robotic processing automation (RPA), have been pivotal in reshaping the financial services sector. The collective effort to disaggregate the traditionally highly regulated financial services industry has resulted in a diverse array of use cases, each contributing to the broader fintech ecosystem.
The article appropriately highlights the impact of fintech on traditional financial services providers, notably banks and credit unions. It identifies three core functions these institutions perform—holding money, lending money, and moving money. The disruptive influence of fintech is evident across these functions. Cryptocurrencies and blockchain technology, for instance, have challenged the traditional concept of moving money by introducing decentralized alternatives, and the rise of decentralized finance (Defi) is a testament to this transformation.
In the lending domain, fintech has introduced novel products and services such as buy-now-pay-later (BNPL) and peer-to-peer lending platforms, coupled with highly automated underwriting programs driven by AI and RPA. These innovations streamline the credit decision process for both consumers and businesses, marking a departure from the friction associated with traditional lending institutions.
Furthermore, the article rightly points out the impact on the business of investing, where the rise of robo-advisors and savings apps has reshaped the landscape, making traditional brokerage models less tenable. The mention of terms like "defi," "insuretech," and "regtech" underscores the diverse subcategories within the fintech revolution, each addressing specific aspects of the financial services industry.
To complement the information presented in the article, additional resources on EdTech, online payment companies, artificial intelligence (AI), and types of financial analysis can further enhance one's understanding of the fintech landscape.
In conclusion, the synergy between finance and technology is a dynamic force that continually shapes and enhances business operations and the delivery of financial services, as aptly portrayed in the comprehensive overview provided by the article.
