FinTech (Financial Technology): The World of Digital Finance
FinTech is a contraction of ‘Finance’ + ‘Technology,’ i.e., the use of technology in the financial services industry, resulting in the introduction of new and innovative products and services. Technology is used to boost business processes and the delivery of financial services. By disrupting conventional methods, FinTech can take the form of a start-up, software, or a service that offers technologically advanced ways to make financial processes more effective. Fintech poses conventional finance with unparalleled obstacles through waves of new and creative ideas, including disrupting the necessary banking activities to foreign money transfers, corporate and personal loans to private investment that profoundly affect the global financial system. Fintech is transforming finance, just as the internet changed the written press and other industries.
The first term that comes to mind may be ‘cryptocurrencies’ any time you hear about FinTech, but there’s more to it than just cryptocurrencies. Different lenses or viewpoints on FinTech have distinct angles or other points of view.
There are different perspectives on Fintech such as:
Fintech for dinosaurs:Dinosaurs in the financial world are certainly not the ones from Jurassic Park. Back in 1994, if you recall, Bill Gates said that ‘we need banking, but we no longer need banks.’ At that time, he also called banks ‘dinosaurs’ and predicted that technology would force them to extinction (just like what changing environment did to the reptiles, i.e., Dinosaurs). Yet, the ‘dinosaurs’ of the financial world have evolved rather than becoming extinct. Fintech for dinosaurs, therefore, applies to all financial giants that are disrupting the banking & capital markets, insurance services, asset and wealth management, transfer, and payment of funds. For instance, Global bank HSBC has entered into a Fintech partnership to allow for quicker business payments. The business will use Australian FinTech Identitii’s tokenization technology with its own receivables infrastructure to create a Digital Accounts Receivable tool (DART).
Fintech for entrepreneurs: Entrepreneurs refer to the start-ups or early-stage companies that aim to address the customers’ pain points and provide an innovative solution. Fintech is seen as a sweet-pot by entrepreneurs, and they keep on searching for ways to create creative technologies to boost the financial services industry. Amid the COVID-19 outbreak, many banks were forced to close several branches (the main contact points for a significant proportion of customers). This is where FinTech entrepreneurs can fill the gap left by traditional banks by making financial services accessible through digital platforms. For example, Paytm (an e-commerce payment system) requires minimal human contact, thus complying with social distancing regulations while maintaining or even increasing the convenience level for customers.
Fintech for investors: Because of the younger, wealthy, and tech-savvy consumers, FinTech businesses are gaining traction, and investors see it as a ‘need for the future’ to put money in, to generate high returns (which is the ultimate goal of an investor). The fact that both ‘technology’ and ‘financial sectors’ parent Fintech opens the door to endless opportunities. Based in New York, Tiger Global Management is the largest investor in FinTech companies (total capital invested to date is $677 million).
Fintech for customers: Fintech aims to provide customers with alternative channels for financial operations, including payments & transfers, securities clearing and settlement, small business lending, and personal financial planning and investment, etc. For example, traditionally, customers were required to wait for several days to receive international funds. However, due to digital platforms such as Skrill in the UK, receivers can get the funds within four working hours.
Based on the above overview, it is evident that FinTech isn’t a new field; it’s just one that has snowballed. Technology has always been part of the financial world to some degree, whether it was the advent of credit cards in the 1950s, ATMs in 1967, or electronic trading floors in 1971.
Now, the question arises: Why is there a sudden growth of Fintech Companies?
After the financial meltdown of 2008-09, Fintech has continued to spring from all corners of the globe. The GFC has disclosed the regulatory weaknesses in the global financial system, including ‘centralization’ due to which traditional banks were able to monopolize financial services. However, since 2008, banks have been worrying about recovery and a wave of new laws to comply with. Previously, investment in modern technologies and adjusting to the changing financial environment was not given a priority. Therefore, Banks and other financial institutions are now playing a technology-wise catch-up with Fintech companies for their survival. Moreover, customers, especially millennials, no longer want to access in-person financial services. They prefer financial services to be mobile, accessible 24/7, personalized, and flexible.
Before the Global Financial crisis of 2008-09, it was difficult for challengers to enter the market because of the banks’ monopolistic atmosphere. As a result, in order to compete, the early disruptors (such as FinTech companies) in financial services have had to incorporate greater transparency. As more flexibility and more choices become available with greater freedom, Fintech has brought the finance sector to the next level by offering consumer-friendly financial services. Fintech helps to operate smoothly for both customers and companies. It saves time and effort by giving financial players creative ideas to remain competitive in this highly controversial market.
Ms. Guneet Kaur
Research Fellow at Digital Euro Association