Financial technology (fintech)
Financial technology, commonly referred to as fintech, encompasses the innovative use of technology to enhance and transform the banking and finance sectors. It includes advancements such as mobile applications, web-only banking, and crowdfunding, which provide users with more accessible and efficient ways to manage their finances compared to traditional banks. The rise of fintech has been particularly notable since the financial crisis of 2008, which created a demand for more innovative financial solutions as regulatory changes left a gap in conventional banking services. Fintech companies operate with lower overhead costs and are less burdened by regulations, allowing them to offer competitive rates and diverse loan assessment models that utilize alternative data sources. This shift has led to a more diverse credit landscape and improved risk assessment methods, making financial services more available to various demographics, including underserved communities in developing nations. However, fintech start-ups face challenges such as regulatory hurdles and the need to attract customers away from established banks. Overall, the fintech boom reflects a significant change in how financial services are delivered and accessed globally, driven by evolving consumer demands and technological advancements.
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Financial technology (fintech)
Financial technology, or fintech, is a term used to describe technological advances and changes in the banking and finance industry. It involves new technology, such as smartphone applications, and innovations, like web-only banking and crowdsourcing, that allow people to keep track of their money in ways that differ from traditional banking. Financial technology companies are changing the banking industry by offering wider access to services and products that were once only exclusively available at traditional banks. The fintech revolution is driven by a wave of start-up companies with innovative business and revenue models, and a wider array of products and services than what can be offered at a traditional bank.
Background
In 2008, the stock market crash plunged the United States into what became known as the Great Recession. A major catalyst for the crash was the collapse of Lehman Brothers, a sprawling global bank, in September of 2008. The crisis was building long before then, however. In the years before the stock market crash, a housing crisis was also taking shape.
The housing crisis of the early 2000s was the result of mortgage lending operations at many banks across America. Loans were being approved for subprime borrowers with poor credit histories who struggled to repay them, resulting in a high number of foreclosures. This resulted in the market being flooded with available houses, which then led to a housing price slump.
Taxpayer-financed bailouts of many banking institutions were needed to shore up the industry after the 2008 collapse. In the years since, regulators have concentrated on making finance safer. The crisis, and the heavy level of regulation that followed, created a vacuum of innovation in banks. Since the crash, there has been a boom in financial technology, with billions of dollars being invested in fintech since the beginning of 2010.
Overview
Financial technology start-ups have been able to tailor their business models in such a way that they avoid the structural formalities of a traditional bank. These new fintech businesses have also been able to provide a more efficient means of serving customer needs. Although fintech firms are not likely to kill off major banks anytime soon, they have reshaped the financial industry in three major ways: by cost-cutting, risk assessment, and diversifying the credit landscape.
Fintech companies are able to cut costs while also improving the quality of financial services. One of the key reasons for this is that fintech firms do not have as much regulation, branch networks, or the need to protect existing businesses. Since these companies have lower overhead than traditional banks, they can offer the borrower better deals.
One way that fintech companies are proving to be more innovative than traditional banks is that they have developed new ways of assessing risk. Fintech firms gather information on small businesses to assess how well they are doing. For example, fintech companies look at everything from social media reviews to a company's use of logistics firms in making their assessments. This data-driven lending is different than that used by traditional banks, wherein decisions are generally based on a single credit score.
Fintech firms are also creating a more diverse and stable credit landscape. Banks take in short-term funds, such as deposits, and turn them into long-term assets, such as mortgages, borrowing heavily to fund the lending. Many fintech companies avoid this by matching borrowers and lenders directly. In these financial technology firms, a lender commits his or her money until the final payment is due, which means he or she takes on the risk of the loan defaulting rather than the fintech company itself.
Financial technology start-ups face many challenges, however. Regulation and the cost of acquiring customers more accustomed to traditional banking may cause the failure rate for fintech businesses to be high. Those that are able to survive will generally share the following characteristics:
- advantaged modes of customer acquisition
- innovative uses of data
- segment-specific propositions
- the ability to leverage existing infrastructure
Fintech start-ups need to build the most important aspect of any business, which is a customer base. Banks already have customers, and fintech firms need to find a way to get those customers to switch, and do so in a cost-effective way.
One of the biggest ways financial technology companies are changing the banking landscape is through the use of data. Fintech firms are finding innovative ways to not only collect data but also to use it to attract and serve customers. As noted above, many fintech start-ups look at nontraditional data instead of a single credit score when determining whether to give a borrower a loan.
Using segment-specific propositions means that fintech companies are selective in choosing their target customer. They try to determine a customer base that will be most receptive to what they offer. For example, some fintech companies target customers who favor automated software over human advisers, while others may focus their customer search on borrowers interested in cost-effective mortgages.
Successful fintech companies leverage existing infrastructure by finding ways to work with the existing ecosystem of banks. Many fintech start-ups collaborate with bigger banks to offer services to a bank's underutilized customer base, running that part of the business while the bigger bank supplies the credit.
While financial technology firms may never take over the role of big banks, it is clear they are changing the financial industry as a whole. As the use of smartphone applications, web-only banking, crowdsourcing, and other advancements continue to grow, so too will the financial technology boom. Indeed, customer demand continued to drive significant growth in the fintech industry into the 2020s in both developing and developed economies. Research by the World Economic Forum in 2024 revealed that fintech companies have succeeded in transforming entire economies in developing nations, where traditional banking systems have often struggled. Furthermore, the industry has allowed millions of people, especially in remote areas of emerging nations, access to credit, bill payments, money transfers, and other essential financial services to which they have never before had access.
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