What Is FinTech?
The term FinTech stands for the combination of two words: Financial Technology. Financial technology is an industry that uses technology for financial services or activities. And FinTech companies provide financial services through mobile apps, websites, or other applications.
What Are Examples of FinTech?
Financial technology has many applications for regular consumers and businesses alike. As a result, people use financial technologies for many financial activities.
There are popular FinTech applications like Robinhood, Acorn, and Ameritrade. These firms allow consumers to trade online for as low as $5. And without going through the traditional route of hiring a broker and paying a high fee to buy a stock.
Recently, there has also been the innovation of robo-advisers. Which are computer software that can help stock traders buy stocks. Robo-advisors customize a stock portfolio according to the investor’s goals and risk tolerance.
The popular crowdfunding website Patreon is also a type of a FinTech company. Patreon is a website that enables patrons to support their favorite creators. It would be a type of FinTech that supports crowdfunding through its platform.
Source: Patreon
Another big FinTech company in crowdfunding is the website Kickstarter. Kickstarter has helped raise over 6 billion dollars for different creative projects.
Financial technology has also helped the insurance industry. Through artificial intelligence and data analysis to create a more personalized insurance coverage.
Many innovative FinTech companies use technology in insurance. One example is Cuvva, which allows drivers to buy hourly car insurance. Cuuva tracks the person’s driving through the data from their mobile phone as they drive.
Mint is also an example of a FinTech company. Mint provides users with financial services by gathering data across financial accounts. So that users can better track and budget their finances.
What Is the Difference Between FinTech and Banks?
A significant difference is that banks have many restrictions and regulations. Meanwhile, FinTech startups have newer business models with fewer constraints slowing their growth.
Financial technology changed the traditional bank process and improved its service. Some people consider digital banking as separate from FinTech. And see digital banking as traditional banking wrapped up in its digital appearance. It allows customers to enter checks or transfer money without going to the bank.
Though the traditional banking activity or services still stay the same. That’s why some consider digital banking separate from FinTech.
Banks have provided mobility to do the digital process online. Yet the existing size and organizational structure problems restrict traditional banks.
FinTech firms focus on improving, automating, or changing how people use financial services. For example, Eno a technology that helps customers create virtual card numbers. This technology also allows for tracking bank accounts and credit cards.
Source: Capital One
Regular banks bind themselves by their size due to bureaucracy. And this makes it hard to be flexible to the needs of different users. This problem allows FinTech firms to sweep in and focus on improving the lack of user experience. Financial technology firms exploit the gaps in the services of traditional banks.
How Does FinTech Make Money?
There are a couple of methods firms use to earn money from clients for their applications:
Subscription: One method is to charge an annual or monthly subscription. And firms can provide new users with a free trial period that gives them an incentive to use their service.
Transaction Fee: The second method charges a fee percentage per use or a piece of earned money.
An excellent example of the transaction approach is crowdfunding companies like Kickstarter. Kickstarter uses this model and takes 5% of the total money fund from projects.
The PayPal business model uses this approach to earn money from user transactions. Firms that transfer money online also make fees from the amount transferred.
Advertisement: Another method for FinTech firms is using advertising to earn money. This method is the easiest to set up, as long as the website or mobile app has some space to put up the ad.
Management Fee: Robo-advisors make money by charging a fee based on the asset it manages.
How Do FinTechs Lend Money?
FinTech lends money in a different process than traditional banking. For example, if you are requesting a loan in banking from in the past, it can take days before approval.
Lenders and analysts would use estimates and assessments to make their lending decisions. In contrast, FinTech loan companies use a different way of automating these decision-makings. The firms would also use data analysis to analyze a person’s financial information.
Experian is a company that works to pull in data to discover information on a customer. A large amount of data allows FinTech companies to lend out loans to customers in less time.
Different FinTech loaning companies have different business models for lending money. For example, a company called Earnest analyzes personal data. Then create a student, medical, or home loan most suitable for their situation. Fundbox, a FinTech company, uses a similar model. Using big data analytics to help make a credit decision for a loan or a line of credit.
There are financial technology companies that specialize in person-to-person lending. P2P is a type of lending that connects people looking for loans with lenders online. This lending process disrupts the traditional approach of borrowing money through a bank.
And with P2P websites, the person requesting a loan does not need to put in a deposit. And the person lending the loan will be able to earn interest for their lending money.
FinTech companies can transfer money by disbursing loans to a person’s bank accounts. And connect with third-party companies to get back overdue payments.
How Is FinTech Shaping the Future of Banking?
Source: holytransaction
FinTech is shaping many of the bank services people have nowadays. It allows remote access to such services 24/7, while traditional banks are only open from 9–5. It eliminates the wait time for doing simple banking services.
Remote access to financial services increases people’s productivity. Now people can shop, save money, get loans, and pay bills all from the comfort of their homes. Also, people can automate payment, making it easier to pay for their accounts. Moreover, most digital banking services are accessible without any monthly fees necessary.
Another way FinTech has helped shape banking is for payment and transfer. Financial access across the globe makes it easier to conduct business. Now people can transfer money across half the world in less than a second.
Individuals traveling or out of their country don’t need their physical cards. It creates the possibility of doing payments or transfers using various methods. It is possible to make financial payments with digital wallets as well.
Besides the benefits for the consumers, there are also benefits to banks. The technology gives banks the ability to provide services without hiring more people. As a result, banks can save on operational costs and offer more benefits.
What Are the Advantages and Disadvantages of FinTech?
With the onset of financial technology come many advantages and disadvantages. The benefit of this development is that it allows people to save more time in their life. Besides, online financial services remove the need to go to a physical branch.
And anyone that has access to the internet could connect to financial services. Internet access to these financial technologies would remove geographical barriers. Making it people from different areas able to take investment opportunities.
There’s another benefit when payment and money transfer are more efficient. Financial efficiency allows freelance and remote workers to receive money from anywhere.
Another benefit is that it allows a more personalized user experience. Companies for loans or other forms of banking can perform more services than before. Technology could help bolster the security of banking firms.
It would also allow authentication of identity and document sign all online. While also automating many other services for many customers at a single time.
But when banks store information online, this would also create a problem. It is a problem because there are a lot of digital footprints when people use financial services.
Online purchases and certain services would paint a clear picture of behaviors. In case of leaks, this would mean that someone can now use this information to their advantage. It would allow someone to know about your personal information and habits.
Increased technological advancement would not be accessible to people without the internet. And would only create a widening gulf for countries that lack such technology. Moreover, the benefits of financial technology would not be possible.
What Are the Most Prominent Big Data Problems in FinTech?
Big data can help FinTech companies to better connect to users’ needs. Information, when analyzed, can help understand user preferences and habits. Yet, there are also considerable data problems that Fintech companies need to face:
Data Security: FinTech companies stores a lot of important information about consumers. FinTech companies have data on people’s social security numbers and credit card information. That’s why a challenge is keeping information from hackers and preventing data leaks.
Data Management: Another issue is managing data, so the company complies with regulations. It is crucial to collect and store user data without violating any laws.
And without managing data, a FinTech company would not be able to use data to adapt to the competition. It would be a valuable asset for business applications when the company manages the data.
Without management of data, a FinTech would create irrelevant or false information. This problem makes lousy data for decision-making on marketing new products. It would need time and money to sort out the data again to make better decisions in the future.
Improper Tools: The investment to create a system to manage data is expensive. And many startups in the FinTech industry do not have the capital to make such investments. So, they would lack the ability to use big data to help the business.
And without the right tools to automate the process creates a problem. Companies will need to invest time and effort to sort and analyze the information.
Yet, it is hard to use data in its raw form and in different formats. And companies need the right tool to analyze and gather the information together.
There is also the need for expertise to examine the information. Companies need to sort out the information that is helpful or irrelevant to their goals.
