For the first time in human history, people can access their money whenever they want it. We can thank fintech for that.
But what exactly is fintech? The term combines “finance” and “technology” to describe any business that uses technology to enhance financial services. Fintech is growing rapidly and becoming more influential in the day-to-day lives of businesses and individuals. It covers everything from investment applications to cryptocurrencies to digital payments and online lending.
Brief history of fintech and banking
The marriage of technology and finances is nothing new. The credit card was invented in 1950, and less than 20 years later, the first automated teller machine (ATM) was introduced in London, England. There are now more than 3.5 million ATMs in use around the world, and personal finance is a common practice that is constantly guided and shaped by technology.
As such, fintech and banking are always evolving. It seems like every day, a new breakthrough in data science or machine learning contributes to the banking industry’s digital transformation.
The rise of mobile banking
The clearest indication of this transformation is mobile banking. Most banks now offer a smartphone app that gives customers quick access to their accounts and financial records. Banks have learned that they will not survive purely on in-person banking at physical branches.
The emergence of neobanks has also stoked the desire for mobile banking apps. Neobanks eschew the idea of a physical branch entirely, preferring to conduct 100% of their business in the digital world. Online-only neobanks such as Chime, Simple, N26, Revolut, and Monzo have become household names in finance without breaking a single inch of physical ground. Neobanks are an aspect of fintech and banking that’s likely to continue growing exponentially.
Cryptocurrencies and fintech
The development of cryptocurrencies may be the most popular byproduct of fintech. Cryptocurrencies trace their history back to 1983 and David Chaum’s experiments, but it wasn’t until 2009 and the advent of bitcoin that the world’s first decentralized cryptocurrency was established.
Throw in the development of blockchain and its increased transparency and security, and cryptocurrencies are leading the charge of banking independence and the decentralization of finances.
Fintech’s impact on investing, trading, and loans
While we aren’t quite at the point where technology can accurately predict where markets are heading, fintech can run colossal amounts of data through algorithms that identify market risks and trends. This eases the risky nature of investments and trading. Trading is now a truly global endeavor that anyone can do via their smartphones, and that is entirely down to fintech.
Thanks to fintech app development, payments and lending have also undergone incredible transformations. The days of waiting lists and lengthy risk assessments are over, and banks can now approve loans in minutes, all from the comfort of your own home (or phone). People can also request credit reports multiple times a year without hurting their credit score, meaning more people than ever understand their financial situation.
The entire banking industry is becoming increasingly more transparent with every new fintech and banking trend, be it cashless payment companies such as PayPal and Stripe or free credit platforms like Credit Karma and HTEC partners such as Ingenico and Zest. Insurance companies have been slower than banks to embrace fintech, but this is also starting to turn as traditional insurers companies begin to embrace automation and flexibility. Mobile car insurance is now the norm, and many health insurance companies have partnered with wearable devices that allow people to track their own health data.
Innovative uses of AI, automation, data science, and blockchain in fintech
At the heart of all fintech industry trends are specific technologies that complement the banking industry.
Artificial intelligence (AI) often finds itself at the core of new developments in fintech and banking. AI algorithms are now predicting changes in the market. AI helps providers understand and track the spending habits of customers while fostering a tighter relationship between banks and the people who use them.
AI’s ability to mine data would not be possible without modern developments in big data technology. AI and big data combine to sift through mountains of data in seconds, identifying trends and consumer preferences. Banking software is now developed with a hyper-analytical mindset as banks and credit providers look to understand their customers on a more personal level. Big data makes this far easier than ever before.
While many technologies have adapted to fintech, blockchain is unique because it was created with financial institutions in mind. Blockchain has decentralized the industry to a point where transactions no longer require a third party, bridging the gap between consumer and provider. Despite blockchain’s importance, it’s still in the early stages of development, and the continued growth of blockchain is one of the most exciting aspects of fintech and banking.
Finally, robotic process automation (RPA) has streamlined various aspects of the finance industry, taking monotonous and time-consuming tasks away from people and entrusting them to robots. These tasks include data collection and analysis, transaction management, and even communication with chatbots. RPA has opened a lot of doors for the development of fintech, but there remains much work to be done. All of this makes the future of fintech and banking look particularly rosy. But there is still the potential that human frustration with digital limitations will curb fintech innovation. It is easy to forget that people still desire security and privacy, and there remains a certain cynicism and fear of an entirely digital industry. As banking software increases its share of the financial market, some people in the older generations may reject it and manage their money the old-fashioned way.
New regulations challenging fintech and banking
Banking regulations arguably pose the biggest threat to fintech’s development. Regulatory risk is a constant shadow in the banking industry, but it is a fear felt more keenly in fintech than in traditional banking, for a few reasons.
The sheer novelty of fintech means that many of the streamlined processes for complying with regulations simply aren’t in place, and it only takes one transgression to break the trust of a customer. Throw in the challenge of having to train new staff quickly and you have the potential for major problems.
It’s inevitable in finance is banking regulations are always changing as the industry fights to stop criminal activity. The most recent examples are PSD2 (which impacted payment services) and the GDPR laws designed to tighten security around data usage in the EU. But these are just two notable examples. Staying compliant with banking regulations isn’t just recommended in fintech, it is of the utmost importance. The rapid nature of fintech also means that there is more regulatory scrutiny than in traditional banking. Fintech is often an easy target for new regulations, and failing to comply is often the death knell for fintech start-ups.
Future challenges will not stop fintech
The challenges are obvious but don’t expect fintech to take a step back any time soon. There has never been a more fertile time for the industry. Investment in fintech is booming, with $33 billion in funding going to start-ups in 2018. The value of the market is expected to grow to $309.98 billion by 2022. While this may only be a small fraction of the wider financial industry, it’s a number that’s only moving up. Fintech has made financial awareness a 24/7 reality, and the best is yet to come.
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